What Is a Levy? Tax Difference & Money Flow Malaysia

You may have heard employers complain about the "foreign worker levy" or certain companies paying the "HRDF levy". You may also have come across "tourism tax" or "sugar tax". Why does the government have so many different types of levies, and where does the money actually go?

This is not just an academic question. It touches business costs, the price of products you buy, and the margins of companies you might own shares in on Bursa Malaysia. Understanding levies lets you read annual reports more sharply and assess the impact of every budget policy change.

This article answers three core questions: what exactly is a levy, who decides the rates, and where the collected money goes.

Quick Answer

A levy is a mandatory charge imposed by the government on specific parties (typically employers or producers) for a specific purpose - whether to regulate an industry, fund a particular programme, or shift economic behaviour. The rate is set by the relevant Ministry through legislation or regulations and approved in the annual Budget. Collected funds typically flow into the Federal Consolidated Revenue Account, or in some cases are ring-fenced for specific purposes such as worker training (HRDF) or health programmes.

What Is a Levy? The Basic Definition

In public finance language, a levy is a mandatory charge imposed for a specific purpose. It's not just an ordinary "tax" - there's a regulatory or earmarking element that distinguishes it.

For example, when an employer hires a foreign worker, the government imposes an annual levy. The objective isn't just revenue; it's a policy mechanism to: 1. Reduce reliance on foreign labour, 2. Encourage automation and local employment, 3. Cover the social and infrastructure costs of accepting foreign labour.

Similarly with the HRDF levy - employers with significant Malaysian workforce pay 1% of monthly wages, and that money funds skill training. This levy has a clear "purpose" element, not just general "income tax".

Levy vs Tax: 3 Key Differences

Many confuse levies with taxes. Although both are mandatory payments to government, important differences exist:

1. Collection Purpose

Taxes (like income tax, SST) are collected for general government revenue - placed into the consolidated account and usable for any budget allocation. Levies typically have a specific purpose - either regulating a specific industry or funding a particular programme.

2. Target Payer

Taxes are typically imposed broadly (all income, all sales, all tourists). Levies are often limited to specific parties - employers hiring foreign workers, companies employing many locals, or producers of particular products.

3. Policy Justification

Taxes are typically justified on grounds of "civic duty" or "public return". Levies are justified as direct costs of specific activities - for example, "you use foreign workers, so you pay the social cost the government bears".

In practice, this boundary is fuzzy. Many things called "taxes" actually function as levies (tourism tax, sugar tax), and some "levies" are similar to ordinary taxes. But understanding this conceptual difference means you can think critically about every new policy announcement.

Types of Levies & Special Taxes in Malaysia

Here are the main mandatory payments classified as levies or functioning as levies in Malaysia:

1. Foreign Worker Levy

Authority: Ministry of Human Resources (KESUMA) + Ministry of Home Affairs (KDN)
Rate: RM410 (domestic helpers) to RM1,850 (manufacturing/construction)
Payer: Employer
Annual collection: ~RM1.7 billion (2022)

2. HRDF Levy (HRD Corp)

Authority: HRD Corp (under Ministry of Human Resources)
Rate: 1% of monthly wages (mandatory if ≥10 Malaysian employees), 0.5% (voluntary 5-9 employees)
Payer: Employer
Use: Worker skill training - claimable for training costs

3. Tourism Tax

Authority: Royal Malaysian Customs Department (JKDM)
Rate: RM10 per room per night
Payer: Foreign tourists (Malaysian citizens & PR exempted)
Collector: Hotels & digital platforms like Agoda, Booking.com

4. Excise Duty on Alcohol & Tobacco (Sin Tax)

Authority: JKDM
Rate (effective 1 Nov 2025): Cigarettes +2 sen/stick, Alcohol +10%, Cigars +RM40/kg
Payer: Producer or importer
Estimated additional revenue: RM700 million - RM1 billion per year

5. Sugar-Sweetened Beverage Tax

Authority: JKDM
Rate: 50 sen per litre (up from 40 sen in Budget 2024)
Target: Carbonated drinks > 5g sugar/100ml, juices > 12g/100ml
Payer: Beverage producers

6. High Value Goods Tax (HVGT)

Authority: JKDM (pending implementation)
Target: Luxury goods like watches, branded bags
Status: Announced in Budget 2024, implementation deferred

7. Casino & Gaming Licensing Levy

Authority: Ministry of Finance
Rate: 35% gaming tax + casino licence fees
Payer: Casino operators (Genting Malaysia)

Who Sets the Levy Rates?

