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1. Overview
Malaysia has a “pay first, talk later” system when it comes to tax assessments (“Assessment(s)”). When a taxpayer cannot pay an Assessment raised by The Inland Revenue Board (“LHDN”), LHDN often institute civil recovery proceedings and seek summary judgment before the Courts. LHDN have argued that under the Income Tax Act 1967 (“ITA”), the Court has no choice but to grant judgment in favour of LHDN in such proceedings.
Najib Razak challenged the constitutionality of this position and argued that LHDN should not be able to usurp the power of the Courts, to the detriment of all Malaysian taxpayers. Whilst the Federal Court rejected Najib Razak’s arguments, it highlighted other protections available to taxpayers in challenging Assessments.
2. Background
On 16 October 2023, the Federal Court rejected the final appeal by Malaysia’s former Prime Minister and his son (Appellants) in tax recovery proceedings instituted by on unpaid income tax assessments. The RM 1.69 Billion assessments were amongst the largest in Malaysia.
In the lead-up to the decision, many Malaysians were critical of the fact that Najib’s dispute made it all the way to the Federal Court and questioned why he was being allowed to challenge LHDN’s tax collection process and procedures. It was common to read on social media “how come Najib can challenge to stop the payment of tax but I have to pay LHDN first?”
Whilst some might have been unhappy that Najib was challenging the LHDN and opined that he should be made to pay the tax without question, the reality is that the challenge before the Federal Court was on an important point of constitutional law and the outcome would have an impact on every Malaysian taxpayer.
The constitutional question was whether LHDN had too much power under the ITA such that it could usurp the judicial powers of the Court (enshrined in Article 121 of the Federal Constitution) and would leave Malaysian taxpayers open to abuse.
To understand the implications of the decision, the legislative framework of Malaysian Tax Law needs to be understood.
3. Tax Appeal And Recovery Procedure
A. Tax Appeal
Where the LHDN raise Assessments or “taksiran cukai” against a taxpayer, the taxpayer has a right to appeal to a domestic tax tribunal known as the Special Commissioners of Income Tax (“SCIT”).
Malaysia has a “pay first, talk later” system where Assessments have to be paid first by the taxpayer, whether or not the taxpayer appeals against the Assessments. In many cases, the taxpayer has a very good case against LHDN but does not have the money to make payment when Assessments are raised.
B. Tax Recovery
Where the tax on an Assessment continues to be unpaid after 30 days, LHDN will often start legal proceedings in Court to recover the amount of tax under the Assessment (“tax recovery proceedings”). This happens well before a taxpayer’s appeal before the SCIT is heard.
Malaysia has a unique provision in Section 106 of its ITA that provides in tax recovery proceedings:
“the court shall not entertain any plea that the amount of tax sought to be recovered is excessive, incorrectly assessed, under appeal or incorrectly increased”
LHDN have historically utilised Section 106 ITA to argue that where an Assessment is not paid, the LHDN are entitled to automatic summary judgment and the Court has no power to entertain a taxpayer’s defence.
The Courts have accepted LHDN’s position, with one Court even stating “the court must close its ears and shut its eyes… making the amount claimed conclusively correct and unchallengeable”. In other words, the Court acts as a rubber stamp to grant summary judgment in tax recovery cases.
This is in stark contrast to summary judgment proceedings in normal civil cases, where summary judgment will not be entertained if the defendant can demonstrate that there are ‘triable issues’. LHDN have argued that in tax recovery proceedings, a taxpayer can never raise triable issues (i.e that a taxpayer will not have a defence).
It is thus important to note, the taxpayer’s right of appeal against an Assessment to the SCIT is often rendered illusory because even before the SCIT can hear the matter, LHDN file tax recovery proceedings against the taxpayer in a separate court and obtain automatic summary judgment. Without appropriate checks, the LHDN could bankrupt a taxpayer well before their appeal to SCIT is heard.
4. Najib's Constitutional Challenge
In Najib’s case, LHDN instituted civil recovery proceedings against the Appellants in the High Court and applied for summary judgment. Pursuant to Section 106 ITA, the High Court granted LHDN summary judgment, without a full consideration of the Appellants’ Defence. The Court stated that it had to grant summary judgment and could not consider triable issues. This was upheld by the Court of Appeal.
The Appellants therefore instituted a final appeal to the Federal Court and mounted a constitutional challenge on the basis that Section 106 ITA usurped judicial power by ousting the jurisdiction of the Court to consider defences raised by taxpayers in tax civil recovery proceedings.
