Expanded SST to raise RM10bil annually, but may weigh on demand — Analyst

New Straits Times

18 hours ago

KUALA LUMPUR: The expanded Sales and Service Tax (SST) is expected to boost government revenue by RM10 billion annually but may dampen consumer demand and trigger modest earnings downgrades, CIMB Securities said.
The research house said that while broadening the tax base is a fiscally prudent move, higher operating and input costs are likely to be passed on to consumers, potentially softening consumption in the second half of the year.
"The revised tax structure will raise operating and input costs, which are likely to be passed on to consumers. This may result in higher prices for goods and services, potentially weakening demand and consumer purchasing power," it said in a note.
Under the revised framework, discretionary and non-essential goods will be taxed at between five and 10 per cent, while the scope of the service tax will be expanded to cover six new segments.
These include leasing and rental, construction, financial services, private healthcare, education and beauty.
CIMB said the impact will likely become more visible in the third quarter of 2025, when businesses begin to reflect slower sales volumes and margin pressure in their earnings.
It maintained its year-end FTSE Bursa Malaysia KLCI target at 1,560 points and said the broader economic impact of the tax reform is expected to be modest, although some sectors may see minor earnings downgrades.
Mixed sectoral impact
The SST expansion will affect sectors differently. For banks, the eight per cent service tax on fee-based income will hit a segment that, in some cases, makes up to 70 per cent of non-interest income.
Still, CIMB Securities said the overall effect is expected to be marginal, as banks are likely to pass on the tax to clients.
"We expect banks to pass on the tax to clients, which may dampen transaction volumes," it said, noting that the net impact is likely to be neutral to slightly negative.
The outlook for consumer-facing companies is less upbeat, with retailers of non-essential goods likely to see weaker demand and slimmer margins as some absorb the tax to stay competitive.
In the property sector, real estate investment trusts (Reits) may face limited rental reversion as the eight per cent SST on rental income takes effect, along with a six per cent tax on maintenance services. Reits with weaker occupancy and pricing power are expected to be more affected.
Construction firms will face a six per cent service tax unless their projects involve residential buildings or public amenities. "To preserve margins, contractors are likely to pass on the higher SST through contract repricing," the firm said.
CIMB Securities' top stock picks in light of the SST changes include CelcomDigi Bhd, Gamuda Bhd, Public Bank Bhd, RHB Bank Bhd, Tenaga Nasional Bhd, Maxis Bhd, IOI Corp Bhd, IJM Corp Bhd and 99 Speed Mart Retail Holdings Bhd.
"We expect the revisions to earnings forecasts to be relatively modest, but sectors directly impacted by the tax expansion will require closer monitoring," the research house added.