LHDN Fines and Penalties: A Guide to Income Tax, e-Invoicing, and Withholding Tax

In 2026, the Malaysian tax landscape has shifted from manual oversight to an automated, data-driven regime managed by the Inland Revenue Board (LHDN). With the full implementation of national e-invoicing, the margin for error has narrowed significantly. Compliance is no longer a year-end task but a transactional requirement.

Failure to adhere to LHDN regulations—whether through late filing, under-reporting income, or neglecting the new e-invoicing mandate—can lead to substantial financial penalties and legal action. Understanding these risks is essential for protecting your business’s cash flow and reputation.

This guide provides a detailed breakdown of the current fines and penalties enforced by LHDN in 2026.

Key Takeaways

• e-Invoicing is Mandatory: Since July 2025, every transaction must be validated. Non-compliance results in fines per invoice.
• SAS Enforcement: Under the Self-Assessment System, the burden of proof lies with the taxpayer; LHDN uses AI to flag discrepancies instantly.
• Income Tax Penalties: Range from fixed fines for late filing to percentage-based penalties for undercharged tax.
• Withholding Tax Risks: Payments to non-residents must be managed carefully to avoid a 10% penalty on the gross amount.
• Voluntary Disclosure: Reporting errors before an audit can significantly reduce penalty rates.

1. e-Invoicing Penalties (Section 120 of the Income Tax Act)

As of 2026, e-invoicing is the operational standard for all Malaysian businesses. LHDN enforces strict penalties to ensure the integrity of the digital audit trail.

• Failure to Issue an e-Invoice: Any person who fails to issue a validated e-invoice for a B2B, B2G, or B2C transaction commits an offence.
• The Penalty: A fine of not less than RM200 and not more than RM20,000, or imprisonment for a term not exceeding six months, or both.
• Why it matters: Without a validated e-invoice (UUID), your business expenses will be deemed non-deductible during corporate tax filing, effectively increasing your tax liability.

2. Income Tax Filing & Payment Penalties

LHDN enforces different tiers of penalties based on the nature of the default.

Late Filing of Tax Returns (Form C, B, BE, P, or E)

If you miss the statutory deadlines (e.g., 31 March for Form E, 30 June for Form B/P):

• Penalty: RM200 to RM20,000 or prosecution in court.

Under-reporting or Incorrect Returns (Section 113)

Making an incorrect return by omitting or understating income:

• The Fine: RM1,000 to RM10,000 PLUS a penalty of 100% of the tax undercharged.
• LHDN Practice: In many cases, LHDN may reduce the 100% penalty to 15% – 45% if the taxpayer cooperates or makes a voluntary disclosure.

Tax Evasion (Section 114)

Wilful evasion with the intent to defraud:

• The Fine: RM1,000 to RM20,000 PLUS 300% of the tax undercharged, or imprisonment for up to 3 years.

3. Withholding Tax Penalties

If your business makes payments to non-residents (e.g., for royalties, technical services, or interest), you are required to withhold a portion and remit it to LHDN within one month.

• Failure to Remit: If the tax is not paid within the one-month window.
• The Penalty: A 10% increase on the amount of withholding tax that remains unpaid.
• Double Jeopardy: If the withholding tax is not paid, the entire expense is disallowed for your business’s tax deduction purposes until the tax and the penalty are settled.

4. Late Payment of Tax (CP204 & Final Tax)

Managing monthly tax installments (CP204) is critical for companies.

• Late Installment Payment: A 10% penalty is automatically imposed on the unpaid balance of the monthly installment.
• Deviation from Estimate: If the actual tax payable exceeds the original estimate by more than 30%, a 10% penalty is charged on the difference.

How to Mitigate Penalties: The Voluntary Disclosure Program

LHDN often runs programs to encourage taxpayers to “come clean” regarding past errors. Even without a specific amnesty program, Voluntary Disclosure is the best defense.

1. Self-Correction: If you find an error, notify LHDN before an audit notice is issued.
2. Lower Penalty Rates: Disclosures made before an audit typically attract a much lower penalty (e.g., 10-15%) compared to the standard 100%.
3. Amended Returns: Use the “Amended Return Form” within six months of the original filing to correct errors in your tax estimate or declared income.

Did You Know?

In 2026, LHDN’s MyTax dashboard provides a “Compliance Score.” Any outstanding fines or late e-invoicing validations are flagged in red. A low compliance score can impact your ability to apply for government tenders, grants, or professional licenses.

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Conclusion: Data Integrity as Your Best Defense

The shift to a digital-first tax system in Malaysia means that LHDN now has visibility into your transactions as they happen. The most effective way to avoid fines is to integrate your invoicing and payment systems. By ensuring every payment is linked to a validated e-invoice and every tax installment is tracked accurately, you transform compliance from a risk into a routine operation.

Frequently Asked Questions (FAQs)

1. What happens if LHDN rejects my e-invoice validation?

You have 72 hours to correct and re-submit the data via the MyInvois portal. If you continue to issue unvalidated invoices, you face the RM200–RM20,000 fine per instance.

2. Can I be barred from leaving the country for unpaid fines?

Yes. Under Section 104 of the Income Tax Act, LHDN can issue a “Stoppage at Exit” notice if you have significant unpaid taxes or penalties. You can check your travel status on the MyTax portal.

3. Does LHDN fine individuals for not having a TIN?

Currently, TINs are assigned automatically at age 18. However, failure to use your TIN in required transactions (like property purchases or vehicle registration) can lead to delays and administrative penalties.

4. Is there a penalty for not keeping business records?

Yes. Under Section 82, failure to keep proper records for 7 years can result in a fine of RM200 to RM20,000 or imprisonment. In 2026, this includes maintaining digital copies of all validated e-invoices.