C1 Introduction to Income Tax PDF

INCOME TAX: An income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens. 1. E...

INCOME TAX: An income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens. 1. Every state should contribute a part of their revenue to the country; 2. Tax payable by each individual must be specific and not doubtful; 3. Each tax should be charged at a suitable time and situation where tax payer are able to pay at ease 4. Tax payable should be at a minimum cost - Adam Smith, 1776 - 1. To raise revenue to finance government expenditure 2. To ensure taxes are collected efficiently and at a minimum cost both to the government and tax payers 3. To regulate the private sectors of economy to maintain the desired level of employment and increase economic development / growth 4. To regulate the activities of specific areas of private sectors so as to encourage activities which ae beneficial to the country and to discourage those which are undesirable to the national interest 5. To regulate the distribution of income and wealth as between different types and classes of citizen. 6. To regulate the specific activities of citizens which are thought to be undesirable. 7. To ensure fairness and equality 8. To ensure that the government in power will continue to get support from the voters  DIRECT TAX INDIRECT TAX Paid directly by those on whom it is levied. Not paid directly to the government. Cannot be distributed or transferred Collected via third party Paid directly to the government which is Managed by Royal Custom Department managed by LHDN of Malaysia Examples Examples Income tax Goods & Service Tax Real Property Gain Tax (GST) Stamp Duties Sales Tax Petrol Income Tax Service Tax  The chargeability of income is governed by Section 3 of the Income Tax Act, 1967 (ITA) which states that “income shall be charged for tax for each year of assessment (“YA”) upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia”. The phrase accruing in or derive from Malaysia connotes the source of income must be in Malaysia. Income accrued in or derived from Malaysia will be taxed at the time of accrual or derived notwithstanding the fact that the income may not have been received in Malaysia.  Section 3 of the ITA extends its territorial scope to include foreign source income received in Malaysia from outside Malaysia. Foreign source income refers to income which is accrued in or derived from a tax jurisdiction outside Malaysia. With effect from YA 2004, foreign source income derived from sources outside Malaysia and received in Malaysia by any person (other than a resident company carrying on the business of banking, insurance or sea or air transport) is not subject to Malaysian income tax.  With effect from 1.1.2022, foreign source income received by a resident company in Malaysia would be subject to tax.. A special rate of 3% would be charged on foreign source income received in Malaysia during the period from 1.1.2022 to 30.6.2022. Income To be subject to income tax in Malaysia, the amount received or receivable must be income (that is, revenue in nature, not capital gain). Some common examples of revenue income are remuneration or fees for services rendered, amounts received for sale of goods and services, amount received for use of money or indebtedness and amount received for use of amenities and premises Section 4 (a) Business Income (b) Employment Income (c) Dividend, Interest or Discount Income (d) Rents, Royalties or Premium (e) Pensions, Annuities or other periodical payments (f) Others Derived from Malaysia “Derived” means accruing from, arising from or springing from. “Malaysia” is defined to include: The territories of the Federation of Malaysia The territorial of waters of Malaysia (defined as 12 nautical miles from the shore line), the sea bed, the sub-soil of the territorial waters and the air space above the territorial waters; and the Exclusive Economic Zone (EEZ), over which Malaysia has the sovereign rights or jurisdiction for purpose of exploring and exploiting natural resources, whether living or non-living. Any Income that is derived from Malaysia, as defined, is subject to income tax in Malaysia.  YA is the “year in which tax is assessed”. Basis Period ❑Individuals: calendar year basis (1 Jan – 31 Dec) ❑Companies: calendar year or accounting year basis