Removal of Service Tax on Recovery of Employment and Statutory Costs

We are pleased to share that the Royal Malaysian Customs Department (RMCD) has made an announcement on 13th August 2026 to reaffirm that the recovery of employment costs and statutory costs are not subject to service tax.

For context, this represents a reversal of the position previously adopted by the RMCD in its Guide on Employment Services dated 9th June 2026.

We welcome the latest announcement that reaffirms the principle that pass-through costs in relation to employment services are not subject to service tax given that this position:

  • Upholds the canon of neutrality in tax treatment with regards to the business choice of direct employment and employment administered through employment agencies.
  • Ensures that employment opportunities are not adversely affected by tax policies.
  • Avoids further cascading taxation for businesses in various sectors.
  • Avoids rise in price of goods and services which affects the cost of living and competitiveness of export sector.

Kindly note that the non-imposition of service tax on recovery of employment costs and statutory costs is subject to conformance with disbursement or out-of-pocket expense (OPE) criteria. For avoidance of doubt, the service fee charged by the employment service providers are subject to service tax (as widely practiced since 2018).

Disbursement treatment beyond employment services

We would also like to emphasise that the above decision is only in respect of employment services, while the position taken by the RMCD with regard to non-application or limited application of disbursement treatment in respect of management services, rentals and leases, logistics services and other sectors remain unchanged at this juncture. We hope that a more comprehensive policy review would be made soon to achieve reaffirmation of a unified disbursement principle applicable across various taxable services in a harmonious manner.

Important Notes

The information in this write-up is meant to be generic and non-exhaustive. It should not be taken as a substitute for professional advice. This write-up is based on the information publicly available as of 13th August 2026, and we do not undertake to necessarily update this write-up to incorporate new information the becomes available after this date.  Strictly no liability assumed.

This write-up is a copyright of TRATAX Sdn Bhd, strictly no reproduction or citation without appropriate attribution.

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