Tax knowledge and tax compliance determinants in self assessment

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detailed scrutiny assessments) as well as an issue of the competency (tax knowledge), it is believed that these significant changes (to a SAS) could potentially make tax knowledge much more important factor when ascertaining the accuracy of tax returns and therefore more directly affect the tax compliance behaviour of individual taxpayers. 1.3 OVERVIEW OF MALAYSIA AS A COUNTRY AND WHY MALAYSIA IS SELECTED IN THIS STUDY? Malaysia is a federation that consists of thirteen states and three federal territories in Southeast Asia with a total land of 329,847 square kilometres (127,355 sq. miles) and the population stands at over 27 million (Department of Statistic Malaysia, 2008). The country is separated into two regions—Peninsular Malaysia and Malaysian Borneo—by the South China Sea. Malaysia borders Thailand, Indonesia, Singapore, Brunei and the Philippines. Malaysia's head of state is the Yang di-Pertuan Agong (The King) and the government is headed by a Prime Minister. The government is closely modeled on the Westminster Parliamentary System. The largest ethnic groups in Malaysia are the Malays, Chinese and Indians (Department of Statistic Malaysia, 2008). Malays who make up about 65% (Department of Statistic Malaysia, 2008) of the population are the predominant group with Chinese (22%), Indians (9%) and other ethnic groups (4%) making up the rest. Islam is the official religion but all other religions such as Christianity, Buddhism and Hinduism are freely practised. Malaysia is a federal 10
constitutional elective monarchy (further details on Malaysia as a country can be found in Chapter 3). Tax systems in Malaysia were introduced by the British into the Federation of Malaya in 1947 and were based on Heasman’s Report (Singh, 1999:138). Initially, the Income Tax Ordinance 1947 was gazetted as the main act but subsequently reformed and replaced by Income Tax Act 1967 (ITA) which took effect on January 1, 1968. Currently, ITA 1967 continues to be the main act to govern direct taxes in Malaysia, particularly corporate and individual income tax. The Lembaga Hasil Dalam Negeri or the Inland Revenue Board (IRB) is the tax authority which administers direct taxes in Malaysia. Other than income taxes, the IRB is also responsible for administering, assessing, collecting and the enforcement of real property gain taxes, petroleum taxes and stamp duties. Royal Malaysian Customs (RMC) is the government agency responsible for administering the nation’s indirect tax policy. The core business is to collect tax and in line with that, RMC’s vision is to be a respected, recognized and a world class Customs Administration. There are a number of factors that make Malaysia important for our study of tax compliance disciplines especially in a self assessment system. One of the most important factors is that Malaysia recently introduced SAS in year of assessment 2004 for 11
Page 1 and 2: TAX KNOWLEDGE AND TAX COMPLIANCE DE
Page 3 and 4: ABSTRACT Self assessment system (SA
Page 5 and 6: DEDICATION To my late father, fathe
Page 7 and 8: TABLE OF CONTENTS Abstract ii Dedic
Page 9 and 10: 2.6 SELF ASSESSMENT SYSTEM - A CONC
Page 11 and 12: 4.3.5.1 Age 214 4.3.5.2 Income leve
Page 13 and 14: 6.3 RESPONDENT BACKGROUND 288 6.4 I
Page 15 and 16: TO TAX ADMINISTRATORS 392 8.4 LIMIT
Page 17 and 18: LIST OF TABLES Table 2.1: SAS intro
Page 19 and 20: independent variables. Table 6.14:
Page 21 and 22: 1.1 INTRODUCTION CHAPTER 1 INTRODUC
Page 23 and 24: Efficiency refers to how the tax au
Page 25 and 26: (US) and the United Kingdom (UK) we
Page 27 and 28: and Lundstedt, 1976), gender (Vogel
Page 29: Revenue Board Malaysia (IRB). The s
Page 33 and 34: countries. Despite similar capitali
Page 35 and 36: development on tax compliance resea
Page 37 and 38: conclusions about what the Malaysia
Page 39 and 40: could provide new insights to the I
Page 41 and 42: ecome more aware of their tax oblig
Page 43 and 44: “ future research can explicitly
Page 45 and 46: The result of this study will contr
Page 47 and 48: and stepwise multiple regressions.
