(TAX UPDATE) When Your Tax Refund is Stuck and LHDN Won’t Let You Offset …The Hidden Cash Flow Trap for SMEs

Imagine this.

You are the boss of an SME. The year-end accounts are done, the tax computation is submitted. Good news that you are due for a tax refund from YA 2021. Finally, some cash is coming back to your business.

But then, the unexpected happens.

LHDN (HASiL) informs you that your application to set off the tax credit against the next year’s instalments is rejected. Not only that, your refund hasn’t been processed for years.

Meanwhile, your business still has to pump in fresh cash to pay the current year’s tax instalments (CP204).

In short, you are “taxed twice on cash flow” that your refund is stuck, but your next instalments still need to be funded.

1. Why This Happens

Based on CTIM’s Memorandum (DESIRE Dialogue 1/2024) with LHDN

LHDN headquarters instructed all branches not to allow tax credit set-off starting March 2024.
Even if a company has huge prior year tax credits, it cannot offset against current CP204 instalments.
Refunds are processed subject to TBBC fund allocation meaning your refund depends on government cash flow timing, not your actual entitlement.

In other words, your cash is parked with the government until the allocation allows it to be released.

2. Why This is a Big Problem for SMEs

For a typical SME, cash flow is king. When refunds are delayed, you face:

Double Funding Stress
- Your money is stuck in tax credit, but you still need to pay fresh cash for CP204 instalments.
Business Disruption
- Cash that could be used for stock purchases, payroll, or debt repayment is now locked with LHDN.
Over-Taxation Feeling
- From a practical view, it feels like you’re over-taxed, because the government holds your cash while still asking for more.

Our professional body CTIM called this “practical over-taxation and deprivation of economic liberty” … a strong phrase, but very real for SME owners trying to survive.

3. How It Impacts Your Trust in the System

The self-assessment system is supposed to be a partnership:

Taxpayers estimate and pay taxes on time.
LHDN refunds or offsets promptly when there is an overpayment.

When one side delays the refund and blocks set-off, it erodes trust.

You face working capital pressure.
Your financial planning becomes uncertain.
Investments may be delayed, because you are busy waiting for your own money.

This is especially frustrating for group structures, where one company overpays tax while another needs cash for expansion—but you cannot transfer the credit to ease the group’s burden.

4. What SME Bosses Can Do

While waiting for policy to improve, here are practical steps:

Plan CP204 estimates carefully
- Avoid overpaying tax if your cash flow is tight.
- Monitor the 6th, 9th, and 11th month revision windows to adjust early.
File Refund Requests Promptly
- Ensure your tax computations are complete and clean, so there’s no reason for LHDN to hold your refund longer than necessary.
Communicate with LHDN Early
- If your business faces critical cash flow issues, inform LHDN to prioritise your refund.
- CTIM noted that LHDN may prioritise companies with critical cash flow.
Consider Tax Cash Flow as Part of Business Strategy
- Treat tax like a short-term deposit with the government.
- Build a small cash buffer to absorb timing mismatches.

5. Closing Thoughts

For many SMEs, this is a hidden cash flow trap.

You play by the rules, you pay taxes early, yet your refund is delayed, and you cannot offset against future instalments.

Because in Malaysia’s current tax environment, getting your own money back is no longer automatic.

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