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CHAPTER 1
INTRODUCTION TO MALAYSIAN TAXATION
LESSON LEARNING OUTCOME:
1.1 State the background of Malaysian taxation
1.2 Identify the difference between direct taxes and indirect taxes
1.3 Know the basis period and classes of income
WHAT IS TAX & INCOME TAX?
HISTORY OF MALAYSIAN TAXATION
Income Tax Ordinance 1947
- Effective from 1 January 1948 & applicable to Peninsular Malaysia.
Sabah Income Tax Ordinance 1956
- Effective in 1957 & applicable to Sabah.
Sarawak Inland Revenue Ordinance 1960
- Effective 1961 & applicable to Sarawak.
Income Tax Act 1967 (ITA 1967)
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1.1 BACKGROUND OF MALAYSIAN TAXATION
Objectives of taxation.
Different sources of revenue law.
Scope of charge (section 3, ITA 1967).
OBJECTIVES OF TAXATION
(Role of tax towards development of the country)
i. To raise government fund
Tax as a source of government revenue. Raising fund to finance government
expenditures.
ii. To develop nation’s growth
Tax as an encouragement of economic growth. Ensure stable growth to
finance the country's annual budget.
iii. To supervise income and wealth distribution among different groups
Tax as an instrument of redistribution of income and wealth. Ensure justice
and fairness in the tax burden spread equitably among taxpayers.
DIFFERENT SOURCES OF REVENUE LAW
1. Statute law (referred to as the legislation)
Principal legislations are:
- Income Tax Act 1967 (ITA 1967)
- Petroleum Income Tax Act 1967
- Labuan Offshore Business Activity Tax Act 1990
- Real Property Gains Tax Act 1976
- Promotion of Investments Act 1986
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Subsidiary legislations are:
- Leasing Regulations of 1986
- Public Orders
- Exemption Orders & Double Taxation Agreements (DTAs)
2. Case Law (judge made laws)
The accumulated decisions of the courts, the courts have expressed
their opinions regarding the interpretation of the statues.
3. Practice of the Inland Revenue Board Malaysia (IRBM)
Applied through its review procedures and routine tasks when dealing
with tax agents & taxpayers and through Public Rulings (PRs) &
guidelines issued by the IRBM.
SCOPE OF CHARGE (SECTION 3, ITA 1967)
According to Section 3 of Income Tax Act 1967, income tax shall be charged
for each year of assessment upon the income tax of any person accruing in
or derived from Malaysia or received in Malaysia from outside Malaysia.
However, with effect from 2004 until 2021, except for resident companies
engaged in the business of banking, insurance, sea or air transport, income
earned from outside Malaysia and remitted to Malaysia by Malaysian
resident is exempted from income tax. A non-resident individual will only
be chargeable to tax on income derived from Malaysia.
With effect from 1 January 2022, foreign-sourced income of tax residents
will no longer be exempted when remitted to Malaysia.
Income tax in Malaysia is imposed on income accruing in or derived from
Malaysia. For residents, tax is also imposed on income derived from outside
Malaysia and received in Malaysia. However, resident companies carrying
on the business of banking, insurance, sea, or air transport (BISA) are
assessable on income from wherever derived (world income scope).
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Subject to conditions, the following foreign-sourced income received in
Malaysia (other than BISA) from 1 January 2022 to 31 December 2026 qualify
for tax exemption:
Dividend income received by resident companies, limited liability
partnerships (LLP), and individuals (in respect of dividend income received
through a partnership business in Malaysia)
All classes of income received by resident individuals (excluding a source
1.2 DIFFERENCE
of income BETWEEN business
from a partnership DIRECT &
in INDIRECT TAXES
Malaysia, which is received in
Malaysia from outside Malaysia)
Three categories of scope of charge:
Define
1. Territorial basis direct & indirect taxes
Based onList
territorial basis,of
the types income
directtax&isindirect
only chargeable
taxes on income accruing
in or derived from Malaysia, which is Malaysia source of income.
2. Foreign source income
Foreign source income received in Malaysia by any person is exempted from
income tax according to Paragraph 28, Schedule 6 of Income Tax Act 1967.
However, there is an exception in which the resident company carrying on
the specialized businesses includes banking, insurance, sea and air transport
are accessed on world scope basis, that is, income wherever derived, even
though the income is not received in Malaysia.
3. World scope basis.
A Malaysian resident person who carries on business in banking, insurance,
sea, and air transport will be chargeable to tax on all incomes wherever
derived.
DEFINE DIRECT AND INDIRECT TAXES
A direct tax is a tax that a person or organization pays directly to the entity
that imposed it. An individual taxpayer, for example, pays direct taxes to the
government for various purposes. Direct tax is managed and collected by
Inland Revenue Board Malaysia (IRBM).
Indirect taxes are taxes that can be passed on to another entity or
individual. They usually imposed on a manufacturer or supplier who then
passes on the tax to the consumer. Indirect tax is managed and collected by
Royal Malaysian Customs and Excise Department (RMCD).
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TYPES OF DIRECT AND INDIRECT TAXES
DIRECT TAX:
INDIRECT TAX:
Income tax:
Import and export duty:
- tax imposed on individuals or
- tax collected on imports and
entities (taxpayers) that vary with
some exports by the customs
the income or profits (taxable
authorities of a country.
income) of the taxpayer.
Excise duty:
Petroleum income tax:
- a percentage levied on
- tax imposed on all petroleum
manufacture, sale, or use of
company which operation in
locally produced goods (such
Malaysia.
as alcoholic drinks, tobacco
Real property gains tax:
products, motor vehicle and
- tax on chargeable gains derived
playing cards).
from disposal of property in
Sales & service tax (SST)
Malaysia.
Entertainment tax
Stamp duty:
Gaming tax
- tax that levied on documents.
1.3 BASIS PERIOD & CLASSES OF INCOME
The concept of year of assessment, basis year, basis
period, financial year & accounting period.
The classes of income (section 4, ITA 1967).
THE CONCEPT OF YEAR OF ASSESSMENT, BASIS
YEAR, BASIS PERIOD, FINANCIAL YEAR &
ACCOUNTING PERIOD
Year of assessment (YA) is the year when the income tax is assessed. It covers
one calendar year (1 January till 31 December) or one accounting period.
Basis Year is the year when the income is derived.
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Basis Period is the period when the income is derived.
Financial Year (FY) is a one-year period that a company or government uses for
accounting purposes and preparation of its financial statements.
Accounting Period is a period that covers certain accounting functions, which can
be either a calendar or fiscal year.
THE CLASSES OF INCOME (SECTION 4 OF ITA 1967)
According to section 4 of ITA 1967, income are classes by:
Section 4(a): gains or profits from business
Section 4(b): gains and profits from employment
Section 4(c): dividends, interests, and discounts
Section 4(d): rents, royalties, and premiums
Section 4(e): pensions, annuities, or other periodical payments
Section 4(f): gains and profits exclude section 4(a) – (e)
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SELF ASSESSMENT CHAPTER 1
QUESTION 1.1
a. Give definition of income tax.
b. What are the roles of tax towards development of the country?
c. Give THREE (3) examples of direct and indirect tax.
QUESTION 1.2
a. Explain about Self-Assessment System and e-filing system in Malaysia.
b. Describe the different source of revenue law implemented in Malaysian
Taxation?
c. Briefly explain the scope of charge to tax of a Malaysian resident individual
under the provision of the Income Tax Act 1967.
QUESTION 1.3
a. Discuss the concept of year of assessment, year basis and basis period.
b. Give suitable example to explain differences between preceding year basis
and current year basis.
