Following the Association’s earlier call for a more targeted and proportionate approach to CP500, verified cases surfaced involving fully salaried individuals whose income had been correctly declared through EA and BE forms and subjected to monthly PCB deductions, yet who were nonetheless issued CP500 instalment schedules by the Inland Revenue Board of Malaysia (LHDN).
In these cases, affected individuals had no undeclared income, no business income, and no omission of bonuses or allowances, all of which had already been taxed under the employment income framework. Despite full compliance, CP500 instalments amounting to several thousand ringgit were auto-generated, causing distress, confusion and unnecessary financial anxiety.
Affected taxpayers were subsequently required to physically visit LHDN offices, obtain manual forms and resubmit or amend prior-year BE returns to resolve issues arising from system-generated assessments rather than taxpayer error or non-compliance.
National President of the SME Association of Malaysia, Dr Chin Chee Seong, said these developments confirmed that the Association’s earlier concerns were grounded in practical realities.
“What we highlighted in January is now happening on the ground. Fully salaried taxpayers who have complied with all filing and payment requirements are being issued CP500 notices and then asked to correct errors they did not create,” he said.
While LHDN announced a one-year penalty waiver for CP500 non-payment in the Year of Assessment 2026, Chin reiterated that the measure did not address the root of the issue.
“The issue is not penalties, but erroneous assessment and procedural inefficiency. A system that generates incorrect obligations and shifts the correction burden onto compliant taxpayers undermines confidence in tax administration,” he said.
CP500 was introduced under Section 107B of the Income Tax Act 1967 to facilitate advance tax collection from non-employment income not subject to withholding tax. However, where individuals whose income was entirely employment-based and already subject to PCB were captured without a clear explanation or automated correction, serious concerns were raised over system logic, data interpretation and internal controls.
Chin stressed that requiring compliant taxpayers to take time off work, queue at tax offices and navigate manual amendment processes ran counter to the Government’s objectives of digitalisation, ease of compliance and administrative efficiency.
Accordingly, the SME Association of Malaysia called on the Government and LHDN to urgently review and rectify the CP500 auto-generation mechanism, implement system-level safeguards and exclusions, eliminate the need for physical walk-ins and manual amendments arising from internal misclassification, provide clear explanations on how CP500 figures are derived, and ensure that administrative or system errors were resolved internally without transferring the compliance burden to taxpayers.
The Association reiterated that Malaysia’s tax system must promote voluntary compliance through clarity, predictability and proportionality, rather than create unnecessary hardship through overlapping or incorrectly applied mechanisms.
“A fair and modern tax system is one that corrects its processes at the source. Compliant taxpayers should not be penalised with additional administrative hurdles for errors they did not cause,” Chin said.
