What is Potongan Cukai Bulanan (PCB)?
Potongan Cukai Bulanan (PCB) or Monthly Tax Deduction (MTD) is a mechanism in which employers deduct monthly tax payments from the employment income of their employees in accordance with the PCB deduction schedule. The monthly deductions are retained by the employer and paid over to the Inland Revenue Board (LHDN).
This mechanism is designed to avoid the issues that accompany requiring payment of a large sum at the end of the year.
PCB as Final Tax
Intended to reduce the employee’s burden to pay in one lump sum, the PCB deduction is normally not enough to cover the actual tax required from tax payees. These deductions are intended to reduce the burden on the employee by making monthly tax payment in advance to LHDN. However, tax payees still need to file the returns, unless the following conditions are met:
- The only source of income is the employment income;
- Employee has been working for 12 months in the calendar year with the same employer;
- The employer has been deducting PCB from employee’s salary correctly;
- The employer is not paying any of employee’s taxes; and
- The employee has not opted for a joint assessment with his/her spouse.
If any of those conditions are not met, then a tax return must be filed. If the above conditions are met and employee has not submitted a tax return by the deadline for submission (April 30th), the employee will be deemed to have made an election not to submit a return.
Employer’s responsibilities under the MTD Rules are as follows:
1. Deduct the MTD from the remuneration of employee in each month, or the relevant month, in accordance with the Schedule of Monthly Tax Deductions or Computerised Calculation Method, and pay to the Director General.
2. Make additional deductions from employee’s remuneration in accordance with the direction given by the Director General under Rule 4 of MTD Rules.
3. Employer shall pay to the Director General, not later than the fifteenth day of every calendar month, the total amount of tax deducted, or should have been deducted by him, from the remuneration of employees during the preceding calendar month.
4. Furnish a complete and accurate record the following in a return when submitting MTD payments/additional deductions:
- employee’s income tax number (if any);
- employee’s name as stated on identity card or passport;
- employee’s new and old identity card number/police number/army number or passport number (for foreign employee); and
- employee’s MTD/additional deductions amount.
Note: If the employer fails to furnish complete and accurate information, the PCB payment will not be accepted. Re-submission of the PCB payment may be compounded if payment is made after the fifteenth day of the following month.
5. To furnish information on cessation of payment of employees’s remuneration as required under Rule 13, MTD Rules, in a prescribed form.
6. Keep and retain, in safe custody, sufficient documents for a period of seven years, from the end of the calendar year, in which the remuneration is deducted in respect of his employee according to the MTD Rules.
7. Inform every employee of his responsibilities.
8. Pursuant to section 75A of the Act, directors of controlled companies are responsible for unpaid MTD under the MTD Rules.
1. Submit a TP3 Form to the employer to notify information relating to his employment with previous employers in the current year.
2. Submit a TP1 Form to the employer if employee wishes to claim deductions and rebates in the relevant month. The deductions and rebate will be effected subject to approval by employer.
3. Submit a TP2 Form if employee wishes to include benefits in kind (BIK) and value of living accommodation (VOLA) as part of his monthly remuneration in ascertaining the MTD amount subject to approval by employer.
4. Keep and retain, in safe custody, each and every receipt relating to claims of deductions, for a period of seven years from the end of that year of assessment under the Act.
5. Furnish complete and accurate personal information and update any changes of his personal particulars to the employer.
6. Furnish correct information in a prescribed form relating to his own chargeability to tax and failure by the employee to do so constitutes an offence under paragraph 113(1)(b) of the Act.
Schedule of Monthly Tax Deductions and the Computerised Calculation Method classifies employee into 3 categories:
Category 1 : Single
Category 2 : Married and spouse is not working
Category 3 : Married and spouse is working
Category 3 of the Schedule of Monthly Tax Deductions or the Computerised Calculation Method is applicable where an employee is divorced, widowed or a single (with adopted children).
Where a wife who elects to claim all child deductions, her MTD is ascertained under Category 3 (KA1, KA20), while MTD for the husband is ascertained under Category 3 (K).
Where a husband and wife elect to claim deduction for certain child, MTD for husband and wife is ascertained under Category 3 (KA1, KA20).
Contribution Payment Period
PCB deductions are to be remitted to the IRBM on or before the 15th of the following month (if the 15th is a holiday the deadline will be the last working day before the 15th).
Penalties on Late Payment
A late payment penalty of 10% will be imposed on the balance of tax not paid after the 30th of April following the year of assessment. If the tax and penalty imposed is not paid within 60 days from the date the penalty is imposed, a further penalty of 5% will be imposed on the amount still owing.
Failure to Comply with PCB
Failure to comply with Monthly Tax Deduction will render an employer liable to prosecution under Rule 17, Income Tax (Deduction from Remuneration) Rules 1994 [“The Rules”]. Under this Rule, any person, who, without any reasonable justification fails to comply with Subrule 10(1) or Rule 3, is liable to prosecution and upon conviction, and can be fined not less than RM200 and not more than RM20,000, or to imprisonment for a term not exceeding six months, or to both. With this, the MTD not deducted becomes a debt to the Government.
Types of Offences under “The Rules” are:
- Failure to remit monthly tax deduction of employees by the 15th. of the following month;
- Failure to deduct and / or inadequately deduct monthly tax deduction of employees;
- Failure to remit or inadequately remit MTD or CP38 deduction that has been made from employees’ remunerations; and
- Failure to give complete and accurate information about employees.