For manufacturing companies, investing in assets is not just a business necessity; it is a strategic decision that directly impacts productivity, efficiency, and competitiveness. However, the upfront costs of acquiring new machinery, equipment, or infrastructure can be substantial, often posing a challenge for businesses, especially small and medium-sized enterprises (SMEs). Fortunately, there are ways for manufacturing companies to ease this financial burden and save on taxes through strategic utilization of investment tax allowances. In this article, we will introduce one of the tax incentives that could be useful to companies in the manufacturing sector: investment tax allowance (ITA).   

What is ITA? 

As stipulated in the Promotion of Investments Act (PIA) 1986, an ITA is a tax incentive offered to companies engaged in manufacturing activities within Malaysia. This incentive applies to businesses involved in the manufacturing, agricultural, hotel, and tourism sectors, provided such a company either participates in a promoted activity or produces a promoted product.  

The ITA is a capital expenditure-based incentive particularly beneficial for companies investing in capital assets. Eligible companies can claim ITA on the qualifying capital expenditure (QCE) incurred on a factory, plant and machinery or other equipment used for the approved project. This means that, on top of the capital allowance, there will be an additional allowance for companies that purchase capital assets for the purpose of promoted activities and promoted products.  

Tax Treatment for ITA 

Companies that are granted ITA by participating in a promoted activity or producing a promoted product are generally allowed for a tax exemption on either 60% or up to 100% of the qualifying capital expenditure incurred, to be utilized against 70% or 100% of the statutory income. The determination of the tax allowances period is based on the approval status by the Malaysian Investment Development Authority (MIDA). 

Additionally, any unutilized ITA can be carried forward to the following years of assessment until it is fully utilized.   

Another key aspect of the ITA that employers should consider is the period during which the allowance is granted. A company that has been granted an ITA will be allowed to claim qualifying expenditure incurred for a period of 5 years, starting from the effective date of the approved incentive. Understanding the exemption period of the ITA is crucial as it can significantly impact your company's tax obligations and affect your tax planning strategy, ultimately reducing the actual investment cost.   

Most businesses are only informed by their tax agents at the time of tax filing that the capital assets they purchased qualify for ITA, which causes them to potentially miss out on a great opportunity to save a significant amount on taxes. Therefore, it is crucial to have a basic understanding of the concept of ITA and plan ahead to maximize your tax savings.