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Differences Between Schedule 7A & 7B Allowances in Malaysia

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Differences Between Schedule 7A & 7B Allowances in Malaysia

Schedule 7A and Schedule 7B of the Income Tax Act 1967 (hereinafter referred to as “the Act”) both provide allowances to taxpayers in respect of capital expenditure incurred for qualifying or approved projects. Schedule 7A provides Reinvestment Allowance (“RA”) to companies in the manufacturing and agricultural sectors, while Schedule 7B provides Investment Allowance in Service Sector (“IASS”) to companies in the service sector.

The two allowances are similar in some respects, as both are given on capital expenditure and deducted against statutory income. However, there are many differences between them, including their purpose, the type of project that qualifies, the eligibility requirements, the approval process and the qualifying period. The Inland Revenue Board of Malaysia (hereinafter referred to as “IRBM”) issued Practice Note No. 3/2026 on 29 September 2026 to explain these differences, and this article outlines them for easy reference.

  1. Reinvestment Allowance

    Schedule 7A of the Act was enacted to encourage manufacturing companies to reinvest in modernisation plans and to increase production capacity. RA is given on capital expenditure incurred on plant, machinery or a factory used for a qualifying project, which is the expansion, modernisation, automation or diversification of an existing business in manufacturing and agricultural activities.

    A company may claim RA if it is resident in Malaysia, has been in operation for not less than 36 months, has incurred capital expenditure for a qualifying project in a basis period for a year of assessment (“YA”), and fulfils any other related conditions. No written approval from IRBM is required, as the claim is made through the Income Tax Return Form (“ITRF”) and is subject to IRBM audit.

    RA is available for 15 consecutive YA, beginning from the YA in which the claim is first made. The allowance is 60% of the capital expenditure incurred in the basis period, restricted to 70% of statutory income. Alternatively, RA may be deducted against 100% of statutory income if the qualifying project achieves the level of productivity prescribed by the Minister of Finance (hereinafter referred to as “the Minister”).

    Unabsorbed RA can be carried forward for a maximum of seven consecutive YA after the 15 YA period, and any balance remaining after that is disregarded. Additional RA is available for the basis periods of YA 2016 to YA 2018 to a company whose 15 YA period ended before YA 2015 or in YA 2015, and PENJANA RA is available for the basis periods of YA 2020 to YA 2024 once the 15 YA period and/or the Additional RA period has ended. The unabsorbed RA for the 15 YA period, Additional RA and PENJANA RA are calculated separately.

  2. Reinvestment Allowance for Manufacturing

    For manufacturing, a qualifying project is the expansion, modernisation, automation or diversification of an existing business in relation to the manufacturing of a product or any related product in the same industry. The company must fulfil the definition of “manufacturing” for the purposes of RA, which is provided in paragraph 9 of Schedule 7A of the Act.

    The qualifying expenditure is capital expenditure incurred on plant or machinery, excluding assets meant for directors or staff.

  3. Reinvestment Allowance for the Agricultural Sector

    For the agricultural sector, a qualifying project is an agricultural project undertaken by a company to expand, modernise or diversify its cultivation and farming business, excluding the business of rearing chickens and ducks. The qualifying agricultural activities are:
    (1)
    cultivation of rice and maize;
    (2)
    cultivation of vegetables, tubers and roots;
    (3)
    cultivation of fruits;
    (4)
    livestock farming;
    (5)
    spawning, breeding or culturing of aquatic products; and
    (6)
    any other activities approved by the Minister.

    The qualifying expenditure is capital expenditure incurred on:
    (1)
    the clearing and preparation of land;
    (2)
    the planting of crops;
    (3)
    the provision of an irrigation or drainage system;
    (4)
    the provision of plant and machinery;
    (5)
    the construction of access roads, including bridges; and
    (6)
    the construction or purchase of buildings (including those provided for the welfare of persons or as living accommodation for persons) and structural improvements on land or other structures.

  4. Investment Allowance for Service Sector

    Schedule 7B of the Act was introduced to provide a specific investment allowance to companies in the service sector, including transportation, communications, utilities and other sub-sectors approved by the Minister. The investment allowance aims to encourage investment in infrastructure and services that are essential for public welfare and economic development, and to promote the growth of the service sector by providing incentives to service sector companies for capital expenditure in approved service projects.

