(March 15): In an era dominated by technological advancements, businesses are continually evolving to harness the benefits of IT, which has significantly transformed their operations. One transformative aspect is the adoption of electronic invoicing (e-invoicing), a paradigm shift that promises increased efficiency, reduced errors and enhanced tax compliance.

Despite the digital age ushering in unprecedented opportunities, a stark reality remains — businesses, especially small and medium enterprises (SMEs), are falling behind in embracing new technologies and software. The question that looms large is: Why is it proving to be challenging for these businesses to adhere to the government's mandates?

This reluctance to adapt was evident in June 2022 when reports surfaced that more than 31,000 entities, ranging from individuals to companies, failed to declare their income. The repercussions were staggering, resulting in tax losses of an estimated sum of RM665 million.

Adding to the complexity is the perennial issue of constant changes in government regulations, presenting an ongoing challenge for businesses to adapt swiftly to sudden shifts. From new tax frameworks to revised regulations, the ever-evolving landscape demands agile adaptability and has left many businesses struggling to keep up.

As other Asian countries eagerly embrace this digital evolution, the spotlight now turns to Malaysia and the crucial strides it must take to keep pace with the dynamic shifts in the global economic landscape.

Countries across Asia, including Japan, Vietnam, South Korea, and the Philippines, have embraced e-invoicing since 2021, following a global trend. Singapore, on the other hand, has been practising e-invoicing since 2019, with the Infocomm Media Development Authority (IMDA) leading the charge by becoming the first Peppol Authority outside of Europe in May 2018. Peppol is a secure way to send invoices to customers in the public sector, which was developed as an EU standard.

With Singapore leading the way, the question arises: Is Malaysia falling behind?

E-invoicing in Malaysia has been permitted since 2015, aligned with the implementation of the goods and services tax law supporting indirect taxation yet businesses were choosing traditional invoicing.

Marked by paper-based processes and manual documentation, traditional invoicing has long been the norm. However, this conventional approach presents inherent drawbacks, including delays, errors and heightened operational costs.

Recognising the opportunities and efficiencies offered by e-invoicing, Malaysia made a significant move in March 2023 by mandating e-invoicing by phases, kick-starting on Aug 1 this year to enhance service quality, reduce compliance costs and increase overall business efficiency.

Introduced with the specific goal of aiding the government in achieving its 2024 tax collection target of RM185 billion, the e-invoicing system is mandatory for taxpayers with an annual income or sales exceeding RM100 million from Aug 1, 2024 onwards. To ensure a systematic transition, taxpayers in other income categories will be progressively brought under the mandate, with full enforcement targeted by July 1, 2025 onwards.

According to Datuk Seri Ahmad Maslan, when he was assuming the role of deputy minister of finance I, the implementation aims to overcome revenue leakage and shrink the size of the shadow economy.

The adoption of e-invoicing serves as a mechanism to improve the efficiency of the country's tax administration, ultimately enhancing tax compliance. Between 2000 and 2019, the shadow economy reduced from 30.2% to 21.2% of gross domestic product (GDP).

Due to the implementation of GST from 2015 to 2018, the size of the shadow economy was reduced to 21.2% from 2010 to 2019. It was also reported that the implementation of the e-invoicing system is projected to increase tax revenue contribution to between 14% and 15% of GDP, providing certainty for businesses.

Be it larger or smaller organisations, many businesses may not have fully adapted to the new system, despite the introduction of simpler and more affordable techniques. The rationale behind this is that there has been a widespread misconception about e-invoices that needs to be addressed.

Sending invoices in PDF format isn’t equivalent to an e-invoice. It involves using structured data exchangeable between the buyer and supplier. Another common myth is that e-invoices are not reliable. E-invoicing isn’t just environmentally friendly as we eliminate the usage of papers, but also minimises human errors. It is a seamless process and doesn’t require manual data entry, which in return expedites payment cycles.

Believe it or not, the move towards mandatory e-invoicing presents an array of opportunities for businesses in Malaysia, especially SMEs. Here's how one can benefit from e-invoicing.

However, the challenges persist, especially for businesses lacking the necessary resources for e-invoicing.

This issue becomes even more pronounced for SMEs, where limited resources, knowledge gaps, a shortage of manpower and time constraints compound the difficulties.

Even larger organisations grappling with these resource challenges raise a crucial question: if these entities face obstacles in implementing e-invoicing, what does it mean for the already resource-constrained SMEs? With TaxPOD, Malaysia's first one-stop online tax learning platform for businesses, one can gain the knowledge and skills necessary to navigate the complexities of the tax landscape. With TaxPOD, businesses can do it themselves without having to rely on others.

Delaying the process under the misconception that authorities will be lenient or overlook the transition is a grave miscalculation that can have profound repercussions. Businesses, both large and small, need to recognise that embracing e-invoicing is not just a compliance requirement but a strategic move for long-term sustainability. Allocate resources, invest in training, and seek guidance to bridge the knowledge gaps.

Collaborate with e-invoicing service providers to streamline the implementation process. Waiting until the last minute will only exacerbate the challenges and hinder your competitiveness in the evolving business landscape.

The Inland Revenue Board of Malaysia holds the power to impose fines ranging from RM200 to RM20,000, or imprisonment up to six months, or both, for non-compliance with e-invoicing regulations.

Offences include failure to issue e-invoices, self-billed e-invoices or consolidated transaction invoices. Non-compliant taxpayers may take it lightly, but the consequences are real and painful.

In a recent case last year, a businessman in Batu Pahat was charged at the Magistrate’s Court for tax evasion amounting to more than RM545,000. Another incident occurred in Johor where a recycling company, failing to file tax returns, incurred a penalty of more than RM2 million, in addition to a fine of RM18,000 at the Magistrate’s Court.

As Malaysia takes decisive steps toward mandatory e-invoicing, it is imperative for businesses, particularly SMEs, to embrace this technological evolution.

The transition promises enhanced efficiency and operational effectiveness and contributes significantly to the nation's economic transparency and fiscal growth. Businesses should view compliance not only as a legal obligation but as a strategic imperative for long-term sustainability, mitigating the risks of severe penalties and legal consequences.

Yap Shin Siang is the group CEO of YYC, a local accounting, tax and business advisory.