RM1 mln on paper, still mandatory in practice: The illusion of e-invoicing relief

KUCHING (Jan 4): On paper, the government’s decision to raise the mandatory e-invoicing threshold from RM500,000 to RM1 million in annual revenue seems like a welcome reprieve for small and medium enterprises (SMEs).

Announced in December 2025, the move was framed as a win for struggling SMEs, promising relief from e-invoicing compliance at a time when rising costs are already eroding business margins.

According to industry groups, the move would have technically exempted an estimated 200,000 SMEs from the e-invoicing mandate. However, in reality, this number may be lower as numerous conditions and structural requirements continue to restrict those who can meaningfully benefit from this threshold increase.

A deeper look reveals that this policy change is less of a meaningful overhaul and more a superficial political fix – one that placates public complaints while leaving the fundamentals of the e-invoicing regime largely unchanged.

Conditions that trump the RM1 mln threshold

While headlines focused on the raising of the exemption threshold to RM1 million, significant conditions remain that introduce wide carve-outs, pulling many small operators back into the e-invoicing net regardless of their own revenue.

According to several taxpayers and consultants, the Inland Revenue Board (IRB) has made it a mandatory requirement that once a business’ annual revenue exceeds RM1 million in a specific year of assessment, the e-invoicing mandate would apply regardless of subsequent changes in its actual current revenue.

For example, a company that recorded annual revenue exceeding RM1 million in 2022, but subsequently scaled down operations in 2023, generating revenue well below the threshold and only minimal transactions in 2024, may still be required to register for e-invoicing under Phase 4 solely because of its historical turnover.

Despite operating at a much smaller scale, the business must still undertake system registration, administrative setup and ongoing compliance obligations.

For SMEs already in decline or in a winding-down phase, this backward-looking test may be seen as punitive, as it imposes fresh compliance requirements on businesses whose current scale of activity no longer reflects the revenue level that triggered the mandate.

Besides this, IRB has also announced that the exemption does not hinge solely on being under RM1 million in annual turnover. If a business forms part of a group, or has related entities, shareholders, subsidiaries, or joint ventures (JVs) with turnover exceeding the threshold, it is still required to implement e-invoicing.

In practice, this means the exemption applies only in the narrowest sense — to businesses that are genuinely isolated and fully standalone.

More critically, the guidelines do not appear to prescribe any materiality threshold for these relationships. There is no distinction between a controlling shareholder and a minority shareholder, nor any clarity on whether the size or duration of a JV matters.

A company could, in theory, be pulled into mandatory compliance simply because it has an eligible corporate shareholder holding as little as one per cent equity, or because it has single low equity JV with a larger company.

This raises a fundamental question: how many SMEs today operate without any form of shared ownership, past collaboration, or group affiliation at all?

In reality, many SMEs function within supply chains, shared equity structures, or collaborative arrangements that are not only commonplace but often necessary for survival and growth.

As a result, a significant portion of smaller firms operating within Malaysia’s typical business environment will remain in scope, despite falling below the headline threshold.

Such technical exemptions substantially dilute the substance of the policy shift and reinforce the perception that the primary objective is not to materially ease compliance burdens, but to preserve the breadth of the tax authority’s digital reporting framework.

More concerningly, rather than offering meaningful relief, these conditions may also discourage otherwise standalone SMEs from expanding through JVs, partnerships, or minority shareholdings, for fear of being prematurely drawn into a complex and costly compliance regime.

Compliance by proxy

But even if a SME is technically exempt, there is still the issue of “compliance by proxy”.

According to many SMEs, one of the most contentious outcomes of the current design is that they may be forced to adopt e-invoicing simply because its customers or suppliers require it for their own reporting.

This shifts the compliance burden downstream — from large corporates with dedicated finance teams to smaller operators with limited administrative capacity. In effect, SMEs are being pulled into the system not by law, but by commercial necessity.

In this case, the threshold increase offers little relief to SMEs who continue to face the real issue: the cost of e-invoicing adoption and compliance.

Revenue vs Earnings as a threshold

A growing criticism of Malaysia’s e-invoicing framework is its reliance on revenue rather than earnings as the primary threshold for compliance.

Revenue is a blunt indicator of a firm’s ability to absorb regulatory costs, particularly in low-margin, high-turnover sectors such as construction, logistics, wholesale trading and food distribution. A business can cross the RM1 million revenue mark very quickly without possessing the financial resilience or internal capacity to manage complex compliance requirements.

