LABUAN: The SME Association of Labuan called for two measures in Budget 2027 to help keep the island’s businesses competitive — applying the service tax exemption under Section 48 of the Service Tax Act 2018 to services performed in Labuan, and waiving import duty on goods produced by Labuan micro, small and medium enterprises (MSMEs) and sold elsewhere in Malaysia.
The association made the call ahead of the Budget 2027 announcement on Oct 9, while welcoming the announcement by Entrepreneur Development and Cooperatives Minister Steven Sim that the Cabinet had agreed to exempt MSMEs from the new minimum wage increase.
“This decision shows the Government’s clear understanding of 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,” said SME Association of Labuan President Jefery Tan in a statement on Friday.
On Section 48, the association said services performed entirely within Labuan by Labuan-based providers should be exempt from service tax, regardless of where the customer is registered.
It said the issue was particularly relevant because most, if not all, major industry players in Labuan are registered on the mainland and often award large, multi-disciplinary contracts to contractors based elsewhere in Malaysia, who then engage Labuan service providers.
The association said applying Section 48 as intended would prevent additional tax costs on work carried out in Labuan, noting that at eight per cent, every RM100,000 of work by a Labuan service provider adds RM8,640 to the cost, including RM640 in tax charged on tax.
“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 at Designated Area, and that engaging local service providers remains the natural choice,” he added.
Federal Territories Minister Hannah Yeoh established the Labuan Industry Task Force in February 2026. Since then, the association has engaged with Perbadanan Labuan, the Royal Malaysian Customs Department and the Ministry of Finance, and said Budget 2027 was the right time to resolve the matter.
On import duty, the association said Labuan MSME producers, including food and seafood processors, depended on sales to the rest of Malaysia for growth, but goods made in Labuan were treated as imports and attracted import duty when they left the island.
“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’s Budget 2027 proposals are for Section 48 to apply to services provided by Labuan-based providers in Labuan, regardless of where the customer is registered, with the customer’s location determined by its SSM Business Address and PBT Trading Licence.
It also proposed waiving import duty on goods made in Labuan by MSMEs with genuine local value-added when sold elsewhere in Malaysia.
Services supplied into Labuan by companies based elsewhere would remain taxable under Section 50, which the association said it fully supports.
“Our proposals have a modest effect on national revenue, but would make a meaningful difference to Labuan’s businesses and employment.
“We thank the Ministry of Finance, Federal Territories Ministry, the Royal Malaysian Customs Department and Perbadanan Labuan for their engagement, and look forward to seeing these measures in Budget 2027,” Jefery said.
