Secondment Of Employees And Outsourcing/Supply Of Employees Is Not Subject To Service Tax

Employment services were first prescribed as taxable services under Service Tax (Amendment) (No. 4) Regulations 1997 [P.U. (A) 413/1997] with effect from 1 January 1998. The description of the taxable employment services was “provision of all types of employment services".

The description of taxable employment services was subsequently amended by Service Tax (Amendment) (No. 2) Regulations 2002 [P.U. (A) 509/2002], with effect from 1 Jan 2003, as follows:

"Provision of all types of employment services excluding -
provision of employment services in the form of secondment or supplying employees to work for another person for a period of time; or
provision of employment services for employment outside Malaysia."

However, administratively, Royal Malaysian Customs (RMC) had decided that "secondment of employees with administrative fee/charge/mark-up imposed” is subject to service tax. This was disputed by businesses and a dialogue was held on 16 December 2011 among the RMC, CTIM and the representatives from the industry associations to discuss the matter. The dialogue urged the RMC to re-consider the above administrative decision.

Upon re-assessment of the disputed issue, the RMC has recently issued an official letter indicating that
secondment of employees or supplying/outsourcing employees for a specific period of time by an agreement is not subject to service tax underItem (i), Group G of the Second Schedule to the Service Tax Regulations 1975.
Relevant employment agencies may apply to their respective RMC Branches to cancel their service tax licences.
All service taxes levied and collected from the customers by the relevant employment agencies must be paid over to the RMC.

Members may view the RMC letter on the Institute's website.

Service Tax (Amendment) Regulations 2012 [P.U.(A) 244/2012]

The above amends Group G in the Second Schedule of the Service Tax Regulations 1975 [P.U. (A) 52/1975] under the heading “Taxable Service” by substituting for item “q” with the following item:


“q”. Provision of hire-and-drive car or hire-car services with or without chauffeur in Peninsular Malaysia licensed under the Land Public Transport Act 2010 and the Commercial Vehicles Licensing Board Act 1987 for Sabah and Sarawak excluding provision of hire-and-drive car as defined under the Tourism Vehicles Licensing Act 1999 as operated by tourism operators registered under the Tourism Industry Act 1992.

The amendment is deemed to have come into operation on 31 January 2011. This is because vehicles licensing for Peninsular Malaysia will be governed by Land Public Transport Act 2010 with effect from 31 January 2011. However, vehicles licensing for Sabah and Sarawak continue to come under the Commercial Vehicles Licensing Board Act 1987.

The provision also clarifies that position of hire-and-drive car operated by tourism operators registered under the Tourism Industry Act 1992, as not a taxable service and thus excluded from service tax.