For example, a contractor generating RM1 million in revenue at a five per cent margin is treated no differently from a professional services firm with the same turnover but far higher profitability, despite their vastly different compliance capacities.

From a policy perspective, these two businesses are not comparable, yet the current framework makes no distinction between the two.

To address this mismatch, other countries have adopted more nuanced approaches to the digitalisation of business and tax regimes.

In the United Kingdom (UK), revenue is used to determine Value Added Tax (VAT) registration eligibility, but its Making Tax Digital (MTD) regime incorporates cash accounting and simplified reporting options for smaller and less cash-resilient businesses, reflecting a recognition that profitability and cash flow matter as much as scale.

Moreover, the UK has also adopted generous gradual deferred entry timelines, with businesses earning over £50,000 entering the regime in 2026, £30,000 in 2027 and £20,000 in 2028. This gradual rollout allows smaller businesses sufficient time to adapt rather than forcing abrupt compliance.

Similarly, the Australian Taxation Office (ATO) applies turnover thresholds for digital tax reporting but offsets them with tiered reporting obligations, simplified Business Activity Statement (BAS) reporting and targeted concessions for small businesses, even after thresholds are crossed.

Additionally, both the UK and Australia also allow exemptions or deferrals on practical grounds, such as lack of reliable internet access – a critical consideration for businesses operating in rural and remote areas, including parts of Sarawak’s interior.

While the IRB has indicated that businesses facing this issue may approach them for discussion, there is no mention of exemptions at this time.

In contrast, Malaysia’s current approach applies a rigid revenue test with limited regard for margins or circumstance, raising questions about whether the policy genuinely reflects our business reality or prioritises the ease of enforcement over proportionality.

Is Support Enough?

To its credit, Malaysia’s government has introduced tax relief measures to help offset costs incurred from e-invoicing implementation, including deductions for consultation, system upgrades and related compliance expenses.

These incentives acknowledge that digital compliance carries real costs, particularly for smaller firms.

However, tax relief alone may not be sufficient or equitable to overcome the broader concerns raised by business owners, such as system complexity, ongoing compliance costs, administrative burden and operational disruption.

Moreover, relief that is realised only at the point of tax filing also does little to address the upfront cash flow pressures that are often the most acute constraint for SMEs.

And given the level of pushback voiced by business owners across multiple sectors, this seems to ring true.

In the end, the revised threshold from RM500,000 to RM1 million seems like a tokenistic Band-Aid: a higher number that looks good in the headlines but does little to change the lived reality for SMEs.

Instead of engaging with deeper structural issues such as cost burdens, disproportionate compliance expectations, or more meaningful transitional support, the policy leans on headline relief.

Businesses deserve more than this, they deserve policy that acknowledges  their operational realities, not one that looks generous on paper while remaining rigid in practice.

What SMEs aren’t being told about the RM1 million e-invoicing threshold

1. The RM1 million threshold is not a clean exemption

Being below RM1 million in revenue does not automatically mean a business is exempt. Group structures, related entities, corporate shareholders, subsidiaries, or JVs with non-exempt entities will still trigger mandatory e-invoicing.

2. There is no materiality test for shareholding or JVs

The rules do not clearly distinguish between controlling and minority interests. A small SME could be required to comply simply because it has a corporate shareholder with a small stake, or because it participated in a low-equity JV.

3. “Standalone” SMEs may be rarer than you think

Many SMEs operate within supply chains, shared ownership structures, or collaborative arrangements for the sake of growth. Truly standalone SMEs could be rarer than expected and their growth may be stifled in fear of being dragged prematurely into the current e-invoicing system.

4. SMEs are still subject to “compliance by proxy”

Even when technically exempt, SMEs may still be forced to adopt e-invoicing because their customers or suppliers require it. This shifts the burden from large corporates to smaller firms with fewer resources.

5. Revenue instead of profitability is used as a proxy for capacity

Low-margin businesses can cross RM1 million in revenue quickly without having the profitability or cash flow to absorb compliance costs. The framework makes no distinction between high-margin and volume-driven businesses.

6. Tax relief helps, but only later.

Government incentives for e-invoicing integration largely take the form of tax deductions, which provide relief only after costs are incurred and tax returns are filed. They do little to ease upfront cash-flow strain.

Bottom line:

The RM1 million threshold sounds generous, but its real-world impact is far narrower. Businesses deserve more than this, they deserve policy that acknowledges their operational realities, not one that looks generous on paper while remaining rigid in practice.