E-invoicing implementation and Its challenges to Small and Medium Size (SME) in Malaysia: A Conceptual Paper

E-Invoicing Implementation and its Challenges to Small and Medium Size (SME) in Malaysia: A Conceptual Paper

Nik Balqis Damia Md Asmawi, Nur Afiqah Md Amin^*, Nurul Iffah Ghazali, Nuridayu Yunus

*Faculty of Accountancy, University Technology MARA, Cawangan Selangor, Kampus Puncak Alam, Selangor, Malaysia

*Corresponding Author

DOI: https://dx.doi.org/10.47772/IJRISS.2025.909000015

Received: 22 August 2025; Accepted: 30 August 2025; Published: 26 September 2025

ABSTRACT

This concept paper explores the challenges SMEs encounter in implementing e-invoicing, including limited technological readiness, system integration complexity, data security concerns, and mandatory compliance with new regulatory requirements such as Tax Identification Number (TIN) submissions. Findings from recent studies indicate that SME employees often display skepticism and insecurity toward digital systems, reflecting gaps in infrastructure, training, and regulatory awareness. The paper ends with recommendations, including nationwide training programs, standardized system integration through certified Application Programming Interface (API), strengthened data security compliance with the Personal Data Protection Act (PDPA), and enhanced education for digital platform sellers. These strategies aim to improve SME readiness, foster trust in digital platforms, and ensure smooth compliance ahead of the 2025 enforcement timeline. By addressing structural and behavioral barriers, Malaysia can achieve an inclusive transition toward a resilient digital tax ecosystem that supports both economic growth and global competitiveness.

Keywords- E-invoicing, electronic invoice, digital invoice, small and medium size (SME), technological readiness

INTRODUCTION

Malaysia prioritizes digitization in its development strategy to improve public services, economic growth, and global competitiveness. The 12th Malaysia Plan and the Malaysia Digital Economy Blueprint (My DIGITAL) aim to empower individuals and businesses by integrating digital technologies across sectors, serving as a roadmap for the country’s digitalization activities. (Malaysian Digital Economy Corporation (MDEC,2024). In line with global digital trends, Malaysia is undergoing a significant transformation with the gradual implementation of the e-invoicing system introduced by the Inland Revenue Board (IRB) as part of the country’s digital tax transformation.

Electronic invoicing, often known as E-invoice, is a digital system that substitutes paper invoices with electronic invoices in a structured format. It entails the electronic transmission of invoice data between a supplier and a buyer. E-invoicing is an essential part of Malaysia’s digitalization initiatives, which support the nation’s tax administration system and improve transparency, accuracy and tax compliance among parties. It involves automated creation, transmission, receipt, processing and archiving of invoices using specialized software. The introduction of e-invoicing has become a crucial component of SMEs’ procurement processes, allowing them to improve their procurement capabilities. Nowadays, SMEs use a variety of e-invoicing techniques to improve their procurement procedures while reducing operating expenses.  About 47% of SMEs in the United Kingdom have already embraced e-invoicing, making it a crucial business strategy (Eadie, 2007). Mutunga and Makhamara (2020) revealed that e-invoicing improved the SME’s performance within Nairobi country and moderately improved customer satisfaction and market share.

The SMEs in Asia have also greatly adopted e-invoicing. Garoma (2012) claims that SMEs in India are increasingly utilizing e-invoicing to improve delivery, raise customer satisfaction, expand procurement operations’ flexibility and efficiently manage their inventory. Shah (2025) highlighted that the implementation of digital invoicing platforms improves cash flow measurements, impacting operational capacity and financial capability, particularly for SME with limited cash reserve. Lele Liu et. al (2021) found that implementing digital invoice solutions reduces payment cycles by 30%-50%, resulting in shorter average days sales outstanding. This is due to reduced processing delays, eliminating postal transmit times and automate payment reminders. This paper also found that the organization that implementing electronic invoice management system achieving up to 46% higher liquidity ratios compared to other rivals that utilize traditional invoicing methods. Other than accelerated payment cycles, implementing e-invoicing reduce invoice processing costs by up to 80% compared to manual process due to reduced labor, error correction and material costs associated with physical document processing (Kapittx, 2021). Moreover, ClearTax Malaysia (2024) highlighted that the estimated processing cost incurred by small businesses that are using e-invoicing system fall from RM41.68 per invoice to RM9.60, which representing about 77% saving of the processing cost.

