KUCHING, Jan 31 — Calls for the Ministry of Finance (MOF) to urgently review the application of the CP500 tax instalment scheme are growing amid concerns that its current structure places disproportionate cash-flow pressure on salaried individuals with side income as well as small and medium enterprises (SMEs), particularly those in Sarawak.
The issue has gained urgency as rising living costs, higher interest rates and tighter financing conditions push more salaried Malaysians to supplement their income through rental properties or small businesses, while SMEs continue to grapple with uneven demand, rising compliance costs and stretched working capital.
Sarawak Housing and Real Estate Developers’ Association (Sheda) advisor Dato Sim Kiang Chiok said the CP500 scheme should be confined strictly to full-time businesses with continuous and predictable income streams, and not extended to salaried individuals who are already subject to Monthly Tax Deductions (PCB) under the Pay-As-You-Earn system.
Sim noted that salary earners already pay income tax monthly through PCB, well ahead of annual filing, making the imposition of CP500 on rental or side-business income effectively a “double pre-collection of tax within the same financial year”.
“This is neither equitable nor reflective of the actual cash-flow realities faced by working Malaysians,” he said in a statement.
CP500, formally known as Notis Bayaran Ansuran, is issued by the Inland Revenue Board (IRB) to individuals with non-employment income such as rental income or business profits, requiring advance tax payments based on projected earnings.
Under the current framework, a salaried individual who earns rental income or operates a small side business may still be required to make CP500 instalments even during months when a property is vacant, a project is delayed, or the business generates little or no income.
Instalments also remain payable when businesses incur losses, creating cash-flow strain that Sim said is particularly acute for middle-income earners.
He warned that such a system discourages entrepreneurship and sends the wrong signal to Malaysians at a time when the national agenda is focused on promoting private investment, business formation, and wealth creation.
A crutch for micro-preneurs
Echoing these concerns, SME Association of Sarawak president Jordan Ong said the CP500 scheme does not adequately reflect the operating realities faced by SMEs in the state, whereby business conditions differ significantly from those in Peninsular Malaysia.
He noted that about 75 per cent of Sarawak’s 68,000 registered businesses are micro enterprises, many of which are owner-managed with proprietors drawing modest salaries while reinvesting earnings back into operations.
“In Sarawak, most SMEs operate in geographically dispersed markets with higher logistics and transportation costs, longer supply chains and smaller domestic demand,” Ong told The Borneo Post.
Sectors such as retail, construction, services, agriculture-related businesses and tourism are often project-based or seasonal, resulting in highly uneven cash flow throughout the year, making it especially difficult to accurately project annual incomes.
Ong added that advance tax payments under CP500, which are based on projected income, fail to account for common realities in Sarawak such as project delays, weather disruptions, infrastructure constraints and long payment cycles – particularly for businesses dealing with government-linked corporations (GLCs) or large corporate clients.
As a result, CP500 payments or instalments end up placing significant cash-flow pressure on small businesses, especially micro and growing small enterprises which make up 23 per cent of total registered businesses in Sarawak.
“For many Sarawak SMEs, working capital is already stretched by rising operational costs, including wages, utilities, compliance requirements and financing costs. Advance tax instalments further reduce the funds available for day-to-day operations, staff retention and business continuity.”
“In some cases, this discourages small businesses from expanding, formalising or even continuing operations,” Ong lamented.
Nevertheless, Ong stressed that the SME Association of Sarawak recognises the importance of tax compliance and national revenue collection, but believes that tax policies need to also be proportionate, business-friendly and regionally-sensitive.
He notes that a uniform CP500 implementation does not account for Sarawak’s unique economic structure and cost environment.
“SMEs should not be penalised simply because their income patterns do not align with fixed monthly or bi-monthly projections.”
Tax consultants contacted by The Borneo Post broadly agreed with these concerns, saying the current CP500 mechanism is poorly aligned with the cash-flow realities of salaried individuals and small businesses with volatile or seasonal income.
Some also highlighted that retirees who provide occasional advisory or consultancy services to supplement their daily cost of living will also become some of the most affected due to their reliance on fixed savings.
They noted that advance payments based on estimates can be particularly problematic during periods of economic uncertainty, and that greater flexibility would improve fairness without undermining compliance.
Proposals for a fairer CP500 framework
Against this backdrop, industry players have outlined several proposals to make the CP500 framework fairer and more reflective of actual income patterns.
Sim proposed that salary earners should be exempt from CP500, and tax on their non-employment income should be assessed and paid at the end of the financial year based on actual profits rather than projected figures.
That said, several tax consultants noted that for this to happen, the MoF would have to review the application of Section 107B of the Income Tax Act 1967, which governs the issuance of CP500 instalments.
They said the provision should be reframed to clearly exclude salaried employees who are already subject to Monthly Tax Deductions (PCB), even if they earn non-employment income, to avoid double pre-collection of tax within the same assessment year.
According to the consultants, clarifying the scope of Section 107B would provide certainty to taxpayers and reduce disputes, while preserving CP500 for full-time businesses with predictable income streams.
“CP500 should be limited to full-time businesses with continuous and predictable income, and where PCB does not apply. A fair, practical, and pro-growth tax system must recognise cash flow realities.
“Penalising salary earners who invest or do business will only make Malaysia a less attractive place for investment and enterprise,” said Sim.
Meanwhile, Ong urges MoF and IRB to consider measures to make the CP500 framework more flexible for SMEs.
These measures include allowing instalments to be aligned more closely with actual cash inflows, providing simplified and penalty-free mechanisms to revise instalments when projects are delayed, and considering higher thresholds or temporary relief for micro and small enterprises, particularly those operating in rural and semi-urban areas.
As SMEs form the backbone of Malaysia’s economy, Ong stressed that a practical and growth-oriented tax framework would not only strengthen compliance and support the government’s fiscal objectives, but also improve business sustainability and contribute to a more resilient economy. — The Borneo Post
