In this article, we want to dive deeper into the shift that e-Invoicing facilitates from traditional methods to digital systems, and how it leads to greater transparency and efficiency, especially with the informal economy. But first, let’s do a quick refresher.
E-invoicing has been the term on everyone’s lips, following the Malaysian government’s announcement to officially adopt the new system in 2024.
An e-Invoice serves as a digital record of a transaction conducted between a supplier and a buyer, replacing the need for physical or electronic documents like invoices, credit notes, and debit notes. Nevertheless, it still contains all the vital information found in traditional documents, such as the supplier’s and buyer’s particulars, item descriptions, quantities, prices before taxes, tax amounts, and the total transaction sum. These details are crucial for maintaining accurate records of daily business transactions.
Read more: A Comprehensive Introduction to E-Invoicing in Malaysia
The integration of e-Invoice not only streamlines the taxpayer experience but also enhances business efficiency and boosts tax compliance. Key benefits encompass:
Read more: Benefits, Challenges and Best Practices for Transitioning Your Business into E-Invoicing
How e-Invoicing Differs from Traditional Invoicing
E-invoicing, or electronic invoicing, presents a significant departure from the traditional paper-based invoicing process described. In e-invoicing, the entire invoicing workflow is digitized, eliminating many of the manual steps prone to errors and delays.
Here’s how it works: Instead of receiving a paper invoice in the mail, invoices are electronically transmitted from the seller directly to the buyer’s accounting or enterprise resource planning (ERP) system. This eliminates the need for manual data entry, as the invoice details are automatically captured and recorded within the financial system. Since the approval process in e-invoicing systems is typically integrated with the invoicing system itself, administrators can also review and approve invoices directly, streamlining the approval workflow and reducing the need for duplicate data entry.
Moreover, e-invoicing systems typically offer robust record-keeping functionalities, allowing invoices to be stored electronically in a centralized database for up to 7 years. This removes the need for physical paper copies and enables historical invoice data to be easily accessed and retrieved for auditing or tax reporting purposes.
E-Invoicing Will Significantly Reduce the Shadow Economy
The shadow economy, also known as the informal economy, underground economy, or parallel economy, refers to economic activities that occur outside the official scrutiny of government authorities. These activities are often unreported or underreported to evade taxation, regulation, or social security contributions. The shadow economy encompasses a wide range of informal activities, such as:
1. Undeclared work: This includes employment that is unreported to authorities for tax or social security purposes. It could involve individuals working “off the books” for cash payments, without any formal employment contracts or legal protections.
2. Illegal activities: These are activities that are prohibited by law, such as drug trafficking, human trafficking, counterfeiting, and other illicit trades. The profits generated from these activities are rarely reported to authorities.
3. The informal sector: This refers to economic activities that are legal but not regulated or taxed by the government. Examples include street vending, small-scale agriculture, and household-based businesses that operate without proper licenses or registrations.
4. Underground markets: Such informal markets exist where goods and services are exchanged outside of regulated channels. This can include bartering, trading in goods smuggled from other countries, or selling goods without proper documentation.
Why Does The Shadow Economy Exist?
High tax rates, excessive regulations, and bureaucratic red tape can drive individuals and businesses to evade taxes and operate in the informal sector to avoid compliance costs. In regions with high unemployment or underemployment, people may resort to informal work for survival. Marginalized groups, such as immigrants or refugees, often face barriers to participating in the formal economy, further pushing them towards informal activities. Additionally, in some societies, informal economic practices are deeply rooted in cultural norms and traditions.
As such, the shadow economy poses several challenges for the country as a whole:
- Governments lose tax revenue due to undeclared income and unreported economic activity, which can strain public finances and limit the government’s ability to fund essential services and infrastructure.
- It undermines fair competition as businesses operating in the shadow economy may gain an unfair competitive advantage over compliant businesses by avoiding taxes and regulatory compliance costs.
Workers in the shadow economy are robbed of social protections such as EPF / Socso benefits, healthcare, and legal protections, leaving them vulnerable to exploitation and economic insecurity.
- The shadow economy can also lead to diminished economic growth by distorting official economic statistics, making it difficult for policymakers to formulate effective economic policies. Moreover, the informal sector may hinder productivity growth and investment in the formal economy.
Addressing the shadow economy requires a multifaceted approach that includes simplifying tax and regulatory systems, improving enforcement mechanisms, promoting financial inclusion, and creating opportunities for formal employment. Additionally, fostering a culture of compliance and providing support to marginalized groups can help integrate them into the formal economy.
The Crucial Role that E-Invoicing Plays
The Malaysian government had implemented two main initiatives, namely Tax Identification Number (TIN) and more recently, e-Invoicing to tackle these challenges.
By mandating the use of e-invoicing, the government ensures that all business transactions are recorded digitally, making it difficult for businesses to evade taxes or engage in fraudulent activities. This digital trail of invoices also simplifies auditing and regulatory enforcement, ensuring businesses adhere to tax laws and regulations. Additionally, by reducing manual processing errors and streamlining invoicing workflows, e-invoicing improves overall operational efficiency, further discouraging participation in the informal economy.
Ultimately, these measures, when carried out based on best practices adopted by tax authorities in other countries around the world, contribute to a more transparent, accountable, and formalized business environment in Malaysia.
Moving Forward with E-Invoicing
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