Shadow economy in Malaysia: an introduction

The shadow economy refers to illegal or unreported economic activities that evade state regulations and taxation, including unregistered businesses conducting cash transactions to avoid income reporting. A major component of this sector is tax evasion, which unlawfully reduces tax liabilities and shrinks the national tax base; in Malaysia, it is defined as a deceptive act under Section 114 of the Income Tax Act 1967. Shadow economic activities significantly contribute to the country’s tax gap, with estimates indicating losses of over RM70 billion annually and the shadow economy accounting for about 21% of Malaysia’s GDP, or roughly RM330 billion.