Factors affecting tax compliance behaviour in self assessment system

Abstract

This paper attempts to provide results of a study on the importance of tax knowledge in determining tax compliance behavior in self assessment system (SAS) in Malaysia. SAS have become the key tax administrative approach in developed countries including the USA, UK and Australia. This approach emphasizes both the tax payers’ responsibility to report their income and to determine their own tax liability. One of the main facilitating factors to achieving these aims is the development of the level of tax knowledge among taxpayers. In addition, the introduction of SAS typically achieves further efficiency gains by means such as, reductions in the requirements to supply the supporting documents and proof of income and deductibles to the tax authority when submitting a tax return. The objective of this study is to investigate how these factors interact in the development of a suitable SAS. The study used recent cases of SAS introduction to explore these interactions – the case of individual self assessment in Malaysia. This commenced in year of assessment 2004 and therefore, has been operational now for seven tax years. Given appropriate time, we argued, to enable an exploration to the extent of which developments of tax knowledge and changes in compliant behavior are visible resulting from this change of tax administrative approach. This study will focus on the level of Malaysian individual taxpayers’ knowledge and how tax knowledge levels influence tax compliance behavior in a new SAS. Data were collected through a survey resulting in 1073 responses. Two stages were used to facilitate the analysis. Stage 1, using the t-test and ANOVA, focuses on the characteristics of taxpayers’ knowledge including gender, ethnics, educational level and income level. Stage 2 attempts to describe the relationship between tax knowledge and tax compliant using stepwise multiple regressions. In this model, tax knowledge was divided into seven sub-categories namely; taxpayers responsibilities’ and rights, knowledge about employment income, dividend and interest, personal relief, child relief, rebates and awareness on offence, penalty and fine. The results of this study suggest to policy makers further on the extent to which tax knowledge is important in a self assessment system and in what ways can it 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 understanding of taxpayers' behavior. Key words: Tax compliance, tax knowledge, Malaysia, self assessment system.