Many Malaysian businesses absorb service tax on behalf of their customers as a pricing strategy — keeping the sticker price competitive while quietly covering the tax themselves. It feels like a straightforward cost of doing business. But a 2025 High Court decision involving telco player Tune Talk Sdn Bhd confirms that the tax authorities — and the courts — see it very differently.
Here’s what the case means for any business that absorbs indirect taxes as part of its pricing.
Why Was the Absorbed Service Tax Disputed?
The dispute centres on a revised tax return filed by Tune Talk for the Year of Assessment (YA) 2015, in which the company claimed a deduction of approximately RM2,120,921.00 under Section 33(1) of the Income Tax Act (ITA) 1967.
Rather than passing service tax through to customers, Tune Talk had chosen to absorb it — a common move in the competitive telecommunications market. The question for the courts: does voluntarily shouldering a customer’s tax liability count as an expense “wholly and exclusively incurred in the production of income,” and therefore a deductible cost?
- Section 33(1) of the ITA 1967: Allows a deduction for expenses wholly and exclusively incurred in producing gross income (revenue nature).
- Section 14(1) of the Service Tax Act 1975: Places the legal liability to pay service tax squarely on the customer, not the service provider.
How Both Sides Argued Their Case
Tune Talk’s Position
Tune Talk argued that absorbing the service tax was a legitimate, necessary business expense:
- Absorbing the tax helped retain existing customers and win new ones in a price-sensitive market.
- The cost was directly tied to generating revenue, satisfying the “wholly and exclusively” test under Section 33(1).
- Without absorbing the tax, the company’s competitive position — and its income — would suffer.
The Inland Revenue Board’s (IRB) Position
The Director General of Inland Revenue (DGIR) disallowed the deduction on a narrower reading of the law:
- Under Section 14(1) of the Service Tax Act 1975, the customer — not Tune Talk — is legally liable for the tax.
- Choosing to pay someone else’s tax liability is a voluntary application of income, not a cost incurred in producing that income.
- A pricing decision does not change who the law says owes the money.
From the Special Commissioners to the High Court
- The Special Commissioners of Income Tax (SCIT) ruled in favour of the DGIR, holding that the absorbed service tax was not an allowable expense under Section 33(1).
- Tune Talk appealed to the High Court.
- In October 2025, High Court Judge Alice Loke Yee Ching dismissed the appeal and upheld the SCIT’s decision.
Why the Court Ruled Against the Taxpayer
The High Court’s reasoning rested on two points.
A. The Statutory Language Was Clear and Unambiguous
The court found no ambiguity in either Section 33(1) of the ITA 1967 or Section 14(1) of the Service Tax Act 1975. Because the law explicitly assigns the tax liability to the customer, a provider’s decision to absorb that cost cannot retroactively convert it into a “production cost” for income tax purposes.
B. A Strategic Decision, Not a Cost of Production
The court characterised the absorbed tax as a strategic decision affecting net profit, or at best a promotional gesture — not an expense wholly and exclusively tied to producing gross income. The distinction matters: Section 33(1) protects costs incurred to earn income, not costs incurred after income is earned as a matter of business strategy.
What This Means for Malaysian Businesses
The Tune Talk decision carries a few clear lessons for tax planning:
- Tax absorption risk: Absorbing indirect taxes such as Service Tax or Sales Tax as a marketing or retention strategy does not automatically make that cost deductible for corporate income tax purposes.
- Strict statutory interpretation: Malaysian courts continue to read the ITA 1967 literally. If the law assigns a liability to another party, voluntarily paying it typically disqualifies the cost as a deductible expense.
- Documentation discipline: Businesses need to clearly separate mandatory operational costs from discretionary commercial decisions when preparing tax filings — the two are not treated the same way.
Why This Decision Is Likely to Stand
Once a High Court judge finds that statutory language is “clear and unambiguous,” the bar for a successful further appeal rises sharply. The court’s underlying logic is difficult to dislodge: if the law says the customer owes the tax, a company cannot turn its voluntary payment of that tax into a mandatory production cost simply by calling it a pricing strategy. Allowing that would let businesses redefine tax liabilities through marketing decisions.
Broader Impact on the Market
Although Tune Talk’s case was specific to YA 2015, its effects have rippled across the MVNO (Mobile Virtual Network Operator) and digital services sectors:
- Compliance shift: Most telcos have moved away from claiming absorbed indirect taxes as direct income tax deductions.
- Pricing strategy shift: Companies increasingly adopt “all-in” pricing, where service tax is explicitly built into the price shown to customers — keeping the accounting aligned with the legal requirement that the tax be collected from the user, not absorbed by the business.
Conclusion
The Tune Talk case is a reminder that a smart pricing strategy and a deductible business expense are not always the same thing. Malaysian courts continue to apply a strict, literal reading of the Income Tax Act 1967 — and where the law assigns a tax liability to your customer, absorbing that cost voluntarily is unlikely to survive scrutiny as a production cost.
If your business absorbs service tax, sales tax, or any other indirect tax as part of its pricing or customer retention strategy, it’s worth reviewing how that cost is currently treated in your tax filings — before the IRB reviews it for you. Understanding how the courts have drawn this line can help you structure pricing and documentation in a way that withstands scrutiny.
To deepen your understanding, explore these related Malaysian tax case studies:
- Borrowing Costs: Bank Guarantee Fees Tax Case Study Malaysia
- Capital Gain vs Business Income: When Is a Property Sale Taxed as Capital Gain or Business Income?
- Facilitation Funds: Are They Tax Deductible in Malaysia?