Page 49 and 50: CHAPTER 2 SELF ASSESSMENT SYSTEMS-
Page 51 and 52: Table 2.1: SAS introduction in coun
Page 53 and 54: with postwar democratic thought (Ki
Page 55 and 56: Formal System. Table 2.2 summarises
Page 57 and 58: To reduce the possibility of taxpay
Page 59 and 60: This could be aided through continu
Page 61 and 62: of the tax system (Eriksen and Fall
Page 63 and 64: have a good and reasonable knowledg
Page 65 and 66: compliance, many taxpayers perceive
Page 67 and 68: had a low significant impact on com
Page 69 and 70: 2.4 HOW SELF ASSESSMENT IS OPERATED
Page 71 and 72: keeping as well as the perceived le
Page 73 and 74: issues still remain important and c
Page 75 and 76: Table 2.4: United States’ complia
Page 77 and 78: In 1944 a new income tax system was
Page 79 and 80: assessment system, to overcome thes
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of the amounts deducted by employer
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Notes: Table 2.9 - United Kingdom-
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were quite difficult to complete. M
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In conclusion, tax development in t
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• Individual income tax has a min
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2008). E-Tax (e-filing) was also in
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Self-assessment in Japan has gradua
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administrations and their perceptio
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In terms of personal income tax, th
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Although more operations are becomi
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Table 2.16: OECD Self-assessed Coun
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it is acknowledged that wide variet
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deemed to be the amount of tax liab
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Tax and compliance costs remain a c
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) Sri Lanka Income tax in Sri Lanka
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Table 2.21: Tax development in Sri
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Table 2.23: Sri Lanka - Tax revenue
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information which is related to tax
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assessed, they represented only 67
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(d) applicable to ‘white return
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Sources: OECD (2007:124) (OECD in F
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COUNTRY Table 2.27: Aggregate Admin
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United States Table 2.28: Enforceme
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Malaysia impose a penalty percentag
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2.5.5.3 Electronic filing Table 2.3
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Table 2.31: SAS - Tax Education in
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and to speed up tax collections tha
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Peninsular Malaysia is separated fr
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ITA consolidated the three acts of
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3.4 PERSONAL INCOME TAXES IN MALAYS
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3.4.4 Basis year Section 2 of the I
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eturn (refer Appendix 4). A separat
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Table 3.1: List of deductions for Y
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c) Amount of zakat 61 payment. The
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Having discussed how personal incom
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A new system, known as the Self Ass
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igger increase in 2006 too), a sign
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1) Married woman were required to f
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Table 3.6: A brief comparison on th
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impact upon total revenue. Table 3.
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(STD) 67 audits and 4) investigatio
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Centres (RSCs) in Perak, Selangor,
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planned and implemented special tra
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sufficiently ‘educate’ taxpayer
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which netted RM226.05 million in ta
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In the next chapter, I will discuss
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compliance including age, gender, l
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isks of non-compliant behaviour the
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The wider perspective of tax compli
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Table 4.1: Approach to tax complian
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Figure 4.1: Compliance Index in Ind
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Table 4.2: Tax compliance index int
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Table 4.3: Tax compliance in transi
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Kasipillai et. al. (2003), Lewis (1
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7. GDP per capita, 8. tax system, 9
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Singapore 6.00 8.18 Slovakia 2.62 2
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Given evidence that tax knowledge a
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The result of the study suggested t
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there is insufficient knowledge abo
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taxpayers who read an objectively p
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In conclusion, after taking into co
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4.3.1.1 Tax rates This subsection d
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2008) and increasing tax rates will
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The result also evidenced that the
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4.3.1.4 Summary This subsection dis
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Roth et. al. (1989) suggested that
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simplified the range of guidance th
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potentially could help taxpayers to
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probability) using three major data
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whole population of North Carolina,
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factors in taxpayer compliance, nam
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likely to occur (Allingham and Sand
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y the government and the prices reg
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4.3.3.4 Referents groups (family an
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and referent groups. In the followi
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Table 4.5: Relationship between fin
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evading tax and the consequences of
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Table 4.6: Some previous studies on
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4.3.5.2 Income level Jackson and Mi
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Table 4.7 : Some previous studies o
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4.3.5.3 Culture Chan et. al. (2000)
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avoidance (UA) and masculinity (MAS
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are not aiming to become accountant
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2003 Hasseldine and Hite Female tax
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eferent groups) because these facto
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5.1 INTRODUCTION CHAPTER 5 RESEARCH
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Using a sample from a telephone dir
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income. However, the total of indiv
