Walking the compliance tightrope
NVIDIA co-founder and CEO Jensen Huang was once asked if he was 30 again, what company would he start. He said he wouldn’t.

Building Nvidia was a million times harder than he expected, despite it being the leading producer of computer chips that generate billions of dollars in revenue today.

Having started my firm three years ago, I can attest to this statement. From a one-man operation, the revenue growth had been decent enough for me to hire employees.

Ironically, I am now dancing the line between the micro and small business categories as defined by SME Corp, and the compliance costs have been hair-raising, to say the least.

Micro, small and medium enterprises (MSMEs) account for 97.4% of all businesses in Malaysia today. While the majority are micro businesses, the overall sector contributed 38.4% of 2022’s GDP and provided almost half of the total employment in Malaysia.

The importance of MSMEs cannot be understated. The government has shown its commitment to the sector by offering incentives and setting ambitious targets in key documents such as the Malaysia Digital Economy Blueprint, the National 4IR Policy, as well as recent announcements at the Bumiputera Economic Congress.

While it all sounds good on paper, the reality is different. For instance, the upcoming introduction of compliance regulations such as e-invoicing and sustainability reporting makes many wonder if the government expects too much and/or is less cognisant of the way MSMEs operate.

It is likely that many will throw in the towel rather than keep up with the growing compliance requirements, putting our local innovation and entrepreneurship spaces at risk.

Compliance challenges

It is crucial that we have a vibrant ecosystem of locally owned businesses so that entrepreneurs can drive innovation. Otherwise, we would merely be salaried consumers of foreign entities with low wages, while the economic benefits are reaped by outsiders who may not have our best interests at heart.

Growing compliance costs discourage the spirit of entrepreneurship and therefore the spirit of innovation.

A private limited company’s compliance costs can easily reach RM12,000 to RM20,000 a year, alongside operational expenses. This includes maintaining a company secretary, tax agent, accounting and audit fees, local licences, procurement registrations, etc.

If one manages to scale up their company/business, expect additional compliance requirements such as Sales and Service Tax (SST); EPF, EIS and Socso for employees; corporate income tax payments, etc. These factors can adversely affect a business’ cash flow and its ability to sustain operations.

E-invoicing for MSMEs is scheduled to begin mid-2025. However, larger companies may request MSMEs to adopt e-invoicing earlier to maintain business relationships since the compliance requirement for them begins earlier.

Even sustainability reporting requirements will see MSMEs adopting the process sooner for similar reasons.

Bursa Malaysia's reporting frameworks and Bank Negara Malaysia's regulations alone have made compliance more expensive for MSMEs, owing to pressures from publicly listed companies and banks pushing the obligation to them.

You can mitigate some of the compliance costs by choosing the right legal identity, such as corporations or limited liability partnerships, where fees and compliance costs are lower than companies. Despite sometimes tiny differences in compliance requirements, the benefits of a private limited company entity outweigh this concern.

There are also perception challenges among procurement departments whereby full companies are preferred over enterprises and partnerships.

This does not yet factor in preconceived bias towards local companies that are not MNCs or backed by GLCs on their ability to deliver — an experience I and many others have faced. As the peribahasa goes, “Anak kera di hutan disusui, anak sendiri di rumah kebuluran”.

The way forward

A tailor-made approach to compliance should perhaps be considered.

Taking a value chain perspective to compliance measures — mapping small, medium and large local businesses in key sectors the government wants to support — will ultimately lead to policies/interventions that grow locally-owned businesses in areas where they are lacking and/or help them grow.

For example, reconsider key policies in the National Energy Transition Roadmap and the Government Green Procurement Policy by factoring MSMEs’ ability and availability to fulfil the demand created by those policies. Why create opportunities that can only be met by foreign players?

This is not solely about a nationalistic approach. We still need foreign players where local talents are in their nascent stage. But how are we strategising to ensure that they also give back to the Malaysian economy while letting our local companies still thrive?

We can then reevaluate compliance structures and how they impact local MSMEs and entrepreneurship. In light of the rising cost of living, government rates for items like healthcare, public transportation fees and subsidies need to be revised. SST collection should follow the same logic.

For context, companies with a yearly revenue of RM500,000 are required to collect 6% to 8% SST. This in turn affects their cash flow as they must now pay for the SST upon invoicing and not upon collection.

If the same logic on price increase is to be accepted, naturally the government should raise the SST collection applicable to companies in key sectors to those with at least RM1mil in yearly revenue.

In essence, we need a holistic view of compliance measures that boost the economy while providing support for a thriving MSME ecosystem that would drive innovation and entrepreneurship in Malaysia.

This article first appeared in Star Biz7 weekly edition.
Star Biz7,MSMEs,entrepreneurship,innovation,compliance,SST,e-invoicing,sustainability reporting