RMCD Construction Service Tax Updates 2026: What Malaysian Contractors Must Know

Throughout 2025, the Malaysian government announced several major amendments to how service tax applies to the construction and property development sectors. Now, the Royal Malaysian Customs Department (RMCD) has finally updated their official Guide on Construction Work Services on 17 March 2026 to formally document all these changes in one place.

This 72-page document replaces the outdated June 2025 version. At KS Chia & Associates, we have analysed the updated guide. Here are the key policies you need to apply to your business right now.

1. Residential Units in Mixed Developments Are Exempt

This is the biggest change that was announced last year and is now officially in the guide. RMCD has completely reversed its previous ruling.

Under the old June 2025 guide, the entire contract value for a mixed development (residential + commercial + public facilities) was subject to the 6% service tax. A 25-storey building with 15 residential floors and 10 commercial floors? The whole thing was taxable.

That is no longer the case.

Under the updated March 2026 guide, the residential portion and related public facilities are exempt. Only the non-residential (commercial) built-up area is taxable. Shared public facilities like car parks and lobbies must be split between residential and commercial based on built-up area ratios.

What you need to do:

• Get an architect or surveyor to certify the built-up area apportionment.

• Make sure your construction contract is in writing, signed, and stamped by LHDN.

• The contract must describe the mixed development scope and pricing.

• Keep copies of the planning permission and pre-computation plan.

If you have been paying service tax on the residential portion of mixed developments since July 2025, contact us to discuss possible adjustments.

2. Non-Reviewable Contract Exemption Extended to 30 June 2027

Good news if you signed a construction contract before 1 July 2025.

As announced in late 2025, the government extended the service tax exemption for non-reviewable contracts by one year. The new deadline is 30 June 2027 (previously 30 June 2026).

To qualify, your contract must meet all three conditions:

1. Signed before 1 July 2025.

2. Does not contain a price review clause.

3. Stamped by LHDN before 31 December 2025.

What about Variation Orders?

VOs that do not change the contract value are exempt until 30 June 2026, provided the VO was signed and stamped before the deadlines.

What about Extensions of Time?

EOTs that do not add costs are exempt until 30 June 2027, subject to conditions.

From 1 July 2027, all construction services under these contracts become fully taxable.

3. Your Invoices Could Be Costing You Money

This is a compliance trap that many contractors are not aware of, and the updated guide highlights it clearly.

The March 2026 guide makes it very clear: if your invoice does not separately list building materials and construction services, RMCD will charge the 6% service tax on the entire lump-sum amount.

Here is a simple example. On a RM1 million contract where RM400,000 is materials and RM600,000 is services:

• Lump sum invoice: 6% on RM1,000,000 = RM60,000 in service tax.
• Itemised invoice: 6% on RM600,000 = RM36,000 in service tax.

That is RM24,000 you are throwing away by not itemising your invoices.

The rules are strict:

• Building materials must be stated at actual cost with no mark-up.
• You must keep supplier invoices as supporting documents.
• f you cannot separate goods from services, the entire amount is taxable.

Update your invoicing templates today.

4. B2B Exemption for Design and Build Contracts

Main contractors working under Design and Build contracts can claim B2B exemptions when hiring professional services. This covers architects, engineers, surveyors, lawyers, accountants, and consultants who are registered under Group G.

The planning permission reference number must appear on the consultant's invoice. This is a self-compliance basis — you do not need to apply for approval, but you must keep proper records.

5. Places of Worship — Fully Exempt

Building or renovating a mosque, temple, church, or gurdwara? The construction is fully exempt from service tax, effective 1 July 2025.

But there is a catch. If the development includes commercial buildings (like shop lots) on the same site as the place of worship, the exemption does not apply automatically. You would need to make a separate application to the MOF Tax Division.

Renovation of existing non-residential buildings (shops, offices, warehouses) that are being converted into places of worship is also exempt. But no refund is available for service tax already paid on the original building.

6. Other Changes You Should Know About

Local Authorities (PBT) are no longer exempt. The exemption expired on 30 September 2025. If you provide construction services to PBT, you must charge the 6% service tax. Statutory bodies (EPF, SOCSO, MARA, LHDN, public universities) and GLCs were never exempt.

Repair and maintenance during construction. If maintenance is part of your original construction contract, it falls under Group L at 6%. If it is a separate maintenance contract, it falls under Group G at 8%.

EPCC contracts for ships and platforms. Contractors can choose whether to classify these as construction work (6% service tax, B2B eligible) or manufacturing (sales tax). Pick one and stick with it.

Record keeping. You must keep all records for 7 years from the date of issuance.

Key Dates at a Glance

Get Expert Help

These updated guidelines create real opportunities to save on service tax — but only if you get the compliance right. Wrong invoicing, missing documentation, or incorrect apportionment can cost you.

Our indirect tax team at KS Chia & Associates has been advising construction and property development clients on SST since the expansion took effect. We can help you: •

• Calculate your mixed development apportionment.
• Update your invoicing templates.
• Review your contracts for exemption eligibility.
• Prepare supporting documentation for RMCD audits.

KS Chia & Associates

Chartered Accountants (AF001828)

WhatsApp us: 011 2366 5233

Disclaimer: This article is based on the RMCD Guide on Construction Work Services updated as at 17 March 2026 and related Service Tax Policies. It is for general information only and does not constitute formal tax advice. Please consult a qualified tax professional for advice specific to your situation.

