E-Invoice Phase 3 in Malaysia: Key Changes, Requirements, and Implementation

Malaysia’s e-invoicing mandate is being rolled out in phases to ensure a smooth transition for businesses of all sizes. After implementing Phase 1 (August 2024) for large corporations and Phase 2 (January 2025) for mid-sized businesses, the Inland Revenue Board of Malaysia (IRBM) is now preparing for Phase 3 of Malaysia e-invoicing, which targets smaller enterprises.

Initially, Phase 3 was set to include all businesses with an annual turnover below RM 25 million. However, in a recent update on 28 January 2025, IRBM revised the timeline, splitting Phase 3 into two sub-phases to ease compliance for very small businesses:

• 1 July 2025: Businesses with an annual turnover between RM 500,000 and RM 25 million must comply.
• 1 January 2026: All remaining businesses with a turnover below RM 500,000 (except those exempted with turnover under RM 150,000) will be required to implement e-invoicing.

This phased approach ensures that micro and small businesses have additional time to adapt to the new digital tax framework.

Compliance Requirements Under Phase 3

While the implementation timeline varies, the core principles of e-invoicing remain consistent across all phases. The compliance requirements for Phase 3 are similar to earlier phases but with some considerations for smaller businesses:

1. Mandatory E-Invoice Generation: Businesses must issue e-invoices for all B2B, B2C, and B2G transactions. Each e-invoice must include 55 mandatory fields, such as seller/buyer details, item descriptions, quantities, prices, tax details, and payment information.
2. Schema Compliance: E-invoices must follow the UBL 2.1 format (XML or JSON) as specified by IRBM. Businesses can integrate their existing accounting software with the MyInvois System or use middleware solutions for easier compliance.
3. Real-Time Validation: E-invoices must be submitted to the MyInvois System for validation. A Unique Identification Number (UIN) and QR code are issued for each validated invoice.
4. Recordkeeping: Businesses must retain digital copies of all e-invoices for at least 7 years and store them securely for audit purposes.

Relaxation Period and Key Concessions

To help smaller businesses transition smoothly, IRBM has introduced a relaxation period for Phase 3:

• 1 July 2025 – 31 December 2025 (for businesses with turnover between RM 500,000 and RM 25 million)
• 1 January 2026 – 30 June 2026 (for businesses with turnover below RM 500,000)

During this period, businesses can benefit from:

• Consolidated E-Invoices: Multiple transactions can be combined into a single e-invoice.
• Simplified Product Descriptions: More flexibility in describing goods/services.
• No Penalties for Non-Compliance: Businesses will not face penalties under Section 120 of the Income Tax Act 1967 during the relaxation period.

How Businesses in Phase 3 Can Adopt E-Invoicing: When to Start Preparing?

With Phase 3 of Malaysia’s e-invoicing mandate approaching, businesses must begin preparations early to ensure a smooth transition. Here’s a step-by-step guide on when and how to get started:

Assess Your Current Invoicing System (Start Now): Identify whether your business uses manual invoicing (Excel/paper), basic accounting software, or an ERP system. Determine if your current system can integrate with MyInvois or if you need to generate e-invoice manually through MyInvois Portal (recommended for small businesses with less number of invoices).

Choose the Right E-Invoicing Model and Solution:  If using an ERP/accounting software, check the feasibility of direct API integration with MyInvois (although not recommended). Better opt for a middleware solution (like ClearTax) to simplify compliance. You can also use MyInvois portal for manual e-invoice generation.

 Test & Train Generate sample e-invoices and validate them via MyInvois Sandbox (test environment). Educate employees on:

• Generating & submitting e-invoices.
• Handling rejections/corrections.
• Managing QR codes and UINs.

Go Live Before Deadline: Start live e-invoicing by 1 July 2025 (relaxation until 31 Dec 2025). Full compliance during the relaxation period offers businesses in Malaysia to claim accelerated capital allowance benefit.

Why Middleware is Preferred Over Direct ERP Integration for Phase 3?

Unlike larger enterprises in Phases 1 and 2, many small businesses in Phase 3 may not have custom ERP systems. Instead, they often rely on:

• Standard ERP
• Basic accounting software (e.g., SQL, Excel-based systems).
• Manual invoicing processes.

For these businesses, middleware solutions (such as ClearTax or other IRBM-accredited providers) offer a more practical approach because:

Benefits of Phase 3 E-Invoicing

While transitioning to e-invoicing may seem challenging, it offers long-term benefits:

• Improved Tax Compliance – Reduces errors and enhances reporting accuracy.
• Faster Invoice Processing – Automation speeds up validation and payments.
• Reduced Fraud – Real-time validation minimizes fake invoices.
• Cost Savings – Eliminates paper invoices and manual data entry.
• Better Cash Flow Management – Faster approvals lead to quicker payments.

Challenges of Phase 3 Compliance

Smaller businesses may face unique hurdles:

• Limited IT Resources – Lack of in-house tech expertise.
• Manual Processes – Reliance on Excel or paper-based systems.
• Data Entry Errors – Higher risk of mistakes in mandatory fields.
• Internet Dependency – Requires stable connectivity for real-time validation.

How ClearTax Can Help with Phase 3 E-Invoicing?

ClearTax, an MDEC-accredited e-invoicing provider, offers tailored solutions for small businesses:

• No ERP Needed – Works with basic accounting software.
• Automated Validation – AI checks for errors before submission.
• Bulk Uploads – Supports high-volume transactions.
• Buyer/Vendor Management – Stores recurring transaction details.
• Tax Reconciliation – Matches invoices with sales records for audits.
• Regulatory Updates – Automatically adapts to IRBM changes.

Conclusion

Phase 3 of e-invoicing in Malaysia marks a crucial step in the country’s digital tax transformation. With the revised timeline, businesses below RM 25 million now have more time to prepare, especially those with turnover under RM 500,000 (due by 2026).