In Malaysia, e-invoicing, which was implemented in stages based on revenue threshold. The first phase was started in August 2024 for businesses or taxpayers with an annual turnover or revenue exceeding 100 million.  In addition, effective January 2025, requires firms, particularly small and medium-sized organizations (SMEs), to conform with digital invoicing and tax reporting regulations (San et al., 2023). Despite the e-invoicing system’s benefits highlighted, SMEs readiness varies, with many expressing concern and skepticism about this technological transformation (San et al., 2023).

97% of Malaysia’s business establishments are SMEs, and they are the foundation of the nation’s economy. San et. al (2023) found that the current readiness of SMEs in Selangor towards e-invoicing implementation is at moderate level and there is a significant level of insecurity and discomfort with the system. Many employees fall into the “skeptics” segment, characterized by concerns over the reliability, usefulness, and potential risks of the e-invoicing system. These psychological and technical barriers pose a serious threat to the successful adoption of e-invoicing, especially in SMEs that lack digital infrastructure and training. Since the implementation of e-invoicing in Malaysia is new and will be started to implement for SMEs in 2025, there is lack of study that specifically addresses the impacts of e-invoicing implementation to SMEs. Therefore, this concept paper aims to explore how e-invoicing implementation affects SMEs in Malaysia, highlighting the difficulties they encounter in this implementation journey and identifying the potential strategies to enhance their capabilities in facing this new technological transformation in their business.

CHALLENGES OF E-INVOICING IMPLEMENTATION TO SME

Technological readiness and dependency

Developing countries face challenges in adopting new system due to limited internet connectivity and technological resources, limiting taxpayer capabilities (Palil, Amin & Turmin, 2020). Malaysia’s internet infrastructure is still lacking despite significant advancements, particularly in rural regions. (Mohd & Ambali, 2014). Those with irregular or limited internet access may find it more difficult to apply e-invoicing and regional differences in tax compliance may worsen due to the existence of a digital gap. This will cause tax administration to be unfair.

Sanberg, Wahlberg and Pan (2009) found only 50% of SMEs in Sweden ready in using e-invoicing.  In Malaysia, as per the guidelines issued by Inland Revenue Board Malaysia (IRBM), companies must be able to implement real-time submission of e-invoices through upgraded systems, which will have specific data and security specifications (IRBM, 2024). However, San et al. (2023) discovered that 40% of workers in SMEs in Selangor believe they are ready for adoption, while the overall Technology Readiness Index (TRI) remains very low. This implies that most SMEs are still not technologically or psychologically prepared to meet the technical and regulatory requirements of the IRBM’s e-invoicing.

The fundamental challenge is the mismatch in government aspirations and SME capabilities. SMEs are the backbone of the Malaysian economy, embracing over 97% of business enterprises, but they are restricted from expanding digital systems since they have limited human and financial capacities (San et al., 2023). Most of the employees are classified as “skeptics” in the TRI segmentation, indicating that they are reluctant due to unfamiliarity, poor self-assurance and perceived risks (San et al., 2023), cultural resistance (Lai, 2022) and lack of awareness (Mohamed et. al, 2020). Enty.io (2024) highlighted that SME businesses using e-invoicing systems require reliable technical support to handle outages and malfunctions during system operations. Therefore, many decisions that need to be made by SME are very crucial regarding technology before e-invoicing implementation and need intervention by the government. Without targeted interventions like user training, grant support or simplified e-invoice portals, the compulsory change of business is in danger of widespread non-compliance and administrative fines. The issue is urgent and central to turning Malaysia’s digital tax reform strategy into success.