    A company may claim IASS if it is resident in Malaysia and has incurred capital expenditure for the purpose of a service project approved by the Minister. The company must make a written application, and the allowance is subject to the approval of the Minister.

    The qualifying expenditure is capital expenditure incurred on plant, machinery, fixtures, premises, buildings, structures or works of a permanent nature, excluding assets meant for directors or staff. The allowance is available for five years, beginning from the effective date of approval as determined by the Minister, and is an amount of not less than 60% of the capital expenditure incurred in the basis period for a YA, restricted to 70% of statutory income (or any other rate determined by the Minister in the approval letter).

    Unabsorbed IASS can be carried forward for a maximum of seven consecutive YA upon expiry of the five YA period of that investment allowance, and any balance remaining after the seven consecutive YA is disregarded.

  5. Non-Application

    A company is not entitled to claim RA for any period during which it has been granted any of the following incentives:

    (1)
    Pioneer status under the Promotion of Investments Act 1986 (“PIA”), where a company granted pioneer status under the PIA is applying for or intends to apply for a pioneer certificate, or where a company granted a pioneer certificate under the PIA and the pioneer period has not ended;
    (2)
    Investment Tax Allowances (“ITA”) under the PIA, where a company has been granted ITA and the ITA period has not ended, or where a company has been approved ITA and has not surrendered the ITA approval;
    (3)
    Incentive under the Investment Incentive Act 1968 (“IIA”), where a company has been granted pioneer status approval, labour utilisation or local incentives and investment tax credit (“ITC”) of the IIA and the tax relief period has not ended, or where a company has been granted approval under ITC of the IIA and has incurred capital expenditure which qualified for ITC even though the IIA has been repealed;
    (4)
    Industrial adjustment allowance under the PIA in respect of a manufacturing activity or a manufactured product, where the approval was granted prior to the coming into operation of Section 27 of the Promotion of Investments (Amendment) Act 2007;
    (5)
    Group relief for companies under Section 44A of the Act;
    (6)
    Deductions under any rules made under Section 154 of the Act, where the rules provide that RA shall not apply to that company or person; and
    (7)
    Exemption from tax on income under exemption orders made under paragraph 127(3)(b), or exemption under subsection 127(3A) of the Act, where it provides that RA shall not apply to that company or person.

    Schedule 7B does not apply to a company for the period during which it has been granted exemption under Section 127 of the Act.

  6. Summary Comparison Between Schedule 7A and Schedule 7B

    Reinvestment Allowance (Schedule 7A)

    Investment Allowance Service Sector (Schedule 7B)

    Effective date

    1 January 1979

    YA 1996

    Purpose

    To encourage reinvestment in the manufacturing and agricultural sectors in respect of a qualifying project

    To encourage investment in approved service projects

    Type of project

    Expansion, modernisation, automation or diversification of an existing manufacturing business, or a qualifying agricultural project

    Service sector project in transportation, communications, utilities or any other sub-sector approved by the Minister

    Qualifying expenditure

    Plant or machinery for manufacturing; specified capital expenditure for agricultural projects

    Plant, machinery, fixtures, premises, buildings, structures or works of a permanent nature

    Eligibility

    Resident company, in operation for at least 36 months, with capital expenditure on a qualifying project and fulfilling the related conditions

    Resident company with capital expenditure on an approved service project approved by the Minister

    Approval

    No written approval from IRBM; self-claim through the ITRF, subject to IRBM audit

    Written application and approval of the Minister required.

    Qualifying period

    15 consecutive YA from the YA of the first claim

    Five years from the effective date of approval

    Allowance rate

    60% of capital expenditure, restricted to 70% of statutory income (or 100% if the prescribed productivity level is achieved).

    Not less than 60% of capital expenditure, restricted to 70% of statutory income (or the rate in the approval letter)

    Unabsorbed allowance

    Carried forward for up to seven consecutive YA after the 15 YA period

    Carried forward for up to seven consecutive YA after the five YA period

    Non-application

    Where the company enjoys incentives such as pioneer status, ITA under the PIA, group relief or certain exemptions

    Where the company has been granted exemption under Section 127 of the ITA.


For further information, please visit the official website of the Inland Revenue Board of Malaysia at https://www.hasil.gov.my/en

KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.

Disclaimer

All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

If you wish to obtain more information or assistance, please visit the official website of Kaizen CPA Limited at www.kaizencpa.com or contact us through the following and talk to our professionals:

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