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taxpayers had gone through filing p
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2004 Ming Ling, Obid and Meera 2003
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5.2.2 The respondents Like Spicer a
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independence particularly from any
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X be chosen. Respondents are asked
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probability’ to ‘very high prob
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Loo (2006) used a mixed method appr
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questions’ approach was based on
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‘extremely good’, ‘good’,
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5.4.1.2 Data analysis technique T-t
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5.4.2.2 Hypotheses development for
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The association between tax knowled
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TNAWARE i - Tax knowledge about awa
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A. Demographics control variables (
Page 285 and 286:
B. Tax background control variables
Page 287 and 288:
5.4.3.3 Data analysis techniques In
Page 289 and 290:
The role of Inland Revenue Board (E
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H4B- Positive perception of governm
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Besley, Preston and Ridge (1997) re
Page 295 and 296:
In agreement with Spicer and Lundst
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improved through better tax knowled
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EQUITY i - Perception on equity and
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H5B - With regard to other tax comp
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used. A wider coverage of tax knowl
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6.1 INTRODUCTION CHAPTER 6 ANALYSIS
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total population of Malaysia, parti
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300 250 200 150 100 50 0 128 252 Fi
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500 400 300 200 100 0 333 1,001- 2,
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to better argue that a relationship
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6.5.1 T-tests, Mann-Whitney U. and
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familiarity with employment income
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no significant mean difference betw
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6.5.2 One-way ANOVA, post hoc test
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Non-parametric test, KW and median
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(B6) (F= 3.1113, p < 0.01) and reba
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IV IV A5 (RM) 10000 A5 (RM) 10000 A
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tax knowledge (p
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KW tests also suggested that there
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Figure 6.6 illustrates the results
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Table 6.12: Summary and relationshi
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Table 6.13: Stage 2 -Pearson correl
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Table 6.14 : Stepwise multiple regr
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The estimated coefficient of correl
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low correlation (p
Page 345 and 346:
A. Dependent variable TCHYP Table 6
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TCHYP 40:60 = α + β1TNRESi + β2T
Page 349 and 350:
B. Dependent variable TCDIR Table 6
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TCDIR 0 = α + β1TNRESi + β2TNEMP
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EQUITY and TOTAL were significantly
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6.8.2 Factors affecting tax complia
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GROUP i - Referent group ROLEi i -
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6.8.4 Summary results of Stage 4 Ta
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Table 6.25: Stage 5 -Pearson correl
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Note: Panel B: (Constant) 20.773 9.
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6.9.2 Dependent variable - TCDIR Ta
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Table 6.28 (Panel B) suggests that
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Notes: *** Significant at 0.01 leve
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subject matter. Most researchers vi
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ANOVA test results were sufficientl
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Table 6.33: Tax compliance direct -
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Table 6.35: Tax compliance hypothet
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Table 6.37: Results summary Results
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7.1 INTRODUCTION CHAPTER 7 DISCUSSI
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eason why the CRA emphasised the
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As this study suggested that tax kn
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and Hudson, 2002; Wearing and Heade
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up with education programmes that c
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of being audited, perceptions of go
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Braithwaite et. al. (2009). In addi
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In relation to this finding (financ
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cultivating personal awareness of c
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With regard to age, this result sup
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CHAPTER 8 CONCLUSIONS Self assessme
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This study seeks to contribute to t
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Like many countries, implementing a
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identified the tax compliance deter
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Further analysis (refer to section
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middle income earners) for tax admi
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latest information on tax regulatio
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8.4 LIMITATIONS It is acknowledged
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espondents regarding tax compliance
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Bank Negara Malaysia (2006). Annual
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Chow, C.Y. (2004). Gearing up for t
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Fishbein, M., and Ajzen, I. (1975).
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Inland Revenue Board (IRB) Malaysia
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Lempert, R. (1988). Internal Revenu
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Moriaryty, S. (1998). Tax complianc
Page 431 and 432:
Shoven, J. (1989). The Japanese tax
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Vogel. J. (1974). Taxation and publ
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APPENDIX 1 Section 13. General prov
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shall be deemed to be derived from
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year of assessment (the responsibil
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APPENDIX 4 FORM BE 2007 FOR INDIVID
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Name Tax Reference No. PART C : STA
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Name Tax Reference No. PART F: STAT
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for for for for for reference refer
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GENERAL INSTRUCTION. This survey is
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ii) What is the probability of comp
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The following income MUST BE INCLUD
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SECTION C (TAX COMPLIANCE) Please s
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D11. Designation (Grade for governm
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