Technical complexity and system integration

Technical complexity and system integration is another significant challenge faced by SME during e-invoicing implementation, which impacts national and international regulatory compliance. Furthermore, according to Zimmermann (2019), e-invoicing needs to go by a few national and international regulations, some of which might be intricate and vary substantially from one location to another. Businesses need to ensure that tax regulations are adhered to while maintaining the accuracy and authenticity of electronic invoicing.

Avalara (2021) highlighted that SMEs may find it challenging to connect e-invoicing solutions with their existing Information Technology (IT) and accounting infrastructure, necessitating a significant time and financial investment in IT resources. Ali and Singh (2024) stated that many SMEs have difficulty in integrating their present Enterprise Resource Planning (ERP) or accounting systems with e-invoicing, offering significant operational and compliance challenges.  Companies must ensure that their systems comply with the Income Tax Act 1967 and the IRBM’s mandated 53 mandatory data fields for e-invoice reporting. This lack of connection creates legal gaps, especially during cross-verifications or audit.

The problem is compounded when taking international trade into consideration. Malaysia’s e-invoicing approach is designed considering the world’s best practice, including interoperability across cross-border digital platforms (Roslan, Azis & Mat, 2024). It can be difficult to integrate an e-invoicing system with current government databases and financial institutions, and it calls for a large investment in IT infrastructure (Arewa & Davenport, 2022). The Edge Malaysia (2025) emphasized that SMEs incur significant costs in software integration and training. It is recommended to pick technology partner that delivers secure automated file transfer systems compatible with IRBM’s requirements. Data formats and structures may vary throughout government departments and other organizations. Taxpayers may become frustrated because of problems and delays in completing their returns caused by inconsistent data formats.

Nevertheless, there is no facility among SMEs to adapt to multiple e-invoice formats or varying digital tax regimes across borders. Varying invoice formats and incompatible systems may result in delayed payments or miscommunication with foreign customers. Non-standardization will not only undermine the competitiveness of Malaysia in the ASEAN market but also financially and legally burden small firms. Therefore, issues with integration may impact the overall effectiveness of e-invoicing systems, necessitate the use of extra resources, and raise operating expenses for both tax authorities and taxpayers. The government needs to step up its efforts to establish uniform, transparent standards and assist SMEs with integration.

System security and privacy

Data Security and privacy concerns remain one of the challenges to e­ invoicing adoption, especially for SMEs with no expertise in cybersecurity practices. Rulandri et.al (2022) defined data security as the protection against unauthorized use or modification. Gupta and Chaudhry (2018) highlighted that the concern is on safeguarding private financial information from online attacks. Every transaction must check its counterpart and ensure that the received messages are valid, while also necessitating the authentication of the message source and the preservation of the confidentiality of the communication content (El-Ebiary et. al, 2021)

The Personal Data Protection Act (PDPA) 2010 dictates that companies must keep personal and financial data in secure hands. However, San et. al (2023) found that most SME employees indicate high levels of insecurity while handling e-invoicing systems primarily due to fear of data leaks and lack of confidence in digital platforms. Without encryption, access controls, or employee education, there exists a very real risk of violating PDPA regulations and losing customer confidence.

Furthermore, San et. al (2023) highlighted that 49% of the workers in SMEs fall under the “skeptics” category. It means that they require substantial reassurance before trusting and adopting the e­ invoicing technologies. This suspicion is then followed by not being familiar with technical language, complex user interfaces, and no training on utilizing the systems. While IRBM enforces strict data submission and verification processes for security, most SMEs are not aware of compliance channels or tools capable of securing their data (Olagbemide, 2024). In the lack of systematic education, technical support, and user-friendly interfaces, SMEs may delay implementation or make costly errors, resulting in regulation-related fines or data loss. This highlights the need for data security awareness programs tailored specifically to SMEs.

