Implementation of e-Invoice in Malaysia for Construction Industry

The construction industry is crucial to Malaysia's economy, significantly contributing to GDP and employment. However, it has also been identified as a sector with substantial tax contributions and challenges related to potential tax evasion through inflated expenses.

The first phase of the e-invoicing mandate will also cover construction companies with annual turnovers exceeding RM 100 million starting 1^st August 2024. This initiative aims to modernise invoicing practices, reduce administrative burdens, and improve transparency in financial transactions within the sector.

To assist construction firms in complying with these new requirements, the Inland Revenue Board of Malaysia (IRBM) has released specific FAQs addressing the unique challenges and clarifications related to e-invoicing in the construction industry. This blog will explore these FAQs in detail, providing clarity and additional insights where necessary.

Scope of e-Invoicing for the Construction Industry in Malaysia

The construction industry in Malaysia, known for its various project types and extensive supply chain interactions, covers various transactions requiring financial documentation. 

Implementing e-invoicing aims to streamline and digitise these processes across all segments of the industry.

Key Transactions Requiring e-invoice as proof of Income

• Contracting Services
• Construction services provided outside Malaysia
• Material Supplies.
• Consultancy Services
• Subcontracting
• Government Contracts

Proof of Expenditures required under e-invoicing mandate

• Material Purchases
• Subcontractor Payments
• Labor Costs
• Equipment Rentals
• Professional Fees paid to architects, engineers, and project managers.
• Expenses for utilities consumed during construction.
• Invoices related to permits, licenses, and regulatory fees.
• Insurance Premiums
• Transport and Logistics

Is an e-invoice required for charges to sub-contractors, including penalties?

Yes, contractors must issue an e-invoice for charges to sub-contractors as defined in the Income Tax (Construction Contracts) Regulations 2007.

• Subcontractor: A third party hired by a contractor to perform specific tasks or services as part of a larger project.
• Charges and penalties: Fees and fines imposed or levied due to contractual obligations or regulatory non-compliance.

What is the e-invoicing procedure for claims (during work in progress) on property construction?

If a certification of work done is not needed, the contractor can issue an e-invoice for the progress claim to substantiate the income. 

If certification is required, the e-invoice can be issued once the certificate for work done is obtained.

How does the e-invoice implementation affect a main contractor's purchase of materials on behalf of the owner?

In some cases, the main contractor buys materials on behalf of the owner from vendors, sellers, or traders. Currently, these purchases are then included in the contractor's progress billing to the owner. 

The main contractor can continue including the purchases while billing the owner. However, with the implementation of e-invoices, the invoices issued by the main contractor must be e-invoices.

Should a company issue e-invoices when selling construction materials to related companies if mandated in Phase 1?

Yes, a company must issue e-invoices for the sale of construction materials to related companies.  

Consolidated e-Invoices are not allowed for the sale of construction materials as defined under the Construction Industry Development Act 1994.

Conclusion

Adopting e-invoicing mandates is slightly more complex in the construction industry due to its unique contractual relationships and diverse billing practices.

The IRBM FAQ on e-invoicing implementation in the construction industry addresses initial concerns but is expected to expand over time to cover additional queries. For more detailed information, please refer to specific e-invoicing guidelines.