MANY taxpayers may not be aware that they can receive compensation for late refund of tax overpaid. The Inland Revenue Board (IRB) is diligent in imposing 10% penalties on taxpayers for late payment of taxes, which is normally 30 days after the assessment is issued. However, on the reverse, IRB has not reciprocated with the same vigour when it comes to paying the 2% compensation per annum on the overdue amount refunded. The compensation does not appear to be automatically given.
You must take your hats off to the IRB for promptly collecting any outstanding taxes. However, when it comes to refunds, it is always automatic. Generally, the smaller refunds are returned quickly. Larger refunds take time and, in certain instances, request for refunds could lead to tax audits and therefore refunds could be delayed.
The income tax legislation is clear that once it is proven to the Director General of Income Tax that the taxpayer has complied with the tax legislation, the excess amount must be refunded. Any claim for refunds must be made within five years after the end of the tax year in which the assessment was made. The Director General can use the excess amount to set off against any outstanding income tax or against any outstanding taxes under Real Property Gains Tax or Petroleum Income Tax due by the same taxpayer.
Meaning of the words ‘amount refunded’
It is important to note that the compensation will only be paid on excessive payments on tax instalments or advance taxes by companies, trust bodies, cooperatives, societies, limited liability partnerships.
It will be applicable to individuals receiving employment income, pensions, annuities or periodical payments where the Director General has instructed the payer to deduct the tax.
Compensation for overpayment of tax
The rate of compensation is 2% per annum and it will be payable on the amount refunded after either 90 days from the due date for the electronic filing or 120 days from the due date for manual filing. It is calculated on the number of days beginning after the 90- or 120-day period up to the point the tax is refunded.
Compensation will not be paid if the taxpayer fails to file a tax return or fails to file a tax return by the due date, or if the taxpayer appeals against the assessment.
If the Director General discovers that the compensation has been wrongly paid, he can require the person to return the monies and he can impose a 10% penalty on the amount wrongly paid.
The way forward
Refunding taxpayers automatically after 90-day or 120-day grace period should be the norm. In case the IRB suspects that the refund is subject to dispute, then the taxpayer should be notified of an impending scrutiny for audit within the grace period. Otherwise, the tax refunds should be automatically made without the taxpayer having to revert to the IRB and pursue their refunds which may take many months to complete.
Refunding taxpayers promptly will only augur goodwill and confidence with the taxpayers that the IRB is impartial and is taking care of the interest of the taxpayers. Delays in refunds and late payment or non-payment of compensation affect the image of the IRB.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).