# What It Costs to Miss a Withholding Tax Deduction

> The 10 per cent increase, the disallowance of the whole expense under s.39, and the s.113(2) penalty that survives even after you pay — worked as arithmetic.

- Category: taxation
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/taxation/withholding-tax-non-compliance

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RM5,000 of missed withholding tax does not cost RM5,000. It costs RM5,500 in tax,
RM12,000 in lost deduction, and a penalty that stays on the file after you have
paid everything else. The arithmetic is worth doing once, properly.

## The three separate hits

They come from three different provisions and behave differently.

**One — the 10 per cent increase.** Each charging section carries its own
subsection (2): ss.107A(2), 109(2), 109B(2) and 109F(2) all provide that the amount
you failed to pay “shall be increased by a sum equal to ten per cent”, and that the
total is a debt due to the Government payable forthwith. It is not a s.113 penalty,
though each section lets the Director General remit it for good cause.

**Two — disallowance of the whole expense.** Section 39(1) disallows the underlying
payment entirely, routed by section:

| Payment | Disallowance |
| --- | --- |
| Interest or royalty under s.109 | s.39(1)(f) |
| Contract payment under s.107A | s.39(1)(i) |
| Special classes of income under s.109B, and 4(f) income under s.109F | s.39(1)(j) |

You lose the deduction for the fee, not for the tax. Public Ruling 10/2019 para
14.2 puts it flatly: although the expense is incurred under s.33(1), none of it is
deductible while the withholding tax is unpaid.

**Three — the s.113(2) penalty.** Proviso (ii) to each of those paragraphs provides
that paying late “shall not prejudice the imposition of penalty under subsection
113(2)” where a deduction was claimed in the return. Section 113(2) allows a penalty
**equal to the tax undercharged** for an incorrect return.

## The arithmetic, on LHDN's own example

Public Ruling 10/2019 Example 18. A resident company pays RM50,000 to an Indian
service provider for services performed in Malaysia, and withholds nothing. It
files its YA2017 return showing chargeable income of RM1,000,000 and tax of
RM240,000, having claimed the RM50,000 as a deduction. An audit follows.

| | RM |
| --- | --- |
| Chargeable income as filed | 1,000,000 |
| Tax payable at 24% | 240,000 |
| Add back: fees for services disallowed under s.39(1)(j) | 50,000 |
| Chargeable income after audit | 1,050,000 |
| Tax charged at 24% | 252,000 |
| **Tax undercharged** | **12,000** |
| s.113(2) penalty, illustrated at 100% | 12,000 |
| **Additional tax payable** | **24,000** |

Separately, the withholding tax of RM5,000 is increased by RM500 under s.109B(2),
giving a debt of RM5,500 recoverable under s.106(1).

**Total exposure on a RM50,000 invoice: RM29,500** — against RM5,000 of tax that
should have been deducted at source. Just under six times.

## What paying later does, and does not, fix

Example 19 in the same Ruling runs the sequel. The company pays the RM5,500 on
15 December 2018.

The deduction comes back. Chargeable income returns to RM1,000,000, tax to
RM240,000, and a reduced assessment is issued. But the Ruling is explicit: because
an incorrect return was filed on 31 July 2018, the s.113(2) penalty **will be
maintained**.

That is the asymmetry to remember. The 10 per cent increase can be remitted for
good cause. The disallowance reverses on payment. The penalty for having claimed a
deduction you were not entitled to does not, because the wrong was the return, not
the arrears — and LHDN's withholding tax page confirms this applies whether the
return was filed on time or late.

## The trap on unpaid invoices

Where the withholding tax is **not yet due** because no payment or crediting has
been made to the non-resident on or before the return due date, the deduction is
**not allowable at all** — regardless of whether any withholding tax has been paid.
Accruing a foreign service fee at year end and claiming it before you have paid the
vendor puts you outside s.39(1)(j) by a different door.

The remedy is s.131A: a payer who has filed and paid may apply in writing for
relief where the assessment is excessive on that ground, **within one year after
the end of the year the payment is made**. LHDN's example — royalty and withholding
tax paid on 30 October 2024 for a YA2023 expense — must be applied for before
31 December 2025.

## Common mistakes

- **Calling the 10 per cent a s.113 penalty.** It is not. It lives in the charging
  section, and conflating the two hides the fact that they stack.
- **Assuming paying the arrears closes the file.** It restores the deduction. It
  does not withdraw a s.113(2) penalty already imposed on a filed return.
- **Budgeting the exposure as tax plus 10 per cent.** The disallowance is usually
  the larger number, because it is computed on the whole expense at the corporate
  rate, not on the withholding tax.
- **Waiting for the audit before self-correcting.** The s.113(2) risk attaches to
  the return you already filed, and each further year adds to it.
- **Forgetting the s.131A one-year clock** on the not-yet-due scenario.

## What's next

If you are working through a backlog, sort the payments by section first — the
disallowance paragraph and the form both follow from it. Start with
[withholding-tax-rates](/en/taxation/withholding-tax-rates), then
[cp37-forms](/en/taxation/cp37-forms) for the remittance mechanics.

## Sources

- Public Ruling No. 10/2019 — Withholding Tax on Special Classes of Income, section 14 — https://www.hasil.gov.my/wp-content/uploads/PR_10_2019.pdf (LHDN)
- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — ss.39(1)(f), 39(1)(i), 39(1)(j), 106, 109B(2), 113(2), 131A — https://www.hasil.gov.my/wp-content/uploads/20240521-akta-cukai-pendapatan-1967-akta-53.pdf (LHDN)
- Withholding Tax — Enforcement — https://www.hasil.gov.my/en/perundangan/cukai-pegangan/ (LHDN)

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