Discuss about the Tax Compliance Structure and Compliance.
Taxation is without any doubt the lifeblood of any economy which has tremendous implications for both the underlying people and the government. Most commonly, the taxation system is seen as a mechanism to raise revenue for the government so that it can meet the various responsibilities bestowed on the same especially. However, a key objective of the taxation system is also to alter the consumption of resources through the creation of incentives and disincentives for the same (Feldstein, 2008). A case in point is the high rate of tax levied on cigarettes as the government wants to ensure that lesser resources are spent on the same. Further, taxation system is also a potent means to address the inequalities in income through the imposition of a progressive tax system especially in direct taxes where a higher tax would be levied on individuals with higher income levels (Gregory, Weinzierl and Yagan, 2009). In wake of the above objectives, it is essential to highlight the utility of taxation for people, government and the economy as a whole.
For the people, taxation is very important. One of the main reasons is that through taxation linked revenues, the government is able to provide social security to some extent and also provide various infrastructure in terms of healthcare, education and other basic amenities which can cater to the mass population. The magnitude of revenue through taxation is as highlighted below (Index Mundi, 2012).
For certain services, there are alternatives available in the private sector but purchasing power remains a barrier for the majority of the population and hence the only resort for a sizable people is the government run centres which run on taxation revenues. Also, through taxation, the people are able to utilise their resources and income in a productive manner. For instance, there are deductions available for interest on home loans and additional schemes which promote housing and hence owing to the taxation incentives, people tend to look for their own houses which lead to asset formation. Similarly, the tax system provides disincentives in form of high tax burden on consumption of certain products such as cigarettes tend to lower the consumption of cigarettes and hence promote better health outcomes of the people. Also, the extent of social security system available in an economy to an extent is linked with the underlying tax revenues which is apparent from the experience of the developed nations of the West where even though the tax rates are comparatively higher but the social security system is much more comprehensive as compared to Malaysia (Loo, 2006b)
For the government, taxation revenues are vital to perform the various functions which have grown in the past decades owing to the popularity of welfare state. This is especially true for a country like Malaysia where affordability of even basic amenities could be an issue and hence intervention from the government is required for ensuring the same. Also, the government also has the objective of minimising inequality in society by redistributing the income which is ensured through the taxation system where the revenue from the rich acts as welfare or support payments for the needy and vulnerable population. This support provided by the state ensures that stability in the society is maintained or else there could be potential uprising by the poor (Taha, Nanthakumar and Colombage, 2011). Also, the government through the fiscal policy is expected to ensure that the limited resources available with the nation are deployed in the most productive manner possible thereby ensuring that maximum utility can be served. In fulfilling this objective, a critical role is played by the tax system which the government uses to alter the preferences of the consumers. Besides, there are a host of basic services such as law & order, defence which every government including the Malaysian government needs to be provide which cannot be enabled in the absence of taxation system (Piketty, 2015).
The taxation system has critical effect on the economy. One way this happens in through government expenditure which sets the foundation for economic growth through the providing of requisite infrastructure and also allowing for higher purchasing power of the people. Further, through the prevalence of an effective taxation system, the productivity of the economy improves as the poor people are able to contribute to the production based upon their underlying skill (Hines, 2007). Lack of social support and basic amenities to these people would create additional hurdles for these people to join the labour force. Further, the fiscal policy of the government is critically dependent on taxation and the outcome in this regards tends to impact various macroeconomic indicators such as inflation, GDP growth and unemployment. Also, the currency exchange rate is impacted by the taxation policy which is pivotal for Malaysia considering the rising dependence on trade especially in the past couple of years. Thus, it is apparent that an efficient taxation system is inevitable for the government to play an enabling role in economic development through the support of domestic and foreign investors (Hubbard, 2015).
Considering the above, it would be appropriate to conclude that a sound taxation system plays a critical role in the stability and development of a nation and it stands true for Malaysia as well.
The objective is to determine if the personal and business tax rates that are prevalent in Malaysia fair or not. The personal income tax rates that are applicable for 2016 assessment year are highlighted as follows (PwC, 2016b).
From the above tax rates, it is apparent that the highest marginal tax that is applicable is 28%. Also, the personal income tax applicable for low income i.e. lesser than RM 50,000 annually is quite less at 10%. It is evident that the taxation rates seem biased towards the rich even though the system might seem progressive but empirical evidence suggests that post taxation, the relatively poor are left worse than the rich and not the other way around. This is primarily because the marginal tax rate which is levied for the rich is quite low in comparison to other countries. For instance, in India (a country comparable in terms of development), the marginal tax rate for anyone having an annual income in excess of RM 65,000 is 30%. In comparison, the marginal tax rate applicable for the same is about 16% in Malaysia. Also, the highest marginal tax rate is low and the slab has been kept at very high value. Further, the marginal tax rates till couple of years ago stood at only 25% for the highest income groups and it is only recently that amendments have been done. Further, considering Australia as an example of a developed nation, the highest marginal tax applicable is 37.5% (PwC, 2016b). A developing nation like Malaysia needs to garner higher revenues from the rich in order to enhance wealth distribution but the current system does the opposite and hence there have been regular clamours for reforms from various economists (Chen, 2012). In wake of the above facts, it would be appropriate to consider that the current Malaysian personal income tax system is not fair and is not effectively progressive even though it may seem so from the periphery (Zahid, 2017).
