Chapter 1

Introduction to
Malaysian Taxation
System
Definitions

Tax …

“contribution levied on persons, property or

(Concise Oxford Dictionary)

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Objectives of Taxation
To raise government fund
To develop nation’s growth
To promote fair and equitable justice
To supervise income and wealth distribution
among different groups
To supervise private sectors’ activities
To curb bad activities
…

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Basic Principles
Efficiency
Fair and equitable
Certainty
Flexibility
Transparent in assessment
Convenient mode of payment
Low compliance cost

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Basis of Charge
 Total income – tax is charged on total income
received by a person in that basis year.
 Total expenditure/consumption – tax is
charged on the expenses incurred by a person.
 Wealth – tax is charged on total capital
increment or wealth of a person in a basis year.
 Transactions – tax is charged every time a
transaction incurred.

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Types of Taxes
1. Direct Taxes
 The responsibility to administer direct taxes
in Malaysia lies with the Inland Revenue
Board Malaysia (IRBM)
• [Link]
 Types of direct taxes:
• Income Tax
• Petroleum Income Tax
• Real Property Gains Tax (RPGT)
• Stamp Duty

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Cont’d
2. Indirect Taxes
 The responsibility to administer indirect taxes in
Malaysia lies with the Royal Custom Department
[Link]
 Types of indirect taxes:
• Goods and Services Tax (GST) – w.e.f. 1 Apr2015
Prior to 1 April
- Sales tax – 5 % - 10% on taxable goods
- Services tax – 5% on taxable services
Sept 2018
- Abolish GST, replaced with SST
• Custom Duty (Import & export duty)
• Excise duty

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TAXABLE PERSONS
Incapacitated persons through his/her
agent
Employee
Sole Proprietor
Partners in a partnership (Partnership as a
business do not pay tax but partners
within the partnership)
Trustees
Executors
Hindu Joint Families

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What is Income Tax ?
Income tax is “a tax 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”

(Section 3, ITA 1967)

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Background of the Malaysian
Income Tax System

 First introduced in 1947

 Later in 1968
- Income Tax Act (ITA) 1967

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Scope of Charge
 It determines who and what is liable to
income tax
1) world scope
- taxed on all income wherever derived.
2) derived scope/territorial basis
- taxed on income derived from a country
3) derived and remittance scope
- taxed on income derived from a country and also foreign income
remitted into the country

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 Scope of Income Tax
Charge in Malaysia

Section 3 of ITA, 1967 provides:

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Cont…
 Income tax is charged on income accruing in
or derived from Malaysia by a chargeable
person.
• Foreign income remitted into Malaysia by a
person is exempted.
• However, income of a resident company
carrying on a business of banking, insurance,
sea or air transport wherever derived is
charged to tax on world scope.
• A non-resident person will be taxed on income
derived from Malaysia only (derived/territorial
scope/basis).

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 Classes of Income
subjected to tax:
 Sec. 4, ITA 1967:
 S4(a) Gains or profit from a business;
 S4(b) Gains or profits from employment;
 S4(c) Dividends, interest or discounts;
 S4(d) Rents, royalties or premiums;
 S4(e) Pensions, annuities or other periodical
payments not falling under any of the foregoing
paragraphs; and
 S4(f) Gains or profits not falling under any of
the foregoing paragraphs.

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Cont.
 Sec. 4(A)- Special classes of income on
which tax is chargeable.
 Relates to non-resident individuals for the basis
year.
 The tax on these special income is collected by
way of withholding tax.
 The special income are as follows:
 Payment for services rendered in connection with
use of property or installation or operation of any
plant, machinery or other apparatus purchased
from a non-resident person
 Technical or management services fees for
onshore services
 Rental of moveable property
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Persons subjected to income tax
 Sec.2of ITA defines ‘person’ to include a
company, a body of persons and a
corporation sole.
◦ Body of person - trust body, club, trade
association, co-operatives, etc.
◦ Company
◦ Individual - Sole proprietor, partners in
partnership and other individual receiving
income under Section 4 and 4A.

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Basis of Assessment
Basis year – the year in which income is
derived
Year of assessment – the year in which
income is assessed
Basis period – the period in which
income is derived

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Year of Assessment (YA)
 Prior to 1 Jan 2000, Malaysia adopts the
preceding year assessment (PYA). The
imposition of income tax is a year later than
the derivation of income
 W.e.f. 1 Jan. 2000, Malaysia implements
current year assessment (CYA) to replace
preceding year assessment, where
assessment of income tax is concurrent with
derivation of income.
 Benefit of changing from PYA to CYA:
 tax collection is based on the taxpayers’ ability to pay
on his current cash flow.

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Basis Year & Basis Period
 The basis year (BY) for a YA shall constitute
the basis period (BP) for that YA.
 e.g: BY 2018; YA 2018; BP?

 The BP for the assessment of business

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Cont…
E.g:
H Sdn Bhd (company) closes its accounts
on 30 June each year.
◦ What is the BP for H Sdn Bhd if the accounts
end on 30.6.18?

What is the BP for Ms Rai – an executive

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Assessment System
 Prior to year 2000, Malaysia adopted an
Official Assessment System (OAS).
 Beginning from year 2000, Self
Assessment System (SAS) replaced the
OAS.
 SAS is implemented in stages as follows:
Companies – Year 2001
Individual, partnership and co-operative,
trust body etc – Year 2004

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Tax Rates
Rates
a) Individual (effective YA 2018)

Resident (progressive rate) 0% - 28%

Non-resident (flat rate) 28%*

*income from interest, royalty & s4A are subjected to lower rates

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Cont…
Company
YA09 YA16 YA18 YA19
Paid-up capital of RM2.5m & below
On 1st RM500,000 chargeable income 20% 19% 18% 17%
On subsequent chargeable income 25% 24% 24% 24%

Paid-up capital > RM2.5m 25% 24% 24% 24%

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END OF CHAPTER 1

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