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Tax knowledge and tax compliance determinants in self assessment system in Malaysia

By Mohd Rizal Palil

Abstract

Self assessment system (SAS) has become the key administrative approach for both personal and corporate taxation in developed countries including the USA, UK and Australia. This approach emphasises both the taxpayers’ responsibility to report their income and the need for them to determine their own tax liability. Central to the motivations of self assessment system introduction is an increase in the efficiency of tax collection for the tax authority; however, of more vital importance is the need to enable this without having an unacceptable detrimental effect on the other key characteristics of a well-designed tax system (equity, wider administrative efficiency etc). This requires the development of public awareness of tax laws, and improvements in voluntary compliance. According to prior studies on this topic one of the main facilitating factors in achieving these aims is the development of the level of tax knowledge among taxpayers. The objective of this study is to investigate how facilitating factors interact in the development of a suitable SAS focusing in particular on the role of tax knowledge. To explore the interaction in the real setting the country of Malaysia is used as a case tax system for this study. This country is due to chosen its fairly recent introduction of SAS enabling a specific focus on changes brought about by the move to a SAS with as little time for ‘noise’ creating factors as possible that may result from longer implemented SAS. It also enables a study of this topic in the context of a developing country where many of the prior studies in this area have had in the context of developed countries. This study focuses on the level of individual Malaysian taxpayers’ knowledge and explores how tax knowledge levels influence tax compliance behaviour in a new SAS. Data was collected through a large scale national postal survey resulting in 1,073 responses. Five stages were used to facilitate the analysis. Stage 1, using the t-test and ANOVA, focuses on the characteristics of taxpayers’ knowledge including gender, ethnicity, educational level and income level. Stage 2 attempts to describe the relationship between tax knowledge and tax compliance using multiple regressions. Stage 4 examines taxpayers’ compliance determinants more widely than tax knowledge. Nine variables were tested in Stage 4. Control variables were added in both Stage 3 and Stage 5 in order to assess whether the inclusion of control variables significantly affects tax compliance behaviour. The results suggested that tax knowledge has a significant impact on tax compliance even though the level of tax knowledge varies significantly among respondents. The results also indicate that tax compliance is influenced specifically by probability of being audited, perceptions of government spending, penalties, personal financial constraints, and the influence of referent groups. Results of this study answer such questions as which various taxpayer characteristics of tax knowledge affect compliant behaviour. The results of this study can inform policymakers on the extent to which tax knowledge is important in a self assessment system and in what ways it can affect compliance. It also provides an indicator for tax administrators of the relative importance of tax knowledge in assisting with the design of tax education programmes, simplifying tax systems and developing a iii wider understanding of taxpayers' behaviour. This study contributes to current global literature in this field of the relative importance of tax knowledge in affecting tax compliance, as well as exploring the factors that make people pay taxes in a self assessment system, and discusses methods of increasing voluntary compliance

Topics: HC Economic History and Conditions, HJ Public Finance
Year: 2010
OAI identifier: oai:etheses.bham.ac.uk:1040

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Citations

  1. (2006). 4 If you think the statement is PROBABLY CORRECT 5 If you think the statement is DEFINITELY CORRECT 1 . E mployment income Wrong Correct The following income MUST BE INCLUDED in taxable income: 4
  2. (2006). 4 If you think you are PROBABLY AWARE 5 If you think you are DEFINITELY AWARE 31 Failure to notify chargeability – compound 10% of the total tax payable subject to minimum of RM300 and maximum of
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  4. If you were in the same situation as Mr Danny: i) Would the price increases affect your decision to ‘alter’ the tax return? YES ______ NO _____ ___ ii) What is the probability of ‘altering’ the tax return? Very low probability
  5. If you were in the same situation as Mr. Albert; i) Would you make over claim deductions in year assessment 2006? YES ______ NO _____ ___ ii) What is the probability of making over claming deductions? Very low probability
  6. If you were in the same situation as Mr. Mike: i) Would the penalty last year will affect your decision to under report the commission next year? YES ______ NO _____ ___ ii) What is the probability of under reporting commissions? Very low probability
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