In understanding the context of penalties and offences in Self-Assessment System, we first need to understand the overall meaning of Self-Assessment System. Self-Assessment System is based on the concept Pay, Self Assess and File. Whereby, Pay stands for monthly salary deductions are made for the individuals who are having an employment income or also for the individuals who are having business income through installments. The Self assess stands whereby the taxpayers are responsible in computing their own taxes.
And the file stands for the Income Tax Revenue Form (ITRF) where it will be submitted to the Inland Revenue Board Malaysia together with the payment for the balance of the income tax payable where it is to meet any shortfall in the monthly payments or maybe a claim for a repayment, in case if there is an overpayment. Self-Assessment System (SAS) is being practiced in some developed countries such as United States, United Kingdom, Australia, Japan and The Organization for Economic Co-operation and Development (OECD) Countries as a group.
There are some other developing countries also practicing Self-Assessment System such as Cambodia, Sri Lanka and also Malaysia. As we realize that the central motivations of the Self-Assessment System is being introduced is to increase the efficiency of tax collection for the tax authority. But yet there are some broad groups whereby they offences against the Act, filling inaccurate returns and providing incorrect information, fraud and willful evasion. This leads to the introduction of penalty and offences provision under Income Tax Act. There are few penalties for each offence under Income Tax Act.
All the provision of penalties does helps to ensure the proper compliance by the taxpayers with the tax laws. But how does it ensure the proper compliance. First of all, all the taxpayers are responsible in submitting their income tax for every year assessment. In a way, by submitting their income tax for every year, influence directly where it helps the country to increase its revenue. Income tax is a major source of revenue to a country which it is required to pay for schools buildings and maintenance of schools and hospitals, rural development and other multifarious services which directly and indirectly benefits the publics.
Therefore, a development of a country is depends on the residents. If a taxpayer fail to furnish return or give notice of chargeability will be liable under Section 112 (1) of the Income Tax Act which explains that any person who fail to furnish the return without any reasonable excuse, be guilty of an offence and shall be liable to a fine of not less than RM 200 and not more than RM 2,000 or to imprisonment for a term which not exceeding six months or to both. As this offence will slow down the countries tax administration cycle. The provision for penalties and offences ensures the taxpayer to avoid submitting the incorrect return.
In Section 113(1) under Income Tax Act explains that any person who makes an incorrect return by omitting, understating any income or gives any incorrect information where in relation to any matter affects his own chargeability to tax or any other person. As stated in the law, the taxpayers who have submitted an incorrect return will be liable to a fine of not less than RM 1,000 and not more than RM 10,000 and also shall pay a special penalty of double the amount of tax that has been undercharged in the consequence of the incorrect return or for incorrect information and no imprisonment.
Those penalties will be a courage for the taxpayers for not to submit an incorrect return or incorrect information. This is because those penalties are an extra burden for the taxpayers. Providing an incorrect return and incorrect information will also burden the IRB, for them to come with a report for the year. Therefore as a resident of Malaysia, we should avoid ourselves from submitting an incorrect return and incorrect information to the IRB.
Thus, we also have to play a part in developing our country. The higher is the penalty rate the greater the discouragement for potential tax evasion. There was a few studies has been carried out, and they summarized that penalty rates impact upon tax compliance behavior. When the taxpayers are aware of the offences that they are committing when evading tax and the consequences of being a non-compliant taxpayers, therefore they might reduce their tendency to evade tax.
As stated in Section 114 (1) Malaysian Income Tax Act, which explains that any person who willfully and with intent to evade or assist any other person to evade tax, will be liable to a fine of not less than RM 1,000 and not more than RM 20,000 or to imprisonment for a term which is not exceeding 3 years or to both, and also shall pay a special penalty of treble the amount of tax uncharged. This section in the act, seems to be a big burden for those who willful the evasion. The awareness of the penalties for the offences, will help the taxpayers to not against the laws and always ensures the proper compliances.
In conclusion, the provision for penalties and offences under the Malaysian Income Tax Act 1965 help to ensures proper compliance by taxpayers with tax laws. Imposing the penalties is the most effective way to ensure the proper compliance. The taxpayers must be co-operative, well-mannered, fair, and honest with high integrity. They should also provide all reasonable facilities and assistance to enable the audit office to carry out his duties as it has outlined in Public Ruling No. 7/2000.