Enhancing Consumer Benefit Via Special Tax Scheme for Social Enterprise

In Malaysia, social enterprises (SEs) are still in their infancy, but they are growing in popularity as more people become aware of the beneficial effects on local communities. SEs in Malaysia are business models that combine the aspects of both non-profit and commercial entities to achieve social or environmental objectives. Business organizations, such as partnerships, corporations, and limited liability partnerships, are used to operate SEs because there is no specific legal entity for SEs in Malaysia. From a Malaysian perspective, tax-exempt status is one of the main challenges encountered by Malaysian social entrepreneurs. Despite the government’s efforts to recognize SEs, the problem of taxation for SE has not been resolved because SE still must pay taxes in a manner similar to that of commercial entities. This study aims to provide tax benefits to SE in Malaysia. Although Malaysia revised its laws and accredited SEs, no tax exemption has been provided exclusively for SEs. SEs contributions are meant to improve social welfare, but SEs are not exempt from taxes, such as charitable organizations. SEs business methods and organizational structures, which are comparable to those of commercial companies, lead to the conclusion that SEs are comparable to commercial organizations. The research concludes that by introducing tax exemptions permanently for SEs in Malaysia, customers can benefit from supporting businesses that align with their values, while SEs can benefit from increased support and growth opportunities. Governments can also benefit from a stronger economy and increased social and environmental impacts, making this an attractive policy option for Malaysian society.


Introduction
Social enterprises (SEs) are business models that combine the aspects of both commercial and for-profit entities to achieve social or environmental objectives.
For SEs, the term "SEs" refers to a mission of the organization rather than its legal YURIDIKA FAKULTAS HUKUM UNIVERSITAS AIRLANGGA framework. In the opinion of certain professionals, is businesses that generate profits for general welfare. However, some claim that the word "SEs" applies to nonprofit organizations that employ efficient business criteria. Other scholars contend that, rather than being intrinsically businesslike, the SEs movement is more entrepreneurial in nature, finding innovative remedies to social problems. According to Dees and Elias, SE may oscillate between being completely charitable (social mission) and being purely commercial (financial mission), echoing the conventional debate on the social goals of the business. 1 In Malaysia, SEs are a growing sector that is gaining traction, as an increasing number of entrepreneurs recognize the potential of using business as a tool for positive social and environmental change. provided by the government in an effort to recognize SEs in Malaysia. 3 Under these guidelines, there are three main criteria for SEs. To be eligible for this, SEs must (i) proactively create positive or environmental impacts, (ii) contribute significant resources to their social or environmental mission, and (iii) be financially sustainable.
The third requirement stipulates that the organization must generate more than 50% of its total revenue by selling goods or services rather than through contributions or grants as a starting point. Once accredited, the organization will be categorized as an 1 J Gregory Dees  Malaysia. However, the tax exemption provided by the government was temporary.
To ensure the sustainability of SEs, tax incentives in the form of permanent tax exemptions should be implemented. This study aims to discuss the effectiveness of the tax exemption policy in incentivizing SEs to actively support and collaborate with social entrepreneurs.

Business Organization for Social Enterprise (SEs) in Malaysia
In Malaysia, the Income Tax Act of 1967 (also known as "ITA 1967") requires a business entity to pay taxes on any income produced by its operations. Given the broad definition of a taxable person under Section 2 of the ITA 1967, the majority of commercial entities are normally subject to taxation. Because there are no specific legal entities for SEs in Malaysia, SEs can be in the form of either business organizations or Non-profit organizations (NPOs).
In Malaysia, the common business organization for SEs include:

Sole Proprietor
The sole proprietorship in Malaysia is a type of business structure owned and operated by a single individual. In this type of business, the owner has complete control and responsibility for all aspects of the business, including management, decision making, finances, and operations.

Partnership
In Malaysia, a partnership is owned by two or more individuals. According to Section 3 of the Partnership Act 1961, partnership refers to a relationship that subsists between persons carrying on business in common with a view of profit. Partners in this type of business share responsibilities, profits, and losses. A partnership is not a legal entity, and, as such, the partners and the business are not distinct from one another. The partners are personally liable for all liabilities and debts incurred by the businesses. Partnerships are governed by partnership agreements that outline the responsibilities of each partner and how profits and losses are shared. A partnership is not a tax entity under the ITA 1967, and as such, no tax is imposed on the firm.
Each partner was treated as if he was the sole proprietor and assessed according to his share of the partnership income. 7 Formal partnership deeds may govern the rights and obligations of each partner, but this is not obligatory. 8

Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP) is an alternative business vehicle to carry out business that combines the characteristics of a private company and a conventional partnership. The LLP provides limited liability status to its partners and offers flexibility in internal arrangements through an agreement between the partners.
An LLP is a business vehicle that offers simple and flexible procedures in terms of its

Private Limited Company (Sdn Bhd)
In Malaysia, a private company is a separate legal entity from its owners and shareholders and is limited in the number of shareholders it can have (maximum 50). The shareholders of a private company have limited liability for the debts and obligations of the business, meaning that their personal assets are not at risk if the business cannot pay its debts. 10 Private companies in Malaysia must be registered with the Registrar of Companies and must comply with the relevant laws and regulations governing social enterprises in Malaysia. 11 The Private Limited Company is one of the most common business entities adopted by businesses, including family businesses 12 and SEs, owing to its attributes.

Cooperative Society
In Malaysia, a cooperative society is a legal entity formed by a group of individuals, with the common goal of providing economic and social benefits to their members. These societies were governed by the Cooperative Societies Act of 1993. Under this Act, "co-operative society" is defined as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise which is registered under this Act. Cooperative societies can be formed in various sectors such as agriculture, consumer, credit, housing, and transportation. Some of the most common types of cooperative societies in Malaysia include agriculture, consumer, credit housing, and transportation. According to the findings of the British Council, 43% of people opted to register as private companies limited by shares (Sdn Bhd). This is consistent with earlier findings, according to which 48% of social enterprises were registered in this category. The sole proprietorship registration type was the second most common type of registration (19%). In terms of paperwork and following the law, these two options are regarded as least complicated and burdensome. 15 It is important to note that the best legal entity for a social enterprise depends on factors such as ownership structure, liability protection, and tax implications.

Non-Profit Organization (NPOs)
Non-profit organizations (NPOs) are essential to the success of every society because they satisfy the demands of the general population. 16  including advocacy, research, and community development. Non-profit organizations without charitable status are also subject to regulatory requirements and reporting obligations. NPOs' charitable status is still able to operate in Malaysia, but they are generally not eligible for tax exemptions or incentives. These organizations may also be subject to less regulatory oversight and reporting requirements than those with charitable status, although they are still required to comply with the relevant laws and regulations governing non-profit organizations.

Both types of NPOs play an important role in Malaysian society and
contribute to the development of the country. 23 Charitable organizations are particularly important, as they are able to access additional resources and support from the government and other organizations to carry out their activities. However, NPOs without charitable status are also important as they can focus on a wide range of social issues and provide a platform for advocacy and awareness-raising on important social issues.
In summary, the main difference between an NPO with charitable status and one without in Malaysia is the tax treatment and regulatory oversight they receive, with charitable organizations generally receiving more favorable treatment in these areas.

Enterprise in Malaysia
In Malaysia, tax treatments are discussed in the Federal List of the Ninth Schedule of the Federal Constitution, whereby the federation has jurisdiction over financial matters, including tax rates, in the federal capital. According to Section 3 of the ITA, 1967 states that "Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia".
Malaysia provides tax exemptions to a specific number of entities that are not for profit in nature, such as foundations, non-profit organizations, and companies limited by guarantee.

Commercial Entities
Commercial entities in Malaysia are subject to corporate income tax on their profits, which is currently set at a flat rate of 24%. Malaysia has a diverse economy, and many types of commercial entities operate in the country, such as sole proprietorships, partnerships, limited-liability partnerships, and companies.
For sole proprietorship and partnership (unincorporated business), they possess no separate legal entity, which means the businesses are not separate from the owners; therefore, business profits are taxed as personal income. 25 Meanwhile, companies (incorporated businesses) are regarded as separate legal entities; therefore, businesses are separate from the owner. Companies are required to pay income tax on their taxable income, which is based on their net profits after deducting the allowable expenses and capital allowances.

Charitable Organization
In Malaysia, a charitable organization is a type of non-profit organization that serves charitable purposes, such as providing aid and assistance to those in need or promoting social welfare. Charitable organizations can take many forms, including charities, foundations, non-governmental organizations (NGOs), and community- Any organization or institution approved under subsection 44(6) will automatically be granted a tax exemption on its income (except dividend income) under paragraph 13, Schedule 6, ITA 1967.

