29 January 2012

Paying Tax: When your PCB Deduction is too little

After calculating your income tax payable for last year, you realise that your last year's Monthly Tax Deduction ("MTD") or Potongan Cukai Bulanan ("PCB") is insufficient to cover your actual tax liabilities. To your horror, you realise that you need to PAY TAX to cover the shortfall of deduction!!

What can you do?

As some of my friends and I found out in almost every April of past years (the income tax assessment submission deadline) that it is really painful to pay a few thousands more Ringgit of tax, instead of receiving a nice tax refund cheque.

Reasons (and explanations)

There are a few reasons why wrong estimation and under deduction of tax can happen.

One of the main reasons is that Human Resource Department decides on employees PCB deduction based on Schedule of Monthly Tax Deductions provided by LHDNM (Inland Revenue Board of Malaysia, or simply Income Tax Department). The schedule is the best estimation of your possible tax liability, payable monthly, based on a few criteria like salary range, spouse(s), number of children under 18, etc. It is not very accurate because your tax liability subjects to other factors like bonuses, incentives, Benefit-in-Kind (i.e. company car, allowance, etc.), etc.

Therefore, in every year before 30 April (for employee) or 30 June (for business owner) you still need to calculate your actual tax liability, to submit your tax assessment form and to pay shortfall of PCB deduction.

Solutions

So what can you do about it?

First, the bad news. You still need to pay the deduction shortfall to LHDNM. Taxes and death, remember? The two things that you can't avoid in life. And taxes come before and after death.

Second, the good news. You don't have to pay the shortfall in one lump sum. You can pay by installment. This is the right way:

  • Submit your income tax assessment filing on time
  • After the tax assessment filing, go to the LHDNM branch that keep your tax file. Bring along your tax assessment calculation and a photocopy of EA form, just in case your last year tax numbers are not in LHDNM's system yet.
  • Explain to the tax officer that the shortfall is too much for you to pay in one lump sum, and that you would like to pay the tax by installment. The longest period given for installment that I have heard is 10 months.
  • Be polite and keep a smiling face as your are asking for help. Generally, the tax officer is willing to help
  • The officer will print out a letter for you to bring back to your HR Department
  • Bring the letter back and give it to your HR Department to make monthly deduction from your salary


There are a few more things to note for individual tax payer:

  • It may take a few months after the tax filing deadline for your last year numbers to appear in LHDNM's system. Therefore, may be, JUST MAY BE, you can go and see the tax officer a few months after the tax filing deadline (when the peak period for LHDNM is over) to negotiate for installment.
  • A friend of mine went to see the tax officer 5 months after the tax filing deadline to negotiate for tax installment payment. 
  • Just to explain further: you still need to submit your tax assessment filing on time. Just that you may have a little bit extra time, before you go to LHDNM branch, to negotiate with LHDNM officer for a longer tax payment period.

I believe there are laws or rules somewhere on penalty for late tax payment. However, Malaysia government is still lenient toward individual tax payers. At this point, for individual taxpayer, as long as you are willing to settle your outstanding tax (before they start to contact you) LHDNM still allows a longer tax payment period without penalty or interest charge.

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