Mandatory Compliance with IRB’s E-lnvoice Framework and TIN Submission

Malaysia’s Inland Revenue Board (IRBM) has introduced the e-lnvoice Framework as part of its digital tax reform, requiring all businesses including SMEs and individual sellers on digital platforms such as TikTok, to issue electronic invoices that meet standardized tax reporting criteria (Tik Tok Shop Academy, 2025). According to the IRB e-lnvoice Guideline Version 1.0 (2023), these invoices must contain at least 53 mandatory data fields, including the seller’s Tax Identification Number (TIN). The initiative aims to reduce tax leakage, improve transparency, and bring informal sector businesses into the formal tax. Digital platform small sellers such as TikTok Shop affiliates and others, many of whom operate informally or part-time, are now required to register with the IRB, obtain their TIN, and ensure their transactions are properly reported under the new system. Platforms like TikTok have issued deadlines. For instance, May 2025 for TIN submission with penalties such as wallet withdrawal suspensions for non-compliance.

The seriousness of this requirement lies in its direct operational impact on thousands of small sellers. Many affiliates on digital platforms were previously outside the formal tax system and are unfamiliar with processes such as TIN registration, business registration with SSM (Companies Commission of Malaysia) or e-lnvoice compliance. Failure to meet these obligations means not only the risk of IRB penalties but also disruption of business cash flow due to platform enforcement actions. As such, the e-lnvoice mandate has transformed tax compliance from a back-end function into a real-time operational requirement, pushing even the smallest digital entrepreneurs to align with national tax rules or risk exclusion from key sales channels.

RECOMMENDATIONS

Enhance SME readiness through targeted training and tax incentives

The Inland Revenue Board of Malaysia (IRBM), in partnership with SME Corp and Malaysia Digital Economy Corporation (MDEC), must develop tailored training programs on the implementation of e-invoicing systems to improve the technological readiness of SMEs. Practical modules including e-invoice system navigation, real-time data posting, regulatory compliance, and tax filing under the new regime must be included in the training. Additionally, through online modules and regional workshops, these sessions must be available countrywide, particularly for micro-enterprises or rural areas. These training sessions will break through the information barrier for SME employees, the majority of whom are “skeptics” (San et al., 2023).

The government may offer tax rebates or grants as an extra incentive for early adoption under Section 34(6)(g) of the Income Tax Act of 1967, which already enables deductions for qualified training expenses. Therefore, SMEs will be more financially motivated to send their staff for upskill in preparing themselves for e-invoicing implementation. To reduce the cost of compliance, policymakers may also provide upfront reimbursements for software implementation expenses. Moreover, The Edge Malaysia (2025) advised Malaysia to use Singapore’s approach of providing subsidies and training to SMEs during their transition to e-invoicing as a model for Malaysia’s initiatives. Therefore, these subsidies support will help close the preparedness gap and bring SMEs into compliance with IRBM’s 2027 implementation deadline.

Standardized system integration through certified API and professional guidance

IRBM is responsible for the creation of a recognized Application Programming Interface (API) that conforms with Malaysia’s e-invoicing requirements and incorporates widely used accounting software, which is the foundation of SMEs’ operations, to address integration and standardization challenges. Such an API should be integrated with the 55 required data fields listed in IRBM’s technical guidelines to facilitate optimal synchronization between local ERP systems of businesses and the government e-invoice platform (IRBM, 2025). The revolution in application programming interfaces (APIs) has expedited this shift by facilitating smooth interactions between systems that were previously isolated (Shah, 2025).

The Star (2024) points out that integrated point-of-sale (POS) systems embedded with e-invoicing are useful for retail SMEs since it streamlines operations, minimize manual entry, and enhance compliance with LHDN regulations. Therefore, Malaysia will be able to promote more efficient enforcement, lower the possibility of human error, and enhance tax audit readiness by working with certified computer providers and guaranteeing format consistency.