Coming to the business income tax or corporate income tax, a similar trend is observed. The prevalent corporate tax rates are summarised below (PwC, 2016a).
It is apparent from the above that the highest marginal tax is 24% and thus, the average tax rates ignoring any concessions would be lower than 24%. The highest marginal corporate tax rate prevalent in India is in excess of 30%. The developed world has still higher tax rates which exceeds 35%. Even the various global hub for foreign businesses do not offer tax rates as lucrative as Malaysia. Additionally, it needs to be considered that the government has lowered the tax rate further even though this is not aimed at foreign firms. Thus, it is apparent that the government tends seems to be exceptionally pro-business which seems odd considering that the highest marginal tax rate for individuals is higher than the corporate tax rates (Pomerleau, 2015). Hence, it is apparent that the corporate tax rates seem to be unfair and there is a case to increase the higher bracket of the marginal corporate tax rate so as to enhance the corporate tax collections which then can be used for economic development and providing of requisite infrastructure in the small cities and rural areas. As a result, tax reform is required in corporate taxes as well which seem biased towards businesses at the cost of the national development (Chen, 2012). An additional statistic which highlights towards the non-fair taxation system in Malaysia is the decreasing tax collections as a % of GDP indicated below (Inde Mundi, 2012).
Tax compliance means complying, following or adhering to the various provisions which have been highlighted in the relevant tax statute (for instance ITAA 1967 for Malaysia) and to pay taxes in accordance with the highlighted provisions. However, within the ambit of tax compliance, the taxpayer does have the right to utilise the available concessions in order to lower down the taxes payable. Any tax avoidance not authorised by the statute and any tax evasion would lead to non-compliance. Hence, non-compliance in effect implies not obeying the tax rules that are applicable in a particular geography in relation to computation of tax liability and filing of the same on a timely basis. Non-compliance does not always have to lead to an economic benefit to the underlying taxpayer. Failure to file tax returns (when the law of the land require the same) even when no tax would be payable could be termed as non-compliance (Dom, 2013).
It is apparent that there are various statutory provisions in place by the ITA 1967 in relation to non-compliance which lead to punishments ranging from financial fines to imprisonment. The effect of these fines and penalties on the compliance rate of taxpayers needs to be analysed to determine the underlying effectiveness of these provisions. It would be excepted based on common sense and available literature in this context that erection of fines and penalties typically leads to higher rate of compliance even though there are certain exceptions and the absolute increase witnessed may be quite variable according to various underlying circumstances and other parameters at play (Loo, 2006a)
Empirical studies that have been conducted in the Malaysian context have indicated that compliance tends to remain low despite the implementation of fine and penalties provisions is because of the ineffective enforcement of these rules which tends to diminish the integrity of the enforcement agency (Inland Revenue Board of Malaysia (IRBM)). Also, a key finding from the prior researches has been that taxpayers tend to have a high rate of voluntary tax compliance and thus for enhancing the compliance rate further, it makes sense to enhance the positive attitude rather than address the incidence of non-compliance. This has been found to be true for Malaysia as well on the basis of empirical studies (Loo, 2009). This is particularly significant for salaried employees as there is automatic salary deduction in line with the tax deduction scheduler which has been outlined by the IRBM.
Besides, in certain cases it has been observed that the compliance costs are significant which proves to be deterrent for a taxpayer who wants to be compliant. This is particularly true when the underlying tax payable is lesser and thus it makes economic sense for such taxpayers to risk being caught and fined rather than filing their returns. Also, tax compliance rates amongst the voluntary complying people do not make any significant difference as reflected by the available literature both in Malaysian context and also in global context (Loo 2010; 2006b). Infact, it has been found that in actuality implementation of provisions regarding fines and penalties may tend to have an adverse impact on the compliant people who may not tend to highlight a lower compliance rate (Yussof, 2016). Besides, it has been observed that tax compliance has been adversely impacted due to the incorrect wording of the provisions such as one that dealt with incorrect returns (Kuan, 2014).
There has not been any significant improvement in the tax compliance rate observed for businesses and individuals taxpayers owing to stricter implementation of fines and penalties as these tend to be counterintuitive at times. Consider for instance any delay by a company in filing the tax returns by even a week can attract a very high penalty ranging from 20% to 35% of the total tax which the entity had to pay and clearly such fines could be back breaking for a business. Further, in Malaysia the businesses are required to pay taxes in a monthly manner based on the potential estimates of future income and hence, there is a tendency for the companies to overestimate their revenues so as to avoid any tax related issues with the IRMB on account of underestimation. Hence, in such an environment, it is apparent that the tax compliance rates for various taxpayers would not improve using the system of penalties and fines (Lim, 2011).
