LHDN’s uneven hand: Tough on MSMEs, soft on the shadows

Murray Hunter


LHDN’s uneven hand: Tough on MSMEs, soft on the shadows

Under the Insolvency Act 1967, individual bankruptcies reached 6,776 new cases in 2025, up from 5,977 the previous year, bringing the cumulative total close to 100,000.


Murray Hunter
Aug 12, 2026







MALAYSIA’S Inland Revenue Board (LHDN) has earned a reputation for rigorous enforcement against micro, small and medium enterprises.

When MSMEs fall behind on tax liabilities, even sums under RM500,000, the department often pursues them to the fullest extent of the law, culminating in prosecutions that can trigger personal bankruptcy for owners or winding-up for companies.

This approach extracts revenue from the visible, relatively compliant segment of the economy while larger and more opaque players appear to operate with greater latitude.

Bankruptcy and insolvency data illustrate the human and economic cost.

Under the Insolvency Act 1967, individual bankruptcies reached 6,776 new cases in 2025, up from 5,977 the previous year, bringing the cumulative total close to 100,000.

Business-related causes form a meaningful share.

Roughly 1,121 cases linked to business loans and more than 1,300 involving entrepreneurs or merchants.

Company liquidations provide a closer proxy for formal SMEs.

Forced winding-ups registered about 1,739 cases in 2025, with voluntary proceedings adding another 781.

Since 2018, the combined figure has exceeded 20,000. The Companies Commission of Malaysia recorded 3,277 companies with winding-up status in 2024.

Department of Statistics Malaysia figures show 28,924 enterprise deaths in 2024 alone.

Given that MSMEs constitute approximately 96 per cent of all Malaysian businesses, the overwhelming majority of these closures involve smaller operators.

These outcomes remove entrepreneurs from the productive economy at a time when Malaysia needs innovation and risk-taking.

Bankruptcy carries a lasting stigma that restricts access to credit, contracts and fresh starts.

History shows that second chances can yield extraordinary results: Walt Disney’s first studio collapsed into bankruptcy before he built a global entertainment empire; Henry Ford’s early automobile venture failed before the assembly-line revolution; Milton Hershey and H.J. Heinz both recovered from early business failures to create enduring consumer brands.

Even modern figures such as William C. Durant, a key architect of General Motors, experienced personal bankruptcy yet left a lasting industrial legacy.

Malaysian tax enforcement rarely affords comparable room for recovery.

Meanwhile, activities that generate substantial untaxed income face far less consistent pressure.

Loan-shark operations frequently remain outside the formal tax net, sometimes using subsidiary businesses that facilitate money laundering.

A certain international group structure local subsidiaries as cost centres, while shifting revenue offshore at the point of sale.

Large domestic corporations, advised by sophisticated legal teams, deploy complex arrangements that minimise taxable income.

The result is a system that appears equitable on paper yet uneven in practice: the easily identifiable MSME is pursued, while more elusive or better-resourced actors exploit gaps.

This imbalance carries macroeconomic consequences.

When promising small businesses are driven into insolvency, capital, skills and entrepreneurial energy exit the formal economy.

The tax base itself is narrowed as potential future contributors are sidelined.

True equity would require consistent enforcement across the spectrum with proportionate treatment of MSMEs alongside determined action against illicit and highly engineered avoidance. Until then, the perception that LHDN takes the path of least resistance risks discouraging the very innovators Malaysia needs most. – August 12, 2026