LETTER | The recent introduction of taxation for deferred income and advance payments under The Finance Act 2015 is a prime example on how the past government took full advantage of us - the small and ordinary folks - to benefit themselves and their cronies.

They have introduced a highly oppressive and draconian tax law that has no place in our “New Malaysia” and it has to be put to a stop immediately or many more of our gifted entrepreneurs will disappear.

So, what is tax on deferred revenue? Prior to Year of Assessment (YA) 2016, business income can only be taxed at the time of accrual or derived basis. This means that any payment received from a client for services yet to be performed would only be subjected to tax once they had been rendered.

This is fair as a business should only be taxed as and when they have provided any form of service to the other party such as selling smartphones or pens. Guess what? The old government had found a loophole to manipulate and game the existing tax system by introducing the Finance Act 2015.

Let us tax you first, talk later - under the new amendments to the Section 24 of Income Tax Act (ITA) 1967, you, a businessman, will be taxed in advance if you have received any form of money in advance for your services. You will have no choice but to pay tax in advance even though you have provided absolutely nothing and incurred no debt obligations!

Basically, this is what our Inland Revenue Board (IRB) is telling us: “We want to tax you first and talk later. You can reverse this amount next year when you have performed your services. But right now, we just want your money if you have received any in advance from your clients.”

Well, we have our former finance minister to thank for this. To be honest, this is typically what corruption does. It infiltrates the entire system and defiles everything along the way. Now, we have to pay the price for our past government’s sins and mistakes. To save a rapidly sinking ship, they had to resort to such cheap tactics by taxing us in advance even though we have delivered nothing to our clients. This has to be stopped.

Many of our businesses (especially those that possess subscription-based revenue model) are suffering and struggling to stay afloat. They were severely punished by the hefty tax upfront and could barely make any profit after the deductions.

And because they could not reliably estimate their income and expenses, they had no choice but to resort to several non-cost effective methods to reduce the taxable amount.

Ultimately, this has increased the cost of doing business and stifled innovation and creativity. This is also presenting an opportunity cost to the government and it will not be healthy for the country in the long run.

In 2014, in the case of Clear Water Sanctuary Golf Management v Ketua Pengarah Hasil Dalam Negeri [2014] 1 LNS 809, the High Court reversed a lower court’s decision and held that the license fees received in advance from its members were not income for the year of receipt.

This is due to the fact that there was no debt as the relevant services had not been rendered yet and the decision was upheld by the Court of Appeal.
To our taxpayers’ dismay, the government subsequently passed the Finance Act 2015 to amend the parts of the Income Tax Act 1967 and had overruled the Court of Appeal’s decision.

This has caused many of our decent and hardworking entrepreneurs to be burdened by substantial tax obligations and prevented them from generating sufficient cash flow to sustain their businesses.

Alas, this notorious tax regime marks a vast divergence from the true and fair view of the accounting treatment where revenue is only recognised when the services have been performed or the ownership of the goods have been transferred.

In view of the grossly unfair system of the new tax regime, there had been a joint memorandum submitted by the various leading professional bodies, including the Malaysian Institute of Chartered Accountants, the Chartered Tax Institute of Malaysia, The Malaysian Institute of Certified Public Accountants and The Malaysian Institute of Chartered Secretaries and Administrators, to urge the government to abolish the deferred revenue tax regime.

Sadly, no action has been taken by the government as to date.

The implementation of the deferred revenue tax regime has placed Malaysia at a disadvantage compared to other countries with more established tax jurisdictions.

In the interest of fairness to the taxpayers of the country, the new government should take immediate action to restore a healthy tax environment for the country in order to enhance the country’s economy, in line with the visions of the new Pakatan Harapan government.

Under this New Malaysia, there should not be room for any corruption or abuse of power. I hope that the new finance minister will look into this matter seriously and take the right action immediately. Otherwise, this reformation movement feels more like a rebranding exercise of the old government than a real change.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.