Judicial power of the Federation is vested exclusively in the judiciary pursuant to Article 121 of the Federal Constitution. This is also a key tenet of the doctrine of separation of powers.
It was thus argued that Section 106 ITA took away judicial power from the Court (contrary to Article 121 of the Federal Constitution) and gave it to the Executive (LHDN) whereby LHDN could demand and be granted automatic judgment by the Court in tax recovery proceedings.
It was also argued that Section 106 ITA contravened the right to equality, to a fair trial and that it was disproportional.
5. Apex Court Decision
The Federal Court dismissed the appeal, and curiously conflated the considerations of a taxpayer’s appeal before the SCIT and the tax civil recovery proceedings instituted before the Courts by LHDN (despite recognising that these are separate actions).
The Federal Court held that in tax civil recovery proceedings, the defence of a taxpayer should not be considered at length as the merits of the taxpayer’s arguments may eventually be canvassed before the SCIT. Accordingly, LHDN can obtain judgment for debt recovery (regardless of the correctness or impropriety of the Assessment) and only if the taxpayer is successful at the end of the day before the SCIT, will monies collected by the Government be refunded. In a nutshell, the Federal Court held that if there is still an avenue for the merits to be heard by a Court (even if it’s a different Court), judicial power is not usurped. The same basis was used by the Court to dismiss the deprivation of a right to fair trial argument.
However, the judgment surprisingly did not discuss the very real possibility of LHDN trying to bankrupt, wind up or permanently shut down taxpayers using tax recovery proceedings, well before a taxpayer’s appeal to the SCIT is ever heard. This could render any appeal to the SCIT illusory.
It is also difficult to reconcile the decision of the Federal Court in Najib’s case with the seminal decision of the Supreme Court in PP v Dato Yap Peng [1987] 2 MLJ 311, which held that Section 418A of the Criminal Procedure Code was unconstitutional as it allowed the Attorney General at any time to transfer a case from the Subordinate Court to the High Court, whereby the Court had to rubber stamp the decision. In Yap Peng, even though there would still be an opportunity for the case to be heard on the merits before a different Court (i.e before the High Court), the mere fact that the Attorney General could get an automatic transfer, was held to be unconstitutional.
6. How Are Taxpayers Protected?
Whilst the Federal Court appears to have held that the defence available to taxpayers are limited in tax civil recovery proceedings, the decision has confirmed certain key principles:
A. The Revenue have not used the ‘ideal’ procedure in tax recovery proceedings
The Federal Court ruled that using summary judgment procedures in tax recovery proceedings are not the ideal course of conduct and instead, such action should be undertaken by Originating Summons. This is because section 106 ITA itself provides sufficient basis for recovery to be initiated in the civil courts by way of originating summons.
B. The Courts Have Full Power To Grant Stays
The Federal Court has made abundantly clear that the power of the Courts to grant stays on the enforcement action by the Revenue, is in no way ousted and remains in full force. This is significant for taxpayers as the Revenue have used Section 106 ITA (as well as the new Section 103B ITA) to argue that the Courts should not grant stays in tax cases. The Federal Court has made clear that applying for a stay is always open to taxpayers (both in civil recovery proceedings and judicial review) and the grant of the same shall be at the sole discretion of the Courts.
Additionally, with the Federal Court ruling that an Originating Summons procedure is more ideal, stays may potentially be applied for and granted at any time during the proceedings and not just stays of execution after judgment is given.
C. Judicial Review Preserved Notwithstanding Domestic Remedy
The Federal Court has confirmed that the Courts retain full power to grant Judicial Review in tax cases, notwithstanding the existence of a domestic remedy (i.e taxpayer’s right of appeal to the SCIT). This is significant as historically, the Revenue have argued that Judicial Review is not available to taxpayers where there is a domestic remedy. The case also reiterates the power of the Court to grant stays in judicial review proceedings.
7. Conclusion
Whilst the Federal Court dismissed the challenge, the judgment emphasises the right for taxpayers to determine their appeal before the SCIT. Read as a whole, whilst the Revenue are ostensibly permitted to pursue tax recovery action against a taxpayer (notwithstanding the taxpayer’s appeal to SCIT), such enforcement action should not lead to circumstances where the taxpayers are prevented from ventilating their appeal before the SCIT and from being restored to their original position, if the appeal is successful.
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