Labuan:The Small and Medium Enterprises (SME) Association of Labuan is advocating for the application of service tax exemptions under Section 48 of the Service Tax Act 2018 for services conducted entirely in Labuan in the upcoming Budget 2027.

According to BERNAMA News Agency, the association's president, Jefery Tan, has also suggested waiving import duties on goods produced by Labuan-based micro, small, and medium enterprises (MSMEs) when sold to other parts of Malaysia. This proposal aims to help local producers compete on an equal footing.

Tan expressed support for the Cabinet's decision to exempt MSMEs from the new minimum wage increase, highlighting that such measures demonstrate the government's understanding of the challenges faced by small businesses, especially those operating on an island like Labuan.

Section 48 of the Service Tax Act 2018 stipulates that no service tax is charged for services provided by Labuan businesses within a Designated Area. Tan explained that applying this exemption as intended would ensure that major industries are not subject to tax on top of tax for work performed on their premises.

Tan noted that industry players often award contracts to contractors based elsewhere in Malaysia, who then hire Labuan service providers. Proper application of Section 48 would mean these industry players pay service tax only once, reducing unnecessary costs.

At the current eight percent service tax rate, Tan stated that work valued at RM100,000 by Labuan service providers could incur an additional RM8,640 in costs due to the tax. The association has engaged with local and national authorities since the establishment of the Labuan Industry Task Force in February to address this issue.

Regarding the import duty waiver, Tan emphasized that Labuan's MSME producers, including food and seafood processors, rely on sales to other parts of Malaysia for business growth. Goods from Labuan are considered imports when leaving the island, potentially attracting import duties and putting local producers at a disadvantage.

The association proposed that services supplied by Labuan-based providers be exempt from service tax, regardless of the customer's registration location. Additionally, they suggested that goods with genuine local value-added be exempt from import duty when sold elsewhere in Malaysia.

Tan also supported the continued taxation under Section 50 for services supplied into Labuan by external companies. He expressed gratitude towards the Ministry of Finance, the Federal Territories Ministry, RMCD, and Labuan Corporation for their engagement and hoped these measures would be included in Budget 2027.