Determining levy rates in Malaysia involves three distinct layers of authority:

Layer 1: Acts of Parliament

Every levy must have a legislative basis in an Act passed by Parliament. Examples:

Foreign Worker Levy: Immigration Act 1959/63 + Foreign Workers Recruitment Act
HRDF Levy: Pembangunan Sumber Manusia Berhad Act 2001
Tourism Tax: Tourism Tax Act 2017
Excise Duty: Excise Act 1976

These Acts grant authority to the relevant Minister to set rates and amendments.

Layer 2: Annual Budget

Most levy rate changes are announced in the Budget (Belanjawan) presented by the Finance Minister every October/November. For example, Budget 2026 (presented 10 October 2025) announced increases of 10% in alcohol excise duty and 2 sen per cigarette, effective 1 November 2025. The Budget is approved by Parliament before taking effect.

Layer 3: Ministry Regulations

After the Act and budget, the relevant Ministry issues technical regulations - exact rates, effective dates, collection mechanisms, and exemptions. For the foreign worker levy, the Ministry of Human Resources issues detailed regulations. For tourism tax, JKDM issues operational guidance via the MyTTx portal.

In other words, the full process is: Parliament passes an Act → Finance Minister adjusts rates via Budget → Technical Ministry implements. No single individual can change a levy unilaterally - there are checks and balances.

Where Does the Levy Money Go?

This is the most-asked but least-understood question. Short answer: depends on the type of levy.

Federal Consolidated Revenue Account

The majority of levies - including foreign worker levy, tourism tax, sugar tax, and excise duty - flow directly into the Consolidated Revenue Account. This is the government's master "bank account" controlled by the Ministry of Finance. Once in, the money becomes part of total government revenue and can be used for any budget allocation - from civil servant salaries, subsidies, all the way to infrastructure projects.

This means even if you think "foreign worker levy money should go to local workforce projects", in reality it mixes with other revenue and is allocated by annual budget priorities. The government can "earmark" a specific use if it wishes - but technically, the money has entered the general account.

Special Funds / Earmarked Funds

There are important exceptions where levies are pooled into specific funds:

HRDF Levy goes to the HRD Corp fund - usable only for skill development programmes. Employers can claim back most of their contributions to fund training for their own workers.

Additional excise on alcohol & tobacco (Budget 2026) is explicitly earmarked for the Ministry of Health (KKM) - funding the Lung Health Initiative, diabetes, and heart disease treatment. This is the "sin tax with health hypothecation" model common in many countries.

When you read budget announcements, note whether the government says funds "will go to the consolidated account" or "will be set aside for X". The distinction determines how the money is actually used.

Foreign Worker Levy: Detailed Case Study

Since this is the largest levy by collection and most controversial, let's look more closely:

Who Pays? The employer, fully. Since 2019, employers cannot deduct the levy from foreign workers' wages. The levy is the employer's cost, not the worker's.

How Much? Depends on sector and zone:

Peninsular Malaysia: Manufacturing/Construction/Services RM1,850, Plantation/Agriculture RM640, Domestic Helpers RM410
Sabah/Sarawak: Services RM1,490, Manufacturing/Construction RM1,010, Plantation RM590, Agriculture/Domestic Helpers RM410

Total Collection? According to Ministry of Finance data, foreign worker levy collection was estimated at around RM1.7 billion in 2022. This is comparable to the corporate tax collection of many mid-cap Bursa Malaysia companies.

Multi-Tier Levy Mechanism (MTLM) is being rolled out from 2025 - levy rates will progressively increase based on the number of foreign workers in a company. Goal: reduce dependence, encourage automation.

For a deeper understanding of how the foreign worker levy connects to the FWCMS recruitment system and immigration policy, read our article on Malaysia's foreign worker system FWCMS, NIISe & Turap.

Business executive reviewing tax and levy compliance documents in modern Kuala Lumpur office with KLCC view — For employers and producers, levies are a fixed component in annual financial reporting. Understanding the collection structure and fund flow helps investors assess the impact of every policy change on company margins.

HRDF Levy: A Fund You Can Claim Back

The HRDF levy (now known as HRD Corp) is one of the most structured levies in Malaysia. It is administered under the Pembangunan Sumber Manusia Berhad Act 2001.

Who Must Pay?

Employers with ≥10 Malaysian full-time employees: mandatory registration, 1% rate
Employers with 5-9 employees: optional registration, 0.5% rate
Part-time workers, trainees, and non-citizens: excluded from calculation

Where Does the Money Go? Funds enter the HRD Corp pool - not the consolidated account. The fund is administered by HRD Corp and used entirely for skill development programmes. Employers can claim back most of their contributions to:

Fund employee training
Purchase training books/materials
Pay for employees' professional certifications

This is HRDF's unique characteristic - technically, it's a "loan from employers to themselves" for training purposes. Different from the foreign worker levy which goes directly into government revenue.