Social Enterprise
Overall, the tax treatment of SEs in Malaysia is still evolving and the 25 Afifah Hamdan and others, 'Sole Proprietorship Business Succession in Malaysia: A Perspective of Civil and Islamic Law' (2022) 9 Journal of Asian Finance, Economics and Business.
[285]. government is taking steps to encourage the growth of this sector. As social entrepreneurship continues to gain momentum in Malaysia, policies and incentives are likely to be introduced to support the development of this important sector. In general, the goal of SEs has expanded beyond traditional businesses-the motive is not only to generate income, but also to combat social problems and promote the well-being of the country. 26

Revenue Law and Social Enterprise (SEs) in Malaysia
In Malaysia, SEs are subject to the same tax laws as other businesses are.
Under the ITA 1967, SEs are considered taxable entities. The income tax rate for social enterprises is the same as that for other businesses in Malaysia, which is currently set at a maximum rate of 24%. The link between businesses and charities may occasionally be complex. Businesses have many advantages for charitable purposes. One of the many exclusive treatments is tax exemption, and in some charity structures, such organizations are given permission to collect funds from the public.
Taxation has a significant impact on both businesses and society, affecting  does not support a tax exempt status for SEs. According to the findings, SEs received no tax benefits or tax-exempt status. It has been observed from the discussion above that the main constraint for SE is tax treatment. As discussed earlier, commercial entities are always associated with a profit-oriented objective in their establishment, not including the public goods element. All commercial entities are allowed to be involved in commercial activities to earn profits. For NPOs, to obtain tax-exempt status, the main condition must be solely for charitable purposes and restricted to gain profit. In fact, there is no legal provision in Malaysian laws allowing SEs to receive special tax treatment because of its hybrid concept that combines social and profit goals. Obtaining tax-exempt status under section 44(6) of the ITA renders SEs not profitable, which is parallel to the characteristics of SEs. SEs should be given the best special tax treatment because SEs' goals are the same as those of charities.
In fact, the profit generated by SEs is exclusively for charitable purposes.
In articulating the idea of why tax exempt status should be granted to SEs, it is important to highlight that any cause for the purpose of charity has always been considered noble and good due to the existence of public benefit elements. This is why charity has always been considered to have different characteristics from other purposes, which are commercial, political, or those relating to private individuals. 30 Referring to the definition of SE in Malaysia, SEs can be seen as an innovative solution to fill the gap in the state sector, which is unable to provide comprehensive services to its citizens owing to resource constraints. Nowadays, these enterprises exist all over the world in every economic sector and are involved in a wide range of activities in social and welfare, the environment, health, tourism, and education.
Although SEs have been proven to play an important role in addressing social problems and have a positive impact on socio-economic development in Malaysia, harnessing the benefits of SEs requires long-term government support for growth and financial sustainability to impact the community and even the economic level.
The trend in SEs also aligns with global trends, as many countries around the world, including the United Kingdom, South Korea, and Canada, have introduced tax incentives for SEs. Following this trend, Malaysia can position itself as a leader in the development of the SE sector in the region.
Most of the literature has examined the significance of SEs, and its importance is apparent. SEs contribute to economic growth and job creation, particularly in underserved communities. By providing tax exemptions, SEs can reduce their financial burden, allowing them to invest more resources in business and social missions. In turn, this can lead to increased economic growth and job creation, SEs can help create a more supportive environment for the sector to grow and develop. It can also help attract more investment and support from domestic and international sources. Tax exemptions for SEs could be a more effective way to promote the social good than traditional non-profit models, as they allow for more flexibility and innovation.
Therefore, it is highly recommended for the Malaysian government, and there is a need to appraise existing and proposed tax treatment for SEs in Malaysia, as it could help increase the scale and impact of socially driven businesses.

Conclusion
It is expected that the special treatment of tax exemptions for SEs should be further improved, especially considering the commitment of SEs to allocate their income towards accomplishing their social or environmental goals. It may be possible to lessen costs and ensure the sustainability of SEs by introducing tax exemptions based on the percentage of profits allocated by SEs towards fulfilling their social or environmental goals. Overall, tax incentives and exemptions can be important tools for supporting the growth and development of social enterprises in Malaysia and other countries. By providing financial benefits to SEs that are focused on creating positive social or environmental impacts, governments and policymakers can encourage more entrepreneurs to pursue this business model and help address some of the most pressing social and environmental challenges facing society today. In conclusion, customers and SEs can benefit from a specific tax scheme. Customers can benefit from supporting businesses that align with their values, whereas social enterprises can benefit from increased support and growth opportunities. Governments can also benefit from a stronger economy and increased social and environmental impacts, making this an attractive policy option for Malaysian society.