From Andrew Ewe
The rollout of Malaysia’s e-invoicing framework by the Inland Revenue Board (LHDN) marks a major shift in how taxpayers are expected to document business transactions.
With a phased implementation beginning in 2024, e-invoicing is being hailed as the cornerstone of a modernised tax administration system – one that promises transparency, traceability and reduces tax leakage.
Yet, amid the administrative push, a serious misconception is taking root among taxpayers, trainers and professionals alike: the belief that having a validated e-invoice automatically guarantees a tax deduction.
This assumption is not only misleading, it is potentially dangerous. Businesses that rely solely on e-invoices as proof of deductibility may find themselves on shaky ground when faced with tax audit challenges.
The role of the e-invoice guidelines: helpful, but not law
LHDN has done well to issue e-invoice guidelines and accompanying FAQs to explain the mechanics of e-invoicing. These materials are helpful, but they are not law for deductibility.
Administrative guidance does not have legislative force. While Section 82C, recently introduced into the Income Tax Act (ITA), creates a statutory duty to issue e-invoices in prescribed situations, there has been no amendment to Section 33 or Section 39 – the core provisions that govern whether an expense is tax-deductible.
In short, a compliant e-invoice is not, by itself – at least for now – a ticket to deductibility.
The real legal test for deductibility
The deductibility of expenses remains subject to Section 33(1), which requires that any expense claimed must be “wholly and exclusively incurred in the production of gross income”.
Additionally, Section 39 lists expenses that are expressly prohibited, such as capital expenditure, personal expenses, or fines and penalties.
These provisions focus on substance, not form. The mere possession of a valid e-invoice, no matter how well-structured or digitally verified, does not bypass the requirement that the expense be incurred for business purposes.
Nor can it override statutory prohibitions under Section 39.
This distinction matters. For example, a company director may receive a perfectly valid e-invoice for a luxury watch purchased in the company’s name. But unless the expense passes the business purpose test under Section 33 – and is not disallowed under Section 39 – it remains non-deductible.
Two legs of deductibility: document and substance
What the current conversation misses is that tax deductibility stands on two legs:
- Documentary proof – The invoice or record, which may soon have to be in the e-invoice format under the law;
- Substantive basis – The legal test: is the expense business-related, wholly and exclusively incurred, and not expressly disallowed?
E-invoices serve the first purpose well because they strengthen traceability and documentation. But they cannot replace the second leg.
As tax professionals know, documentation is the starting point, not the finishing line.
A dangerous assumption for taxpayers and professionals
The danger lies in the unintended message being sent: that e-invoicing is the new gold standard, and anything outside it is non-compliant or non-deductible.
This not only risks penalising honest taxpayers during audits but may also lull others into a false sense of security.
If businesses believe that e-invoicing guarantees deductions, they may start claiming expenses that are substantively flawed – triggering greater scrutiny in the future.
What should be done
While it’s prudent for businesses to begin aligning with e-invoicing requirements, especially in anticipation of mandatory phases, compliance should not be reduced to a checklist of digital forms.
Taxpayers must continue applying the principles of Section 33 and Section 39 when assessing whether an expense is deductible.
Conclusion
E-invoicing is a welcome step forward in modernising tax compliance, but we must not confuse procedural innovation with substantive entitlement. The law has always required that expenses be justified not just on paper, but in purpose and substance.
Meanwhile, until legislation clearly provides otherwise, taxpayers should take comfort in knowing that expenses supported by traditional invoices and receipts remain claimable. This is provided they meet the established legal criteria under Section 33 and Section 39 of the Income Tax Act 1967.
To believe otherwise is to fall for the illusion of deductibility.
Andrew Ewe is a Fellow of the Chartered Tax Institute of Malaysia and a former chairman of its northern branch.
The views expressed are those of the writer and do not necessarily reflect those of FMT.