Other Levies Often Forgotten

Tourism Tax (RM10/room/night) - Although called a "tax", it functions as a regulatory levy. Only foreign tourists pay; Malaysian citizens and PRs are exempt. Hotels collect, JKDM receives.

Excise Duty on Alcohol & Tobacco (Sin Tax) - Up 10% (alcohol) and 2 sen per cigarette starting 1 November 2025. Additional revenue is earmarked for KKM.

Sugar-Sweetened Beverage Tax - 50 sen per litre for drinks with > 5g/100ml sugar. Producers pay; only for ready-to-drink beverages (not the teh tarik at your local mamak).

Each has different impacts on sectors and companies. Beverage producers like Fraser & Neave (F&N) and Spritzer have direct exposure to the sugar tax. Cigarette manufacturers like British American Tobacco Malaysia are exposed to excise duty. Hotel operators like Genting Malaysia and YTL Hospitality REIT must manage tourism tax collection.

What Levies Mean for Bursa Malaysia Investors

For active investors, levies aren't just an "abstract business cost" - they're concrete margin factors:

1. Most Exposed Sectors

Manufacturing, construction, services, and plantation are most exposed to the foreign worker levy. Any rate increase directly reduces EBITDA margin. When analysing a sector's PE ratio, investors must factor levy risk into their valuation.

2. Margins & Cash Flow

Examine the "labour costs" and "excise duties" segments in annual reports. For companies with high foreign worker ratios, MTLM will progressively add structural costs. This should be a line item in your cash flow statement analysis.

3. Budget Announcements

Watch the Budget announcement every October/November - levy or excise duty hikes can shift sector margin dynamics overnight. Budget 2026 is a perfect example: the 10% alcohol excise increase directly hit sentiment in that sector's stocks.

4. Automation Plans

Companies announcing serious automation plans (not just lip service) stand to protect margins from rising foreign worker levies. Track capex in quarterly reports for signs of real commitment.

FAQ: Frequently Asked Questions on Levies

1. What's the difference between a levy and a tax?

Taxes are typically imposed broadly and flow into general government revenue. Levies are typically specific to certain parties (e.g. employers of foreign workers) and have a clear policy purpose. In practice, this boundary is fuzzy - some "taxes" function as levies.

2. Can I claim back levies I've paid?

Depends on the type of levy. HRDF levies can be claimed back (for skill training). Foreign worker levy - first year may be claimable in certain conditions, but the rest is not. Tourism tax, sugar tax, excise duty - cannot be claimed back.

3. Can the foreign worker levy be deducted from worker wages?

No. Since 2019, employers are prohibited from deducting the levy from foreign workers' wages. The levy is fully the employer's cost.

4. What is the Multi-Tier Levy Mechanism (MTLM)?

MTLM is a tiered foreign worker levy system being implemented from 2025. Rates will progressively rise based on the number of foreign workers in a company. Goal: encourage automation and reduce dependence.

5. Who collects the tourism tax - hotels or government?

Hotels or digital platforms (Agoda, Booking.com) collect from foreign tourists, then remit to the Royal Malaysian Customs Department every quarter.

6. Do foreign workers pay income tax to Malaysia?

Yes. Foreign workers in Malaysia ≥182 days per year are considered tax residents and pay income tax to LHDN like Malaysian citizens. This is separate from the foreign worker levy paid by employers.

7. Why isn't levy money used for local workforce projects?

Partly YES - HRDF is specifically for training Malaysians. But the foreign worker levy typically flows to the general consolidated account, so its use for local workforce projects is not directly guaranteed. The government can "earmark" if it wishes, but that decision depends on the annual budget.

8. Are levies the same as SST or GST?

No. SST (Sales and Services Tax) and GST (now abolished) are general taxes imposed on consumption of goods and services. Levies are narrower - only for specific parties for specific purposes.

Conclusion

Levies are an important policy mechanism that affects business costs, product prices, and company margins across Malaysia. Understanding the difference between levies and general taxes, who sets the rates, and where the money goes lets you read annual reports and budget announcements more sharply.

For investors, levies aren't just a macro issue - they're a micro factor that feeds directly into margin projections and sector valuations. Every rate change in the annual Budget can move stock prices in affected sectors.

To start investing in Bursa Malaysia companies and monitor the impact of levy policy changes on your portfolio, you'll need access to the stock market first.

Open a CDS account with Mahersaham to start investing in Bursa Malaysia and overseas stocks like the US and Hong Kong.

For beginners who want to understand investing fundamentals before getting started, download our free Stock Market Basics Ebook.

What Is a Levy? How It Differs from Tax & Where the Money Goes in Malaysia