Budget 2027: Labuan SME Association Seeks Tax Relief For Local Businesses

LABUAN, Oct 2 (Bernama) -- The Small and Medium Enterprises (SME) Association of Labuan has called for the service tax exemption under Section 48 of the Service Tax Act 2018 to be applied to services performed entirely in Labuan under Budget 2027.

Its president, Jefery Tan said the association also proposed waiving import duty on goods produced by Labuan-based micro, small and medium enterprises (MSMEs) and sold to other parts of Malaysia to help local producers compete on equal terms.

He said the association also welcomed the Cabinet’s decision to exempt MSMEs from the new minimum wage increase.

“This decision shows that the government clearly understands the pressures small businesses face. The same understanding can make a real difference in Labuan, where businesses carry the additional costs of operating on an island,” he said in a statement today.

On the service tax exemption, Tan said Section 48 provides that no service tax is charged on services provided by Labuan businesses within a Designated Area.

“Section 48 has been in the law since 2018. Applying it as intended ensures major industries are not paying tax on tax for work done on their own premises, which are located in the Designated Area, and that engaging local service providers remains the natural choice,” he said.

He said major industry players often awarded large, multi-disciplinary contracts to contractors based elsewhere in Malaysia, who then engaged Labuan service providers to carry out part of the work.

“If Section 48 is applied as intended, the major industry players pay service tax only once, on the contractor’s invoice. If not, they pay tax on a price that already includes tax,” he said.

Tan said at the eight per cent service tax rate, every RM100,000 worth of work by Labuan service providers could add RM8,640 to the cost, including RM640 in tax charged on tax.

He said the association had engaged with Perbadanan Labuan, the Royal Malaysian Customs Department (RMCD) and the Ministry of Finance (MoF) on the matter since Federal Territories Minister Hannah Yeoh established the Labuan Industry Task Force in February.

“The association believes Budget 2027 is the right moment to settle the matter,” he said.

On the proposed import duty waiver, Tan said Labuan’s MSME producers -- including food and seafood processors -- depended on sales to other parts of Malaysia to expand their businesses.

He said goods produced in Labuan are treated as imports when they leave the island and could attract import duty, placing local producers at a disadvantage compared with producers elsewhere in Malaysia.

“They source Malaysian materials, employ Malaysian workers and serve Malaysian customers. Waiving import duty would help them compete on equal terms,” he said.

The association proposed that services supplied in Labuan by Labuan-based providers be exempted from service tax regardless of where the customer is registered, with the customer’s location determined based on its registered business address and local authority trading licence.

It also proposed that goods produced in Labuan by MSMEs with genuine local value-added be exempted from import duty when sold elsewhere in Malaysia.

Tan said the association supported the continued taxation under Section 50 for services supplied into Labuan by companies based elsewhere.

“Our proposals have a modest effect on national revenue, but would make a meaningful difference to Labuan’s businesses and employment,” he said.

He also thanked the MoF, the Federal Territories Ministry, RMCD and Labuan Corporation for their engagement, and expressed hope that the measures would be included in Budget 2027.

--BERNAMA