SST expansion sends ripple effects across key sectors

New Straits Times

20-06-2025

KUALA LUMPUR: The expanded Sales and Service Tax (SST), projected to generate RM10 billion in annual government revenue, is set to create ripple effects across industries, according to RHB Investment Bank Bhd.
The firm said while essential goods and services remain exempt, the broader tax net is likely to create both opportunities and challenges for key sectors such as plantations, consumer goods, property and real estate investment trusts (Reits).
"On balance, the SST expansion appears to be a carefully calibrated move. It shores up public finances with limited impact on the average consumer, but the sectoral implications could be material in certain pockets of the economy," it said in a note.
Among the sectors expected to face headwinds is the glove manufacturing industry, which continues to grapple with tight margins amid an oversupplied post-pandemic market.
"The expanded SST will increase glove production costs by approximately 25–30 US cents per 1,000 pieces. This puts further strain on producers at a time when competition remains intense, and cost pass-through remains challenging," it said.
A temporary relief has been introduced via a grace period until Dec 31, during which the Customs Department will withhold enforcement of the new tax on latex imports.
The plantation sector also faces pressure, particularly among downstream players, as palm kernel oil (PKO), a key processed output, will be subject to a five per cent SST.
While crude palm oil and fresh fruit bunches (FFB) are exempt as agricultural produce, PKO is categorised as a manufactured product and thus taxable.
RHB Investment said this could affect companies such as Sime Darby Plantation Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd, although the precise earnings impact remains unclear due to limited disclosure on internal versus external sourcing of PKO.
Meanwhile, Reits are expected to absorb the new eight per cent SST on leasing and rental income with manageable short-term impact, as landlords are likely to pass on the tax to tenants.
"However, upon the next lease renewals, upside to rental reversions may be limited, as landlords may prioritise tenant retention and maintain positive business relationships," the firm said.
In view of this, the research house said it prefers industrial Reits, which are typically backed by long-term master leases with multinational corporations.
In the consumer sector, the impact is projected to be manageable given that exemptions cover daily essentials. Retailers with strong bargaining power may be able to offset the effects through rental negotiations.
The expanded SST will also apply to inter-company leases, previously tax-exempt, potentially affecting conglomerates with extensive asset portfolios.
"This change could impact how groups allocate resources across subsidiaries, especially those with large asset portfolios under lease-based structures," it said.
Despite uneven impacts across sectors, the firm remains optimistic about the broader economic outlook.
It noted that the additional RM10 billion in expected revenue can serve as an effective pump-primer to stabilise and drive the domestic economy.
It said the SST expansion also signals the government's ongoing commitment to steady public finance reform, amid global trade frictions and geopolitical volatility.
"It's a good time to gradually accumulate quality names, particularly those with pricing power and minimal tax exposure," it added, recommending a cautious but selective investment stance focused on domestic-centric stocks.