(TAX UPDATE) Malaysia’s 2026 Carbon Tax: What Every SME Needs to Know Before It Hits

(TAX UPDATE) Malaysia’s 2026 Carbon Tax: What Every SME Needs to Know Before It Hits

The carbon tax is coming to Malaysia.

By 2026, the government plans to roll out a carbon tax and it won’t just be a “green” headline. This tax will start with big industries like iron, steel, and energy. But over time, it may knock on the doors of more businesses, including SMEs like yours.

If your company is energy-intensive, exports to the EU, or has plans to grow into manufacturing, now is the time to understand how this new tax may affect you.

This blog breaks down what we know so far, what’s still unclear, and what you can do about it.

What Is Malaysia’s Carbon Tax?

Malaysia's carbon tax is a government plan to put a price on carbon dioxide (CO₂) emissions. In short, companies that emit more greenhouse gases will pay more tax.

It’s a key part of Malaysia’s pledge to go net-zero by 2050 and is also a strategic move to align with global climate regulations, especially the EU’s Carbon Border Adjustment Mechanism (CBAM).

The first phase of the tax will target:

  • Energy sector

  • Iron and steel manufacturers

Later, it may expand to cover industries such as:

  • Cement

  • Aluminium

  • Fertilisers

Expected Tax Rate

The actual rate is still under wraps.

But analysts suggest that Malaysia may follow Singapore’s model. Singapore plans to charge S$45 (around RM156) per tonne of CO₂ equivalent by 2026.

If Malaysia sets a similar starting rate, projections show the tax could raise nearly RM1 billion per year for the government.

How Will the Tax Be Used?

The good news: this is not a “collect and forget” tax.

The revenue will be channeled back into:

  • Research and development of decarbonization technologies

  • Green economy initiatives

  • Support for affected industries to adapt

This reinvestment is meant to ease the transition and drive innovation across industries.

Why Now? The Strategic Drivers Behind the Tax

There are three key reasons why Malaysia is taking this bold step:

The European Union’s CBAM imposes a carbon price on imported goods. If Malaysia doesn’t act, local exports could be taxed at the border. By introducing our own carbon tax, Malaysia can protect its exporters and stay competitive.

Investors and buyers are increasingly demanding carbon disclosures and climate action. The carbon tax strengthens Malaysia’s ESG credentials and attracts green investment.

Malaysia spends billions on fuel subsidies. The government has announced plans to rationalize these subsidies. A carbon tax, when coordinated properly, can help balance the impact and support green alternatives.

Can SMEs Ignore This?

Not advisable.

Even if your business is not directly affected in the first phase, the ripple effects will be felt:

  • Higher electricity tariffs (especially for factories and manufacturers)

  • New compliance costs (carbon reporting, MRV processes)

  • Client and supplier pressure (especially if they’re part of export supply chains)

SMEs involved in energy, logistics, agriculture, or light manufacturing may be asked to show emission data or even absorb part of the carbon cost.

Any Incentives or Reliefs?

Yes – and some are already available.

Here are the key tax incentives that SMEs should explore:

Companies may be allowed to offset up to 5% of their emissions using carbon credits purchased from the Bursa Carbon Exchange (BCX) – a voluntary carbon market launched in 2022.

For companies exploring Carbon Capture, Utilisation and Storage (CCUS), the incentives are attractive:

  • 10-year Investment Tax Allowance (ITA) for in-house CCUS projects

  • 70% income tax exemption for 10 years for CCUS service providers

  • Import duty and sales tax exemption on CCUS equipment (2023–2027)

  • Tax deductions on pre-commencement expenses for up to 5 years before project start

Companies developing carbon projects (e.g., reforestation, methane reduction) can claim a tax deduction up to RM300,000, provided:

  • The deduction is used against income from carbon credit sales

  • The project is properly verified (MRV-compliant)

  • Application is made by 31 December 2026

Companies that invest in energy-efficient machinery or green tech solutions can benefit from:

  • Green Investment Tax Allowance (GITA)

  • Green Income Tax Exemption (GITE)

The 2025 Budget includes RM70 million in rebates to promote the purchase of energy-saving appliances. This may benefit office-based SMEs, too.

Industry Feedback: Not Everyone Is Happy

The Federation of Malaysian Manufacturers (FMM) has pushed for an Emissions Trading Scheme (ETS) instead of a flat carbon tax. They argue that an ETS allows more flexibility and efficiency.

Others worry about:

  • Sharp increases in electricity bills

  • Lack of readiness to track and report emissions

  • Confusing overlap between carbon tax and carbon trading

There’s also political uncertainty. The recent resignation of the environment minister and ongoing subsidy rationalization discussions could delay the tax.

Final Thoughts: Carbon Is the New Cost

For SMEs, this tax is not just an environmental issue – it's a business issue.

Like GST or SST, carbon tax will soon affect pricing, budgeting, and compliance. Being early in understanding and preparing gives your company a head start – and maybe even a green edge.

Let’s not wait till 2026 to be caught by surprise.

Visit Us

  • Wisma KTP, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru

  • Wisma THK, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru

KTP (Audit, Tax, Advisory)

An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients

THK (Secretarial, Bookkeeping, Payroll, Advisory)

A licensed secretarial firm in Johor Bahru providing fast reliable incorporation, secretarial services, corporate compliance services, outsourcing bookkeeping, and payroll services to clients

KTP Lifestyle

An internal community for our colleagues on work and leisure.

KTP Career

An external job community on vacancies in Johor Bahru for interns, graduates & experienced candidates.

#Thk

#KTP


taxKtp Ktp