COMPLAINTS have surged against the Inland Revenue Board (LHDN) whereby many salaried workers solely reliant on modest monthly incomes were stunned to receive an Instalment Payment Notice (CP500) requiring them to pay estimated tax instalments for 2026.
This situation is perplexing. Taxpayers who do not own rental properties, have never earned any rental income. Such “estimated taxes” have left ordinary citizens confused and distressed. More seriously, it exposes fundamental weaknesses in LHDN’s data integration, risk assessment and policy execution.
The root cause is a system failure that has turned a policy intended to reduce burden into administrative hardship. The CP500 is a tax instalment scheme for individuals who have non-employment income such as business, rental and royalty income, with deductions under CP500 at the beginning of each year considered a payment in advance towards the final tax bill issued by LHDN at year end.
As system algorithms were not updated in line with the policy change, news reports reveal salaried workers being wrongly flagged as having “side income”. Groups that should have been automatically exempted instead became victims of flawed system assumptions. Rather than simplifying tax administration, this failure generated widespread administrative friction. Citizens were forced to spend valuable time calling unanswered hotlines or taking leave to visit LHDN offices to lodge appeals.
This large-scale error highlights a serious disconnect between policy intent and execution, leading to an erosion of public trust.
To restore credibility and resolve this issue decisively, the government and LHDN need to take firm action through both technical and administrative reforms, such as the three following measures.
First, review the alignment between policy execution and system logic: LHDN must ensure its system fully adheres to the principle that CP500 applies only to taxpayers with side income. Before issuing any CP500 related to property or rental income, multiple layers of verification must be conducted, including checks on salary sources, property ownership and past tax declarations. Tax notices should never be generated based on assumptions or incomplete data.
Second, establish a fast, simple and taxpayer-friendly correction mechanism: Salaried workers who were wrongly issued Notices should be able to submit an online declaration of “no side income”, with automatic cancellation of the CP500. Taxpayers must also be protected from being deemed in arrears or penalised while appeals are under review.
Third, improve transparency and proactive communication: LHDN should clearly explain the cause of the problem, corrective steps and resolution timeline through official statements and FAQs. Clear guidance on who needs to pay and who does not will help reduce confusion and anxiety, while better training for frontline staff will ensure consistent and empathetic responses.
A sound tax system must be accurate, fair and people-centric. When taxation logic drifts away from reality, it undermines both public confidence and the legitimacy of governance. The government and LHDN must urgently address this systemic flaw and ensure that “serving the rakyat” is embedded not just in slogans, but in system design and daily operations.
Datuk Dr Mah Hang Soon
MCA Deputy President
