In the dynamic realm of business, technological innovations are revolutionizing traditional practices, and one such transformation set to impact Malaysian businesses is the adoption of e-invoices.
In this quick guide, we will delve into the definition of e-invoices, their phased implementation, the critical importance of understanding this shift, and the profound changes it brings to the business landscape.
What is e-Invoice by LHDNM?
According to LHDNM, e-invoice is an e-invoice, or electronic invoice, a document associated with the “sale of goods” or the “performance of services” that undergoes an electronic transmission process and receives validation from the Director-General of Inland Revenue (DGIR).
This shift towards electronic invoicing is part of a nationwide tax administration system reform initiated by Lembaga Hasil Dalam Negeri Malaysia (LHDNM).
These e-invoices not only serve as proof of income and expenses for companies but also emphasize real-time transactions, disallowing the issuance of back-dated documents.
In other words;
e-Invoice is the nationwide tax administration system reform by LHDNM that aims to streamline and modernize the tax process. It serves as a vital component in this system, acting as proof of financial transactions for businesses.
The real-time nature of e-Invoice ensures transparency and accuracy in reporting financial activities.
e-Invoice vs digital invoice
A common misconception prevails surrounding the distinction between digital invoices and e-invoices. While both are integral to the digital transformation of financial transactions, it’s crucial to discern the nuanced differences.
Digital invoices, often encountered in PDFs, JPGs, or email attachments, are a digital rendition of a traditional paper invoice. They retain a visual representation of the document but lack the underlying structured data that facilitates seamless electronic processing.
On the other hand, e-invoices transcend the visual facade and exist in machine-readable formats such as JSON (JavaScript Object Notation) or XML (eXtensible Markup Language). These structured data formats empower e-invoices with the ability to interact with automated systems, ensuring a more efficient and error-free exchange of financial information.
Therefore, understanding this distinction becomes pivotal for businesses navigating the digital landscape, as it influences the efficacy and compliance of their financial transactions within the burgeoning e-invoice framework.
How will e-invoice be implemented?
As announced by the Prime Minister on Budget 2024, the implementation of e-invoices is structured in three distinct phases, with each phase targeting businesses based on their annual turnover and revenue for the fiscal year 2022:
- Phase 1 (by 1st August 2024): Targets businesses with an annual turnover exceeding RM100 million.
- Phase 2 (by 1st January 2025): Expands the mandate to businesses with an annual turnover ranging from RM25 million to RM100 million.
- Phase 3 (by 1st July 2025): Encompasses all other taxpayers, including MicroSMEs and SMEs.
This phased approach is designed to provide businesses with a structured timeline for compliance, allowing them to adapt gradually to the new e-invoice system.
Why businesses need to understand e-invoice?
There are multiple reasons on why businesses need to understand e-invoice and start to adapt e-invoice in their businesses;
1. Mandatory to all Malaysian businesses
Commencing in 2024, businesses operating in Malaysia will be mandated to issue e-invoices for all their transactions. This regulatory shift is not merely a procedural change; it marks a significant departure from traditional business practices, bringing about substantial changes in how businesses operate and interact with tax authorities.
2. Impacts business operations
Understanding the e-invoice system is crucial for businesses as it fundamentally alters the way transactions are recorded and reported. The real-time nature of e-invoices requires businesses to stay current with their financial data, eliminating the possibility of back-dated documents.
3. Compliance with LHDNM requirements
In addition to the operational changes, businesses must ensure compliance with the specific requirements set by LHDNM. This includes understanding the nuances of e-invoice submission, approval processes, and record-keeping practices.
4. Strategic adaptation
Rather than viewing e-invoices solely as a regulatory requirement, businesses are encouraged to see them as a strategic opportunity to enhance efficiency, reduce manual errors, and embrace the benefits of a digitalized financial ecosystem.
How does e-Invoice Malaysia by LHDN works?
1. Doing business in pre-e-Invoice era
Traditionally, businesses or in this case a suppliers issued invoices or digital invoices directly to customers which are buyers, who then made payments.
This straightforward process required minimal interaction with tax authorities and allowed for a relatively quick exchange of goods and services.
2. Doing business in e-Invoice era
In the e-invoice era, the process becomes more intricate:
- Supplier issues e-invoice via 3 methods to IRBM cloud system for validation.
- Notification will be sent out to both supplier and buyer once validated in less than 1 second per invoice.
- At the same time, the supplier will share the e-invoice with the buyer.
- Buyers only have 72 hours to cancel or reject the e-invoice. Suppliers and buyers will receive rejection or cancellation notifications. No editing is allowed after e-invoice is verified by the LHDN.
- Buyer make payment to supplier.
This shift introduces additional layers to the invoicing process, emphasizing the need for businesses to adapt their internal workflows accordingly.
What else about e-Invoice?
There are more about e-Invoice implementation that businesses need to understand;
1. Expanded scope
E-invoices not only cover traditional invoices but also include credit notes, debit notes, and refund notes. The system introduces two additional processes – consolidated e-invoices and self-billed e-invoices – expanding the scope of financial transactions that can be seamlessly managed through the electronic platform.
2. Consolidated e-Invoices
This process allows businesses to consolidate multiple e-invoices of the current month into a single e-invoice, thus streamlining the reporting and validation process.
3. Self-Billed e-Invoices
In cases where businesses act as both the buyer and the seller, self-billed e-invoices enable them to generate invoices on their own behalf, further simplifying the transaction process.
What are legal consequences to the business that failed to comply e-Invoice?
There are legal consequences to the business that failed to comply with the e-invoice by LHDNM.
Failure to comply with e-invoice regulations can lead to severe consequences, including fines ranging from RM200 to RM20,000 or imprisonment for a period not exceeding six months.
These penalties underscore the importance of businesses adhering to the e-invoice mandate and ensuring the accuracy and timeliness of their financial reporting.
How to start adopting e-Invoices?
As Malaysia enters the e-invoice era, businesses must prepare for the profound changes that this digital transformation brings.
Embarking on the e-invoice journey requires businesses to undertake several crucial steps:
- Understanding e-Invoices: Businesses need to familiarize themselves with the intricacies of e-invoices, including the submission process, approval mechanisms, and compliance requirements.
- Operational Changes: Adapting internal business operations to seamlessly integrate e-invoices is essential. This may involve updating accounting systems, training staff, and establishing new workflows.
- Ensuring Compliance: Businesses must ensure that their e-invoices meet all the requirements set by LHDNM. This includes accurate information, adherence to validation timelines, and proper record-keeping practices.
- Participation in Events: To facilitate a smoother transition, businesses are encouraged to participate in e-invoice events. These events provide a platform for businesses to gain insights, ask questions, and stay updated on any changes or developments related to e-invoicing.
By understanding, adapting, and staying informed, businesses can navigate the e-invoice landscape with confidence, ensuring a seamless transition into this new era of business financial and tax management.