What is Investment Tax Allowance Malaysia: Examples, Calculation and Eligibility

Malaysia has very business-friendly policies and attractive tax incentives for economic growth and industrial development. One of the most attractive incentives under these frameworks is the Investment Tax Allowance (ITA), administered by the Lembaga Hasil Dalam Negeri Malaysia (LHDN). 

This blog will help you in understanding ITA, covering:

• The eligibility criteria for registering for Investment Tax Allowance from LHDN.
• How to perform an accurate Investment Tax Allowance calculation.
• The legal compliance requirements as outlined in the Promotion of Investments Act 1986.

What is Investment Tax Allowance (ITA)?

The Investment Tax Allowance (ITA) is a fiscal incentive introduced by the Malaysian government to promote investment in key sectors. These sectors include:

• Manufacturing
• Agriculture
• Green technology
• Hotel and tourism
• Aerospace

The ITA provides companies with tax relief based on their capital expenditures so that they are encouraged to invest in machinery, equipment, and other qualifying assets.

Under the ITA, companies can offset 60-100% of the total qualifying capital expenditure against their statutory income. This helps them in reducing their tax burden. This incentive is particularly targeted at businesses engaged in manufacturing, agriculture, and other promoted sectors, ensuring that Malaysia remains competitive as an investment destination.

Key Features  of Investment Tax Allowance (ITA)

Eligibility

• ITA is available to businesses engaged in promoted activities or producing products specified by the Malaysian Investment Development Authority (MIDA).
• Governed by the Promotion of Investments Act 1986.

Incentive Rates and Utilization

• Companies can claim 60% to 100% of their qualifying capital expenditure (QCE) incurred over the last 5 years.
• Any unutilized portion can be carried forward to subsequent tax years.

Qualifying Capital Expenditure (QCE)

• Includes costs for purchasing machinery, equipment, or other capital assets directly related to business activities.
• Typically excludes land, buildings, or working capital unless specified under special conditions.

Offset Limits

• ITA allows 60%-100% of QCE to be offset against statutory income.
• The allowance is restricted to 70%-100% of the statutory income, depending on the type of expenditure.

Rate of Allowance

The rate of allowance primarily depends on two factors: the percentage of eligible expenses and the cap as a percentage of total statutory income.

Investment Tax Calculation Example

• Company A invests RM 1,000,000 in eligible machinery for a promoted activity.
• The ITA rate approved by MIDA is 60% of Qualifying Capital Expenditure (QCE).
• Company A’s statutory income for the year is RM 1,200,000 and cap on statutory income is 100%

Calculate ITA Amount

• ITA = QCE × ITA Rate
• ITA = RM 1,000,000 × 60% = RM 600,000

Calculation of Deduction on Statutory Income

A 100% deduction on statutory income is permitted, amounting to RM 1,200,000. This is lower than the total allowable deduction.

Apply ITA to Statutory Income

• Taxable income = Statutory income - ITA
• Taxable income = RM 1,200,000 - RM 600,000 = RM 600,000

Calculate Tax Savings

• Assuming a corporate tax rate of 24%, tax savings are as follows:
• Tax Savings = ITA × Corporate Tax Rate
• Tax Savings = RM 600,000 × 24% = RM 144,000

How to Claim ITA in Malaysia

Applying for the Investment Tax Allowance Malaysia, involves the following process:

• Ensure your business is involved in promoted activities/sectors specified by the MIDA. 
• Gather records of eligible capital expenditures, such as invoices, contracts, and proof of payment and check if your capex qualifies under the ITA laws.
• Submit an application for the ITA to MIDA with all required documentation.
• MIDA will review your application and assess whether your investments meet the criteria for ITA.
• If approved, you will get a confirmation of ITA rate and applicable amount.
• Once approved, calculate the ITA benefits based on the percentage of qualifying capital expenditure allowed.
• Deduct the approved ITA amount from your statutory income when filing your Income Tax Return Form (ITRF) with the Lembaga Hasil Dalam Negeri Malaysia (LHDN).
• Retain all supporting documents in case of audits or further inquiries by LHDN.

Importance of Investment Tax Allowance (ITA)

The Investment Tax Allowance (ITA) is a powerful fiscal tool for helping businesses invest in capital-intensive projects. Here’s how ITA boosts growth:

• It gives businesses a chance to consider heavy capital expenditure as it reduces their overall costs. The firms can offset their qualifying capital expenditures against taxable income. This reduces their financial burden.
• ITA gives incentives for only those industries which are important to the Malaysian economy. By targeting these key sectors, it also nurtures and promotes the growth of industries that are essential for Malaysia's long-term economic stability.
• It is able to foster innovation and enhance productivity by giving incentives on upgrading machinery.
• It positions Malaysia as a preferred destination for FDI. Foreign investors are more likely to establish operations in a country with favourable tax policies and growth opportunities.
• SMEs benefit by reducing the cost of expanding their operations and compete more effectively.

Conclusion

The Investment Tax Allowance (ITA) is a cornerstone of Malaysia’s economic strategy. By reducing the financial pressure on businesses, the ITA fosters an environment that encourages capital investment and improves Malaysia’s global competitiveness.

For businesses, the ITA is more than just a tax incentive—it’s a strategic opportunity to optimise costs. Companies should take the time to explore how ITA can align with their growth plans.