Penalties: Be aware of it
THIS is a topic of immediate relevance to individual taxpayers who will be filing their personal tax returns by April 30 (without any business income) and others by June 30 (with business income). Any infringement of the tax law will trigger an offence that leads to penalties, fines and possible imprisonment, which will be monetarily and emotionally painful. It is best to avoid them.
Why do we need penalties? Penalties promote compliance through deterrence (instilling fear of penalties, fines and imprisonment) and discriminates the defaulters and incentivises the taxpayers to comply. If we do not have penalties, the level of compliance will drop and there will be a negative effect on government revenues.
When to impose penalties? Penalties generally arise when taxpayers fail to comply with clear known obligations, such as the date to file an annual return or to provide information as required by the law or to pay taxes on time. In such instances penalties are fixed and will be applied automatically. However, there are instances when matters are not so clear especially when there is a lack of clarity in the law, which leads to interpretation differences. In such instances the penalties are subjective and application becomes discretionary.
Do you have a right of appeal? Yes, of course. Penalties are effectively additional taxes and therefore you have the right to appeal to the special commissioners of income tax within 30 days of the issue of the assessment.
Penalty triggers The important offences and penalties are noted below:
Failure to file tax returns and notify the IRB of your chargeability to tax
– Penalty upon conviction is RM200 to RM20,000 or imprisonment up to 6 months or both. If there is no prosecution, the director general (DG) may impose a penalty up to 300% of the tax liability. If this failure continues for two or more years without reasonable excuse and upon conviction the penalty shall be between RM1,000 to RM20,000 or imprisonment up to 6 months or both together with a special penalty of up to 300% of the tax liability.
Making an incorrect return by omitting or understating any income required by the law or by giving incorrect information in relation to his tax chargeability
– Penalty upon conviction (an exception will be made if he can satisfy the court that the infringement was made on good faith) is RM1,000 to RM10,000 plus a special penalty of up to 200% of the tax liability. If there is no prosecution, the DG may impose a penalty up to 100% of the tax undercharged.
Wilful evasion (wilfully and intentionally evades tax)
– Penalty on conviction is fine between RM1,000 and RM20,000 or three years imprisonment or both plus a special penalty of 300% of the tax undercharged. Late payment of taxes – If the tax due is not settled within 30 days after issue of the assessment notice, there will be automatic penalty of 10% of the tax payable and if the total amount due including the additional 10% is not settled within a further 60 days the further penalty of 5% will be added to the outstanding tax bill.
Since the introduction of self-assessment the assessment notice is deemed to be issued on the day you file your tax return i.e. April 30 and June 30.
There are numerous other penalties in the Income Tax Act 1967 and it is advisable for you to refer to the IRB website for more details: http://www.hasil.gov.my/ or penalty provisions of the Act.
The writer is the managing director of Crowe Horwath Tax Sdn Bhd and a trustee of the Malaysian Tax Research Foundation