Updated: Apr 24, 2022
1) Definition of manufacturing
The Industrial Coordination Act, 1975 (“ICA”) defines manufacturing activity as “…the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal and includes the assembly of parts and ship repairing but shall not include any activity normally associated with retail or wholesale trade”.
There are a few activities which are exempted from the ICA and these include the milling of oil palm fresh fruits into crude palm oil; the production and processing of raw natural rubber of all types including latex, skim, sheets, scrap, technically-specified rubbers, non-standard and modified rubber or any other vulcanized form of natural rubber prepared by any patented or technically specified procedure; and the milling of paddy into rice.
If a manufacturer meets a certain requirement, the law requires it to obtain a manufacturing license from Malaysia Investment Development Authority (“MIDA”). Based on the manufacturing activity, the ICA requires person(s) who are involved in manufacturing activities to obtain a license from the Licensing Officer.
2) Eligible Criteria
Manufacturing companies with shareholders’ funds of RM2.5 million and above or engaging 75 or more full time paid employees;
The minimum Capital Investment Per Employee (CIPE) for the project needs to be RM140,000.00;
Total full-time of the company comprises of at least 80% Malaysians and current policies apply to foreign workers, including outsourced workers. Relaxation from compliance of total full-time workforce of the company to be at least 80% Malaysian is given until 31 December 2022 for expansion/diversification and regularisation manufacturing projects.
Managerial, Technical and supervisory staff with degree and/or diploma/certificate needs to make up 25% of the full-time workforce or product’s value added is at least 40%.
The project must be consistent wit the national economic and social objectives and promote an orderly development of manufacturing activities in Malaysia.
A fine up to RM2,000 or imprisoned up to 6 months or both. After the first offence, the business is also liable to a further fine of up to RM200 for every day the business continues to operate without a license.
What if the company has less than 75 workers and the shareholders’ fund has not reached RM 2.5 million? A company with a paid up capital/shareholder’s fund not exceeding RM2.5 million or manpower less than 75 people may apply for a confirmation letter that the company is exempted from manufacturing license approval. The letter, however, can only indicate that the company is exempted from manufacturing license and does not carry the same weigh as a manufacturing license.
i. Exemption for import duty tax and/or sales tax exemption on raw material/ components and machinery/equipment
MIDA requires manufacturers to present their manufacturing license to obtain an exemption for import duty tax and/or sales tax on raw materials/components and machinery/equipment used in the production of finished products.
ii. Pioneer status or investment tax allowance
Businesses with pioneer status will have a tax exemption from 70% up to 100% of statutory income for 5 to 10 years. Unabsorbed capital allowances incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company; or
For investment tax allowance, a company can get allowances between 60% to 100% on qualifying capital expenditure that incurs within a period of 5 years. The investment tax allowance is an allowance for qualifying capital expenditure means capital expenditure incurred on factory or any plant and machinery used in Malaysia in connection there with. The allowance can be offset against 70% or 100% of statutory income in the year of assessment. Unutilised allowance can be carried forward to subsequent years until fully utilised.
Application of pioneer status and investment tax allowance are mutually exclusive.
iii. Grants and incentives
Domestic Investment Strategic Fund (DISF), Industry4WRD Intervention Fund, Industry4WRD DISF and Smart Automation Grant (SAG) are available for application by qualified Manufacturing License holders.
ABC Sdn. Bhd. was granted ITA of 60% for producing a promoted product commencing from 1.1.2020. It closed its accounts on 31.12.2020 and incurred capital expenditure of RM50,000. Capital Allowance for Y/A 2020 is RM20,000 and disallowance expenses to be added back is RM10,000.
Years of Assessment 2021
Add : Disallowable expenses
Less : Capital allowance
90,000 (70% = 63,000)
Less :- ITA @ 60% of 50,000
Tax payable on 60,000 @ 30% = 18,000 Note : ITA to be fully allowed since the sum is less than the restricted sum of RM63,000 i.e. 70% of Statutory Income RM 90,000.
DEF Sdn Bhd has been granted pioneer status on 1.4.2020 in respect of a promoted product. The tax relief period of 5 years commenced on 1.10.2020 and accounts are made up to 31 December annually. Given in Year of Assessment 2020 the following :-
Pioneer Business (P) Statutory Income (1.10.2020 - 31.12.2020) = RM58,500
Non Pioneer Business (NP) Adjusted Loss (up to 31.12.2020) = (RM22,000)
Other Income = NIL
The restriction to the statutory income of the pioneer company in respect of its pioneer business for purposes of exemption and the computation of the total income of its pioneer business for purposes of taxation is as follows :-
Y/A 1995 (1.10.2020 - 31.12.2020) Statutory pioneer income (Restricted to 85% of statutory income RM58,500)
Less : Non Pioneer Loss
Exempted Pioneer Income
Non Pioneer Business
Statutory Income from Non Pioneer Business
Add : Total Income from Pioneer Business (15% of RM58,500)
Total Income Taxable @ 30%
Note :- The Unabsorbed losses of pioneer business cannot be carried forward and offset against the post pioneer income of the pioneer company (Section 25(2)).