AN EXPLORATORY STUDY ON THE PERCEPTIONS OF TAX FAIRNESS AMONG MALAYSIAN INDIVIDUAL TAXPAYERS AND TAX COMPLIANCE BEHAVIOUR KAMALA ARJUNA PERUMAL Submitted to the Graduate School of Business Faculty of Business and Accountancy University of Malaya, in partial fulfillment of the requirements for the Degree of Masters of Business Administration JUNE 2008
ABSTRACT Tax compliance literature has recognized that perceptions of tax fairness as one of the most important variables that can influence tax compliance behaviour. Based on previous research tax fairness was measured in five separate dimensions: general fairness, exchange with the government, tax rate structure, self interest and special provision for the wealthy tax payers. The purpose of this study is to extend the work of Richardson (2006) done in Hong Kong to measure taxpayers perceptions of tax fairness towards their tax compliance behavior in Malaysia and also to find out if the same western tax fairness dimensions identified by Gerbing (1988) exist in Malaysia. A survey questionnaire was administered to registered individual taxpayers at the four Federal Territory IRB offices situated in Klang Valley, Kuala Lumpur. Results showed that taxpayers have evaluated the tax system as moderately fair and also indicated moderate tax compliance behaviour. The two significant dimensions among Malaysians are general fairness (this dimension comprises of general fairness and exchange with the government) and self interest. The implication of this study is to improve the perceptions of tax fairness among taxpayers in Malaysia. From a policy perspective emphasis should be given to the general fairness and exchange with government dimension to secure more compliance. More educational measures need to be developed targeting at these dimensions in particular and as a general perspective to increase taxpayers moral because education has the potential for increasing compliance levels. Keywords: Tax Fairness, Tax Fairness Dimensions, Non compliance. ii
ACKNOWLEDGEMENTS I wish to express my deepest gratitude to my supervisor, Dr. Anna Azriati B Che Azmi PhD for her advice, patience and constructive criticisms. I sincerely extend my heart felt gratitude to the taxpayers who visited the four Federal Territory IRB Offices during the period of 05/02/08 till 06/03/08 and participated in my survey. I may not be able to complete the research without their participation. I would like to thank the Inland Revenue Board of Malaysia for granting me the permission to conduct the survey on the taxpayers. My special acknowledgments to En. Sabin Bin Samitah, Regional Director of Federal Territory, who granted me the permission to distribute the questionnaires to taxpayers registered at the four IRB offices in Kuala Lumpur. I would also extend my gratitude to the officers and staff at the four IRB offices who assisted me in conducting the survey. Last, but not least I would like to extend my gratitude and heartfelt thanks to my beloved husband who was very understanding and to my twin sons Nameash and Navinv and my lovely daughter Pavitirarupeni who were all supportive throughout the entire course of completing this research project. Finally, I take this opportunity to dedicate this research project to my late father Arjuna Perumal s/o KamalaMuthu Pillay who I miss so much. iii
Table Of Contents Abstract Acknowledgement List of Tables List of Figures ii iii vi vii CHAPTER 1 : INTRODUCTION 1.0 Chapter Overview 1 1.1 Introduction 1 1.2 Problem Statement 3 1.3 Purpose and Significance of the study 8 1.4 Research Questions, Hypothesis and regression Model 8 1.5 Scope of the Study 13 1.6 Limitations of the Study 14 1.7 Organization of the Study 15 CHAPTER 2 : LITERATURE REVIEW 2.0 Chapter Overview 16 2.1 Tax Compliance 16 2.2 Definitions of Tax Fairness 22 2.3 Impact of Perceptions of Tax Fairness towards Tax Compliant Behaviour 26 2.4 Dimensions of Tax Fairness 31 2.5 Demographic Factors and Tax Fairness 40 2.6 Chapter Summary 45 CHAPTER 3 : METHODOLOGY 3.0 Chapter Overview 47 3.1 Research Instruments 47 3.2 Sampling Design 51 3.3 Data Collection Procedure 51 3.4 Data Analysis 52 3.5 Chapter Summary 53 iv
CHAPTER 4 : RESEARCH RESULTS 4.0 Chapter Overview 54 4.1 Characteristics of the Respondents 54 4.2 Perceptions of Tax Fairness and Tax Compliance Mean Analysis 56 4.3 Factor Analysis 60 4.4 Reliability Test for Internal Consistency 64 4.5 Pearson Product Correlation between Tax Fairness and Tax Compliance 64 4.6 OLS Multiple Regression Analysis 69 4.7 Chapter Summary 77 CHAPTER 5 : CONCLUSION AND RECOMMENDATIONS 5.0 Chapter Overview 78 5.1 Discussion And Conclusion 78 5.2 Direction for Future Research And Suggestion 82 5.3 Implications Of The Study 84 BIBLIOGRAHY 86 APPENDICES APPENDIX 1: Questionnaire APPENDIX 2: SPSS Output APPENDIX 3: Application For Permission and Approval Letters from IRB To Study on Tax Fairness and Conduct Survey at 4 Branches v
LIST OF TABLES 1.1 Issuance and Receipt of Individual Tax Returns 4 1.2 Cases Audited and Additional Tax and Penalty 4 3.1 Reversed Coded Items on General Fairness 49 3.2 Dimensions and Statements Measuring Tax Fairness 49 3.3 Tax Non compliance Items 50 4.1 Respondents Profile 56 4.2 Mean and Standard Deviation (SD) for Tax Fairness Dimensions 58 4.3 Mean and Standard Deviation for Tax Compliance 59 4.4 Mean Score for Dimension of Tax Fairness and Tax Compliance 60 4.5 Items of Tax Fairness Factor Loadings, KMO Barlett Test 62 4.6 Items of Tax Compliance Factor Loadings, KMO Barlett s Test 63 4.7 Cronbach Alpha for Tax Fairness and Tax Compliance 64 4.8 Correlation Matrix 1- Tax Fairness and Tax Compliance 66 4.8A Correlation Matrix 2- Tax Fairness,Demographic and Tax Compliance 67 4.9 Regression Analysis: Model 1, 2, 3a and 3b 71 4.10 Summary of the hypothesis testing using OLS multiple regression between independent, demographic (control) and dependent variables 76 vi
LIST OF FIGURES 1.0 Figure 1.1 - Direct Tax Revenue 2 vii