(TAX UPDATE) The Tax Refund Myth – It Takes a Long Time to Get Your Tax Refund

Recently, one of our SME clients told me:

“Don’t worry, once I get my tax refund from LHDN, I will settle your outstanding fee.”

I smiled politely, but in my heart, I wanted to say:

“Boss, nowadays, tax refunds are getting complicated. Don’t plan your cash flow based on that.”

Many business owners still believe the LHDN tax refund system works like clockwork. They often refer to what is stated in LHDN’s Client Charter:

30 working days for tax refund via e-Filing
90 working days for manual submission

But here’s the fine print most people overlook … these timelines only apply if your tax return is complete, correct, and there are no further queries or checks from LHDN.

Let me be very honest. Based on what we see daily, refunds hardly ever come in full within those timelines, especially for Sdn Bhd companies.

The Reality: Small, Drip-Drip Refunds Over Many Years

The tax refund process for companies is getting more complicated. Even if your submission is perfect, LHDN has started adopting a “phased refund” approach. I have witnessed this myself with several of my clients recently.

And it’s not just me. Many tax practitioners I know, including friends from Big 4 firms, have confirmed they are seeing the same trend.

Today, I read another great article by SM Thanneermalai in The Sun newspaper, which reaffirmed what we have been observing. Here is the key takeaway from his article:

Less than first year : Only 5% of your refund
First, second and third year : Another 10% each year
Fourth year : The big chunk 65% of your refund

In other words, it can take up to four years to get your full refund back.

Imagine this situation:

You overpaid tax because your business underperformed, or your profit estimates were too high. Naturally, you expect to get the extra money back to reinvest, pay suppliers, settle fees, or manage cash flow.

But in reality, you may end up waiting years for the bulk of the refund. This is definitely not ideal for your business planning.

Why Overpayments Happen

Our tax system for companies is based on estimated profits. You are required to:

Forecast your profits one year in advance
Pay tax instalments based on those estimates

But there is a challenge:

You cannot revise your estimates during the first six months
You must pay at least 85% of the previous year’s tax within that period

So, if your business slows down, suffers losses, or even stops operating, you still end up overpaying tax. Getting that money back? It is a slow process.

Although revisions are allowed in the 6th, 9th, and 11th months, by then, most of your tax instalments are already paid. The overpayment is locked with LHDN, and getting it refunded takes time.

The current practice of the IRB is not to allow a setoff of the overpayment against the advance taxes that are due currently.

What About Compensation from LHDN?

Legally, LHDN provides 2% annual interest if they delay refunds:

Interest starts after 90 days for e-Filing
After 120 days for manual submission

But honestly, how many SME owners want to earn 2% interest from LHDN? Most prefer to get the refund quickly and use the money to grow the business.

On top of that, claiming the interest is not always straightforward. LHDN can always challenge the refund, raise audits, or impose penalties if they find discrepancies. So, relying on the 2% compensation is not a good strategy.

A Tax Expert’s View — Don’t Overpay

SM Thanneermalai’s advice is clear:

Overpaying tax does not earn you extra points with LHDN
It ties up your cash flow unnecessarily
Getting a refund is no longer a quick process

In fact, he advises taxpayers to be cautious. If needed:

Underestimate your tax estimates within the safe margin (up to 30% below your actual tax)
Accept small penalties if your estimates fall short, rather than overpay and lose access to cash

From our experience, the time and cost of chasing refunds, plus the inconvenience to your business, is more painful than paying a small penalty for underestimation.

Our Practical Advice to SME Owners

Do not rely on tax refunds to settle your financial commitments.
Plan your tax estimates carefully, but do not blindly overpay just to be safe.
If you really cannot forecast, explore underestimating within the allowed margin … it is better to keep cash in your pocket than stuck with LHDN for years.
Always file your tax returns properly, on time, with complete and accurate documentation to reduce refund delays.
Discuss your tax position with your accountant regularly to avoid surprises.

Conclusion: Manage Tax, Manage Cash Flow

Remember, tax planning is not just about fulfilling your obligations. It is also about managing your cash flow wisely.

So, if someone tells you:

“I will use my tax refund to pay your invoice.”

You can smile politely, but quietly plan your business as if that refund is years away. That way, no surprises, no headaches.

PS : This article is inspired by insights shared by Thannees Tax Consulting Services Sdn Bhd managing director, SM Thanneermalai. For more information, visit www.thannees.com.

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