Professional bodies like the Malaysian Institute of Accountants (MIA) and the Chartered Tax Institute of Malaysia (CTIM) must support technological advancements by offering audit checklists and working guides for real-world applications that tax professionals and company secretaries can use to ensure compliance. Workflow diagrams, template drawings, and best practices that adhere to the Income Tax (Electronic Invoicing) Rules 2024 should be included in these records. The auditing and accounting profession may help make it easier for business entities by preserving straightforward, authoritative records, enhancing compliance with the act and minimizing opposition due to disinformation or confusion.

Strengthen data security compliance with PDPA and internal control advisory

According to the Personal Data Protection Act (PDPA) 2010, it is important for SMEs to adopt an adequate data protection strategy because e-invoicing systems handle sensitive financial data. IRBM may help by offering a standardized data protection checklist for system access controls, audit trail requirements, encryption standards, and breach reporting procedures. These actions should not only be recommended, but also required, prior to full integration on the e-invoice platform. Additionally, a certification scheme that acknowledges “PDPA compliant e-invoicing systems” might encourage users and vendors to maintain strict data security guidelines.

Furthermore, accountants, company secretaries and tax agents can take on more proactive advisory function by reviewing the internal controls of clients’ invoicing systems. This includes reviewing the backup procedure for data, identifying risk areas for invoice validation, and advising segregation of roles whenever possible to reduce fraud. As gatekeepers of financial integrity, these people are best suited to ascertain system reliability and transparency. Their advisory roles are supplemented by regular professional development initiatives that will ensure that SMEs not only comply but also cyber resilient and building confidence in Malaysia’s digital tax climate.

Strengthen Education and Support Programs for TIN Registration and E-lnvoice Compliance

To address the compliance challenges faced by digital platform small sellers and other SMEs, it is recommended that the Inland Revenue Board Malaysia (IRBM), in collaboration with those digital platforms and relevant agencies (e.g. SSM, SME Corp Malaysia), develop targeted outreach, education, and simplified registration programs. These initiatives should focus on assisting small and medium size business seller through TIN registration, e-invoice requirements, and basic tax obligations using webinars, step-by-step toolkits, and multilingual materials. In addition, digital platforms should provide user-friendly interfaces for affiliates to input tax information, decreasing errors and facilitating compliance. This strategy utilizes tax administration principles of fairness and accessibility while assisting sellers’ transition smoothly into the formal tax system.

CONCLUSION

The implementation of e-invoicing in Malaysia represents an essential step toward enhancing tax transparency, improving administrative efficiency, and aligning with international digital taxation standards. While the initiative promises significant benefits such as reduced fraud, improved compliance, and faster tax processing. It also exposes gaps in technological readiness, technical complexity, and security preparedness, particularly among SMEs and small-scale digital platform sellers. As highlighted in both academic literature and industry observations, the most pressing issues include low adoption readiness, integration challenges with existing systems, and heightened insecurity over data privacy and system reliability. Without adequate preparedness, SMEs will encounter associated risks such as delays in invoice processing, customer dissatisfaction, and financial penalties imposed by the regulators.

To ensure the successful adoption of e-invoicing, particularly ahead of its full enforcement by July 2025, targeted actions must be taken. These include structured training programs, tax incentives for system upgrades, development of standardized APls, and implementation of clear compliance frameworks aligned with national laws such as the Income Tax Act 1967 and PDPA 2010. Additionally, management of digital platforms must take an active role in guiding and supporting the small sellers to meet regulatory obligations without disrupting their operations. Ultimately, with cohesive efforts from government agencies, professional bodies, and private sector platforms, Malaysia can achieve a smooth and inclusive transition toward a robust digital tax ecosystem. Furthermore, to enhance this study, further research may explore the distinctions in readiness and requirements of SMEs towards e-invoicing implementation in industries beyond retail or digital business, such as manufacturing and services.

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