Why LHDN Audits Companies: 8 Warning Signs Every Malaysian Business Must Know

 

Receiving a tax audit notice from LHDN (Lembaga Hasil Dalam Negeri Malaysia) is one of the most stressful events a business owner can face. An audit means months of gathering documents, answering detailed questions, and potentially facing extra tax assessments and penalties.

But here is what most business owners miss: LHDN does not select companies for audit by chance. They look for specific patterns. There are clear risk indicators that consistently draw their attention. Understanding these signs is your first line of defence.

Based on insights from recent tax audit and investigation guidelines, this guide sets out the eight red flags LHDN uses to identify audit candidates. This includes a major development for 2025 and 2026: real-time transaction monitoring through e-Invoice.

Red Flag 1: Unusual Expense Claims

The statutory test for a deductible business expense under Section 33 of the Income Tax Act 1967 is that it must be 'wholly and exclusively incurred in the production of income.' LHDN scrutinises claims that fail this test. Inflated deductions, personal expenses routed through the company, or directors' entertainment costs without clear business justification will trigger questions. If a private element exists, LHDN may disallow the claim and treat the amount as undeclared income.

Red Flag 2: Abnormal Margins or Persistent Losses

LHDN compares your company against industry data. Margins significantly below sector norms, or year-on-year losses without a credible explanation, will attract attention. If related parties are involved, this may point to a transfer pricing issue where profits are shifted to a related entity at non-arm's length prices. Companies with cross-border related-party transactions must maintain contemporaneous transfer pricing documentation under s.140A ITA 1967 and the Transfer Pricing Rules 2012.

Red Flag 3: Significant Related Party Transactions

Management fees, royalty arrangements, and intercompany loans are assessed for commercial substance and arm's length compliance. LHDN will question whether management fees paid to a holding company have genuine substance, whether royalty amounts are commercially justified, and whether intercompany loans carry market-rate interest.

Red Flag 4: Data Inconsistency Across Government Agencies

LHDN cross-references data from SSM (company filings), RMCD (SST returns), and from YA 2025 onwards, MITRS financial statement submissions. The revenue you declare in your SST return to Customs must reconcile to your Form C submitted to LHDN. Any discrepancy — even a legitimate one — will trigger a query. You should reconcile SST output figures to audited revenue before filing Form C, and document any legitimate differences.

Red Flag 4A: e-Invoice — Real-Time Monitoring (The Game Changer)

This is the most significant shift in LHDN's audit capability. Under the MyInvois framework, e-Invoices issued and received are validated and stored on LHDN's platform in real time. LHDN can track your monthly revenue as it happens, cross-match supplier and buyer records automatically, and compare your declared figures against transaction-level data it already holds.

The era of year-end adjustments is effectively over. Your annual return must reconcile to e-Invoice data. The mandatory timeline is rolling out in phases:

• August 2024: Turnover > RM100 million

• January 2025: Turnover > RM25M to RM100M

• July 2025: Turnover > RM5M to RM25M

• January 2026: Turnover up to RM5M

 

Note: Businesses with turnover below RM1,000,000 are exempted from e-Invoice implementation.

Red Flag 5: Director and Shareholder Transactions

Shareholder loans, excessive directors' remuneration, and personal expenses claimed through the company are examined closely. Asset transfers between directors and the company may also trigger RPGT or stamp duty questions. You must verify that directors' remuneration disclosed in the audited accounts is consistent with Form EA and Form C.

Red Flag 6: Significant Revenue or Profit Fluctuations

Sharp changes in revenue or profit that do not match the economic environment draw LHDN's scrutiny. A 40% revenue drop in a stable year, or a sudden profit surge when input costs rose, will raise questions. Maintain contemporaneous records like board minutes, management accounts, and key correspondence. The explanation must exist before the audit, not be constructed after.

Red Flag 7: Cash-Intensive Businesses

Restaurants, retailers, and construction companies handling large cash volumes face higher inherent risk. LHDN applies indirect income estimation methods, comparing declared revenue against electricity consumption, premises size, headcount, or lifestyle indicators. With e-Invoice now rolling out, LHDN will also compare declared cash revenue against e-Invoice-verified purchase volumes. Implement a POS system, maintain complete cash records, and ensure all sub-contractor payments in construction are supported by agreements and receipts.

Your Tax Audit Risk Checklist — Ask Yourself Right Now

1. Are all expense claims supported by invoices and a clear business purpose?
2. Can I explain why margins are low or why the company reported a loss?
3. Is transfer pricing documentation in place for cross-border related-party transactions?
4. Do SST output figures reconcile to audited revenue?
5. Are directors' remuneration disclosures consistent with Form EA and Form C?
6. Is there documentation explaining significant revenue or profit changes?
7. Are cash transaction records complete and systematic?
8. Does the business comply with the e-Invoice mandate, and do accounts reconcile to MyInvois data?

Need Help with Your Tax Audit Risk?

KS Chia & Associates provides tax compliance review, transfer pricing documentation assistance, e-Invoice compliance review, and annual tax compliance for Malaysian businesses.

WhatsApp us: 011-2366 5233

This article is prepared for general information purposes. It does not constitute legal or tax advice for specific circumstances. Readers are encouraged to seek professional advice for their individual situations.