The five reasons why taxpayers tend to evade taxes despite effective exemptions and rebates offered are outlined as follows.
It is essential that in order to enhance the tax compliance, more focus should be on building the positive attitudes rather than tackling the negative attitudes through the use of penalties. The various measures in this regards are detailed as follows.
References
Chen, K.Y. 2012, “The Progressivity of The Malaysian Personal Income Tax System.” Vol.30, No. 2, pp. 27-43. Available from: Kajian Malaysia. [19 October 2017].
Dom, H. J. 2013, “Enforcement Trent and Compliance Challenges.”Malaysia’s Experience. Available from: https://www.imf.org/external/np/seminars/eng/2013/asiatax/pdfs/malaysia2.pdf
Feldstein, S. M. 2008, “Effects of Taxes on Economic Behavior.” Vol 61, no. 1, pp.131-139.Avaiable from: National Tax Journal. [20 October 2017].
Gregory, N., Weinzierl, M., and Yagan, D. 2009, “Optimal Taxation in Theory and Practice.” Available from: https://dash.harvard.edu/bitstream/handle/1/4263739/mankiw_optimaltaxationtheory.pdf?sequence=2
Hines, J. 2007. “Taxing Consumption and Other Sins,” Vol. 21 No. 1, pp. 67-74 Available from: Journal of Economic Perspectives [20 October 2017]
Hubbard, G. 2015. “Taking Capital’s Gains: Capital’s Ideas and Tax Policy in the Twenty First Century.” Vol. 68 No. 2, pp. 409–424. Available from: National Tax Journal. [20 October 2017].
Index Mundi, 2012, “Malaysia-Tax Revenues: Tax revenue (current LCU).” Available from: https://www.indexmundi.com/facts/malaysia/tax-revenue [20 October 2017].
Kuan, W.P. 2014, “Time to Reform Tax Penalties?.” Available from: https://www.pwc.com/my/en/assets/press/131012-focus-malaysia-time-to-reform-tax-penalties.pdf
Lim, K. 2011, “Late Filling Penalties and the high cost of tax compliance in Malaysia.” Available from: https://lampiran2.hasil.gov.my/pdf/pdfam/penaltylate.pdf
Loo, E. C. 2006a, “Determinants of individual taxpayers’ compliance behavior: Experience of the transition from pre to post self-assessment in Malaysia. In M. Walpole & M. McKerchar (Eds.), Further global challenges in tax administration” pp. 201-225. Available from: Fiscal Publication. [20 October 2017].
Loo, E. C., 2006b. Tax knowledge, tax structure and compliance: A report on a quasi-experiment. New Zealand Journal of Taxation Law and Policy, Vol. 12, no.2, pp.117-140.
Loo, E. C., McKerchar, M., & Hansford, A. 2009. “Understanding the compliance behaviour of Malaysian individual taxpayers using a mixed method approach.” Vol. 4 no.1, pp.181-202.Avaiable from: Journal of Australasian Tax Teachers Association. [20 October 2017].
Loo, E. C., McKerchar, M., and Hansford, A. 2010. “Findings on the impact of self-assessment on the compliance behaviour of individual taxpayers in Malaysia: A case study approach.” Vol. 1, no.2, pp. 1-22. Available from: Journal of Australian Taxation. [20 October 2017].
Piketty, T. 2015, “Capital and Wealth taxation in the 21st Centaury.” Vol 68, no. 2, pp.449-458.Avaiable from: National Tax Journal. [20 October 2017].
Pomerleau, K. 2015, “Corporate Income Tax Rates around the world.” Vol 2, no. 4, pp.124. Available from: Tax Foundation. [20 October 2017].
PWC, 2016a, “2015/2016 Malaysian Tax and Business Booklet.” Vol. 3, No. 2, pp. 131. Available from: https://www.pwc.com/my/en/assets/publications/2016-malaysian-tax-business-booklet.pdf
PWC, 2016b, “Malaysia, Individual – Taxes on Personal Income”, World-wide Tax Summaries. Available from: https://taxsummaries.pwc.com/ID/Malaysia-Individual-Taxes-on-personal-income
Taha, R., Nanthakumar, L. and Colombage, R.N. S. 2011 “The Effects of Economic Growth on Taxation Revenue: The Case of a Newly Industrialized Country.” Vol.7, no. 1, pp.319-329. Available from: International Review of Business Research Papers. [20 October 2017].
Yussof, H.S. 2016, “The Impact of Threat of Punishment on Tax Compliance and Non-Compliance Attitudes in Malaysia.” Available from: https://www.researchgate.net/publication/272390642_The_Impact_of_Threat_of_Punishment_on_Tax_Compliance_and_Non-compliance_Attitudes_in_Malaysia
Zahid, J.S. 2017, “Ahead of Budget 2018 economists call for fair taxation.” Available from: https://www.themalaymailonline.com/malaysia/article/ahead-of-budget-2018-economists-say-higher-corporate-tax-should-replace-gst#2o3lH7qVtLzfCmfl.97
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