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Federal Court Upholds Constitutionality of “Pay First, Dispute Later” System


In the recent Federal Court case of Mohd Najib bin Hj Abd Razak & Anor v Government of Malaysia and another appeal [2023] 6 MLJ 483, the apex court upheld the constitutionality of Section 106(3) of the Income Tax Act 1967 (“ITA”), which provides that a taxpayer is bound to make payment of the quantum assessed to be due by the Inland Revenue Board (“IRB”), and only subsequently dispute the sum so assessed.

The appellants in this case were unsuccessful in their challenge on the constitutionality of the “Pay First, Dispute Later” system provided under ITA, which accorded immediacy to the collection of tax by the IRB, while the disputes raised by the taxpayer are deferred for adjudication to a later time.

Appellant’s Challenge on the Constitutionality of Section 106(3)

The appellants’ challenge on the constitutionality of Section 106(3) of the ITA effectively contests and seeks the removal of the operation of the “Pay First, Dispute Later” structure provided under the ITA enacted by Parliament.

The appellants contend that Section 106(3) of the ITA is unconstitutional as the impugned section:

  • i. Usurps judicial power under Article 121 of the Federal Constitution;
  • ii. Contravenes Article 5(1) of the Federal Constitution as it does not accord the appellants a fair trial and impedes their right of access to justice; and
  • iii. Contravenes Article 8(1) of the Federal Constitution in that the IRB is accorded unlimited powers, creating a disparity between the rights of the IRB and the taxpayer.

Grounds of the Federal Court

No encroachment upon judicial power

The Federal Court opined that the taxpayer had the right, under Section 99(1) of the ITA, to adjudicate the merits of an assessment to the Special Commissioners of Income Tax (“SCIT”) and, if dissatisfied with the SCIT’s ultimate decision, appeal further on questions of law to the superior courts.

The ITA clearly allows for the challenge and contestability of tax imposed.

Any errors in the sum assessed will be refunded to the taxpayer under Section 111 of the ITA, after the full process of adjudication prescribed for objections and appeals in Chapter 2 and Schedule 5 is undertaken.

However, for the purposes of immediate collection and recovery of sums assessed by the Director-General of Inland Revenue (“DGIR”), recourse is made to the courts under Section 106 of the ITA to give effect to the “Pay First, Dispute Later” scheme and operation of the ITA.

Section 106(3) of the ITA states that:

  • (3) In any proceedings under this section 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 under subsection 103(3), (5) or (7).”

The statutory judgment granted under Section 106 is treated as a civil judgment lawfully given in favour of the IRB for the purposes of immediate collection and recovery of tax only. The court undertakes a recovery function in order to give effect to the purpose and object of the “Pay First, Dispute Later” model of tax adopted in Malaysia.

The enforcement provision in Section 106 is merely a temporary restriction of the taxpayer’s rights of challenge, which are deferred while allowing for payment first. Dispute resolution is simply deferred to enable collection first.

As such, when Section 106(3) provides that the court shall not consider certain defences relating solely to the tax assessed, the taxpayer’s right to raise these issues at that juncture that is deferred, NOT curtailed. The courts’ powers remain unaffected.

Further, the statutory judgment does not possess the character of a final judgment obtained after a full adjudication of the tax assessed to be due by the DGIR.

Therefore, judicial power is thus preserved in the ITA for adjudication of the taxpayer’s dispute, notwithstanding an earlier collection mechanism.

Section 106(3) of the ITA is constitutional and cannot be said to encroach upon judicial power nor contravene Article 5(1) of the Federal Constitution in terms of the right to a fair trial or access to justice.

Judicial power is inherent in the taxation process and is neither abrogated, removed nor suspended.

Public Interest

The Federal Court highlighted that the Federal Constitution subsists in, and for, the public interest and the nation as a whole. The purpose of the ITA is to ensure that there is full and speedy settlement of tax debts and that recalcitrant taxpayers do not utilise objections and the appeal procedure to defer payment of their taxes indefinitely.

The “Pay First, Dispute Later” system which ensures that taxes are collected efficiently and expeditiously certainly serves the public interest in terms of the fiscal needs of the public and the nation as a whole.

Further, there is no basis for the appellant’s contention that there has been a contravention of Article 8 of the Federal Constitution as the IRB is levying tax on the appellants in the same manner that it does for all citizens of the nation. The appellants have not been singled out for discriminatory treatment nor treated in a manner not provided for in the ITA.

The Federal Court ultimately held that there is no basis for the contention (i) that judicial power has been in any way abrogated, removed or usurped by Section 106(3) of the ITA; and (ii) the alleged infringement of Articles 5 and 8 of the Federal Constitution was not made out.

As such, Section 106(3) of the ITA is constitutional.


With this Federal Court’s decision, it is apparent that taxpayers merely have a very limited defence (e.g. validity of certificate of indebtedness) in a civil recovery action (followed by summary judgment) taken by the IRB pursuant to Section 106(3) of the ITA.

Thus, the taxpayers shall not wait and must first file a tax appeal under Section 99 of the ITA to appeal against the notice of assessment to the SCIT, and subsequently settle the tax payable amount imposed by the notice of assessment – “Pay First, Dispute Later”. Otherwise, the taxpayers run the risks of losing the statutory right to appeal under Section 99 of the ITA and yet need to pay the full tax payable amount imposed by the notice of assessment (“Risks”).

If the taxpayers did not file the tax appeal within the prescribed timeframe (and extension of time to file the tax appeal was not allowed), the taxpayers will have no recourse to dispute the notice of assessment and at the same time exposing themselves to the Risks.

This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the authors

Desmond Liew Zhi Hong
Halim Hong & Quek

Chew Jin Heng
Dispute Resolution
Halim Hong & Quek

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