CME: Without a special scheme for micro-businesses, e-invoicing may backfire

MONDAY, 01 April 2024: On 22 May 2023, the Inland Revenue Board of Malaysia (LHDN) announced that an electronic invoicing (e-invoicing) system will be implemented in stages starting from 2024. LHDN shared that a pilot implementation with selected companies will begin in April 2024, followed by mandatory implementation based on company’s annual revenue. The new scheme will target firms with revenues above RM 100 million per year from 1 August 2024, to be extended to firms with annual revenues above RM 25 million from 1 January 2025. Finally, from 1 August 2025 all firms will be subject to compulsory e-invoicing.

The Center for Market Education (CME) understands and agrees with the motivations behind the new scheme: reducing the incidence of the shadow economy and enlarging the tax base. However, according to CME the complexity of the scheme may produce the opposite effect. In fact, “when a fiscal regulation is too complicated and compliance not straightforward, it not only creates incentives to elusion and evasion, but it also becomes difficult to enforce”, commented Dr Carmelo Ferlito, CEO of CME.

Currently the implementation of e-invoicing will require each fiscal subject to fill 55 data fields for each counterpart. Additional 12 fields may be required in special cases.

According to CME, the scheme, because of the way in which it is designed, may increase the relative weight of the shadow economy, rather than reducing it. In fact, the fragmented nature of Malaysian capitalism must not be forgotten: in 2021, 97.4% of the firms registered in Malaysia were Micro, Small and Medium Enterprises (MSMEs). It is even more striking that 76.59% of the total number of registered businesses and 78.64% of MSMEs were microenterprises. 

When applied to the generality of firms, the new scheme may find most of them unprepared to implement it in practical terms and the scheme itself may become for microbusinesses an incentive to elude it or to eventually cease operations.

CME invites the Madani government to develop on-the-ground regulations consistent with the commitment to promote foreign and domestic investments. The overall pro-investment ecosystem is made of little bricks and cannot emerge if the regulation on the ground goes against the spirit of entrepreneurship.

A similar discrepancy between the will to make Malaysia an attractive investment destination and on-the-ground regulation can be found in another fiscal reform, which has been implemented with little noise. Currently in Malaysia companies with paid-up capital of RM 2.5 million or less at the beginning of the basis period, and having gross business income from one or more sources from the relevant year of assessment of not more than RM 50 million, are classified as SMEs. Their profits are taxed as it follows:

  • On the first RM 150,000 chargeable income – 15%;
  • RM 150,001 to RM 600,000 chargeable income – 17%;
  • RM 600,001 and above – 24%.

From 2024, if more than 20% of paid-up share capital of SMEs is owned by a foreign company or a non-Malaysia citizen, the SME will not be entitled to the 15% and 17% preferential tax rates. These firms will be subject to a 24% tax rate straight away. Such a measure is in conflict with the principle of fiscal equity, according to which taxes are applied to incomes as figures and not according to the nationality of the individuals producing those incomes.

CME believes that these new fiscal measures are in conflict with the spirit of the Madani framework, which emphasizes both 1) the importance of making Malaysia an open and attractive destination for international businesses 2) the importance of promoting local entrepreneurship, recognizing that domestic investments can be the key driver for long-term sustainable growth.

CME thus suggests not to only to re-instate the principle of fiscal equity but also to develop a special fiscal scheme for microbusinesses which should become an incentive for them to emerge from the shadow economy rather than another mechanism to push them further into it.

Such a scheme should reduce the number of their accounting compliances and simplify the way in which their taxable income is calculated, so to improve also authority’s enforcement capacity.

“The tax base can be enlarged and fiscal revenues improved if the fiscal system moves in the direction of being more equitable and straightforward, to reduce incentives to evasion and improve enforcement  “, Dr Ferlito concluded, stressing that CME reflections are aimed at finding a better way to achieve the desired outcomes: a lower incidence of the shadow economy and a larger tax base.

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About CME: The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia, and Jakarta, Indonesia.

As an academic and educational institution, CME aims to promote a more pluralistic and multidisciplinary approach to economics and to spread the knowledge of a sounder economics, grounded in the understanding of market forces.

In order to do so, CME is not only involved in academic initiatives, but it organizes seminars, webinars and tailor-made economics classes for students, journalists, businesspeople and professionals who wish to better understand the relevance of economics for their daily lives and activities.

Economics matters and needs to be presented in a fashion in which the link with reality is clearly visible. In this sense, we look not only at theoretical economics but also at policy making, with an emphasis on the unintended consequences generated by political actions. Visit