• The government plans to collect 6% service tax from July 1 on construction services for infrastructure, commercial, and industrial buildings, if the taxable value exceeds RM1.5 million annually.

KUALA LUMPUR (June 11): An expansion in sales and service tax (SST), particularly the inclusion of construction services, is likely to drag margins of property developers, rather than that of contractors, according to Maybank Investment Bank (Maybank IB).

Developers will likely need to absorb the additional cost from the tax to be imposed on construction effective July 1 for commercial and industrial projects, Maybank IB said in a note on Wednesday. The cost may be passed on to buyers for future projects to avoid margin erosion, it said.

“As most contracts incorporate a regulatory change review clause, developers are expected to bear this SST, rather than contractors," Maybank IB explained.

The government plans to collect 6% service tax from July 1 on construction services for infrastructure, commercial, and industrial buildings, if the taxable value exceeds RM1.5 million annually.

However, exemptions are provided for residential buildings, public utilities related to housing, and non-reviewable contracts that will enjoy a 12-month grace period from the effective date.

Developers engaged in data centre construction, including Eco World Development Group Bhd (KL:ECOWLD) and Sime Darby Property Bhd (KL:SIMEPROP), could also see increased expenditures, potentially reducing their internal rate of return, the house flagged.

“Concurrently, with a strategic emphasis on generating recurring income from investment properties in recent years, such as malls, the 8% SST on rental income would be borne by tenants, which could restrain developers’ leverage for increment negotiations, we believe,” Maybank IB said.

To avoid margin erosion, developers will likely raise prices for units still unsold and for future projects, though their ability to pass on the rising construction cost to buyers may be limited by slower economic growth and weak market demand, Maybank IB noted.

Overall, Maybank IB maintained its “neutral” call on the property sector.

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