Legal Tax Planning vs Evasion: An Important Boundary

Introduction

There are lawful ways to reduce tax, and there are ways that cross the legal boundary. The difference can mean enjoying reliefs provided by law versus facing penalties or criminal offences.

This article explains three concepts that are often confused: legal tax planning, tax avoidance which the Director General may disregard under s.140 ACP 1967, and criminal evasion under s.113/114 ACP 1967.

Legal tax planning — what is permitted

Legal tax planning means using reliefs, rebates, exemptions, tax credits and structures provided by the Income Tax Act 1967 (ACP 1967) to reduce the tax burden. Examples include claiming individual reliefs, qualifying foreign source income (FSI) exemptions, and zakat rebates — all based on provisions that exist in the law.

s.140 ACP 1967 — anti-avoidance power

When a transaction is arranged mainly to alter the tax burden, the Director General may disregard the transaction. s.140(1) ACP 1967 empowers the Director General, where he has reason to believe a transaction has a direct or indirect effect of:

• (a) altering the incidence of tax that is or would otherwise be payable by any person;
• (b) relieving any person from liability that has arisen or would otherwise have arisen to pay tax or make a return; or
• (c) evading or reducing any duty or liability.

This is known as an anti-avoidance provision — it addresses arrangements aimed at altering the tax burden without genuine commercial substance.

Offences relating to forms and reporting

Besides s.140, the Act provides specific reporting-related offences:

• s.113(1) ACP — offence of making an incorrect return: omitting or understating income, or giving incorrect information about one's own/another person's tax liability. Penalty: fine RM1,000 to RM10,000 and 200% of the under-reported tax.
• s.112(1) ACP — failure to submit an Income Tax Return Form (BNCP) or failure to notify chargeability. Penalty: fine RM200 to RM20,000 / imprisonment up to 6 months.

Every chargeable individual must report all income; failure to submit BNCP within the prescribed period is an offence (penalty/tax increase).

Intentional evasion — s.114 ACP 1967

s.114(1) — wilfully with intent to evade tax (or assist another to evade), including by omitting income from a return, making false statements/entries, or giving false answers to questions/requests for information under the Act. Penalty: fine RM1,000 to RM20,000 / imprisonment up to 3 years and 300% of the under-reported tax.

s.114(1A) — assisting/advising another in preparing BNCP resulting in underpayment of tax. Penalty: fine RM2,000 to RM20,000 / imprisonment up to 3 years.

Reporting channel — e-Pelarian Cukai (e-Tax Evasion)

Members of the public can report suspected tax evasion by individuals/companies through HASiL's official e-Pelarian Cukai portal (https://epelariancukai.hasil.gov.my/).

this item still awaits official confirmation from HASiL — check again with HASiL before deciding. notes from research

Frequently Asked Questions (FAQ)

Q. What is the difference between legal tax planning and tax evasion? A. Legal planning uses reliefs/exemptions/credits provided by law. Avoidance involves transactions intended to alter the tax burden — the Director General may disregard them under s.140. Criminal evasion is an offence under s.113/114 with intent and heavier penalties.

Q. What happens if I report income incorrectly? A. s.113(1): fine RM1,000–RM10,000 and 200% of under-reported tax. If convicted of intentional evasion (s.114(1)): fine RM1,000–RM20,000/imprisonment ≤3 years and 300% of under-reported tax. Actual amounts are determined by the court.

Q. Can HASiL disregard my transaction? A. Yes — s.140(1) empowers the Director General to disregard transactions that directly/indirectly alter the tax burden, relieve liability, or evade/reduce obligations.

Q. Where can I report tax evasion? A. Through HASiL's e-Pelarian Cukai portal.

Glossary

• Avoidance — tax avoidance through transaction arrangements; addressed via s.140 ACP.
• Evasion — criminal evasion with intent; offence under s.113/114 ACP.
• BNCP — Income Tax Return Form (Borang Nyata Cukai Pendapatan).
• FSI — foreign source income.
• Legal tax planning — use of reliefs/exemptions/credits provided by law.
• YA — Year of Assessment.