Electronic Filing of Personal Income Tax Returns in Malaysia

317 Pages·2013·6.55 MB·English

by  Idawati Ibrahim

Curtin Business School
School of Economics and Finance

Electronic Filing of Personal Income Tax Returns in Malaysia:
Determinants and Compliance Costs

Idawati Binti Ibrahim

This thesis is presented for the Degree of
Doctor of Philosophy
of
Curtin University

September 2013
Declaration

To the best of my knowledge and belief this thesis contains no material previously
published by any other person except where due acknowledgement has been made.
This thesis contains no material which has been accepted for the award of any other
degree or diploma in any university.

Signature :
Date : 13 September 2013

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Acknowledgements
With thanks and gratitude to the Almighty Allah
First and foremost, I would like to thank my main supervisor, Professor Jeff Pope for
his valuable suggestions, guidance and careful attention while this thesis was
completed. I also would like to express my special gratitude to my associate
supervisor, Professor Dale Pinto for his guidance and support through my PhD
journey. My sincere thanks also go to Associate Professor Ruhul Salim, Chair of the
Postgraduate Studies, School of Economics and Finance, Associate Professor Fay
Rola-Rubzen, Dr. Yuki Miyamoto and other Curtin Business School administrative
staff, especially Jo Boycott, former CBS HDR Student Coordinator for their
professional advice and friendly approach. I also owe a debt of gratitude to my
friends and colleagues, especially Dr. Hijatullah, Dr. Khadijah, Raihana, Papaporn,
Tshepiso, Budi, John, Christy, Dr. Hani, Dr. Hanani, Dr. Wahiza, Dr. Raja Adzrin,
Fazian, Zainatul Shima, Hannerita and Robin who supported me in various ways
during my study.
I also would like to express my special thanks to my employer, University Utara
Malaysia and the Ministry of Higher Education of Malaysia for providing me with
the financial support while pursuing my PhD. Special thanks to the Inland Revenue
Board of Malaysia for their assistance and co-operation particularly Tan Sri Dato‘
Hasmah Abdullah (former Director General of the IRBM), Mr. Marsidi Zelika (R&D
Department), Mr. Abdul Rahman Yusof and Miss Nor Hayati Mat Kassim
I am very grateful to my husband, Mohammad Sukri Yahaya for his understanding,
patience and moral support during my course of studies at Curtin University. To my
children, Adam Hilmi, Amirul Azim and Ameerah Huda, your love, patience and
understanding have been the source of inspiration for the completion of this thesis.
All prayers made by my husband, children, my late father, who passed away during
my PhD journey, my mother, my brothers and sister, my grandparents, my relatives
and extended family members during my course of study are very much appreciated.
Finally, to those to whom I am indebted, but who are too numerous to be named,
thank you very much.
Idawati Ibrahim (2013)
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Abstract
Technology is regarded as necessary in modern living because it can enable people to
do things faster, with less effort, using less paper and incurring less cost than manual
processing. Millions of income tax returns are easily processed by technology if all
of them are lodged through tax e-filing. With a tax e-filing system, tax authorities
can increase their efficiency because the available human resources can be used for
more important areas such as enforcement and auditing. However, it is unclear
whether a tax e-filing system also provides the same benefits to the taxpayers in
Malaysia because the take-up rates among Personal Income Tax (PIT) payers in
Malaysia is considered unsatisfactory. For the year 2009, for example, it was
reported that only about 30 percent of total PIT payers used the system. Hence, this
study was conducted to examine the factors that affect the e-filing usage behaviour
among PIT payers in Malaysia. In addition, the compliance costs in using the e-filing
system were also investigated to understand whether the tax e-filing system really
saves taxpayers costs in time and money.
A postal questionnaire survey of taxpayers throughout Malaysia was undertaken
which yielded 242 usable responses, with a response rate of 10 percent. Data was
analysed using the Statistical Package for the Social Sciences (SPSS) version 18. The
responses were considered reasonably representative of the taxpaying population.
The Unified Theory of Acceptance and Use of Technology (UTAUT), Technology
Acceptance Model (TAM) and Social Cognitive Theory (SCT) respectively are
among the major theories that were used as underpinning theories in formulating the
framework for factors affecting the use of the tax e-filing system in the current study.
Further, by employing a logistic regression analysis, it was found that perceived
usefulness and anxiety were two significant factors that affected a taxpayer‘s
decision to use or not to use the e-filing system. Specifically, taxpayers with a high
level of perceived usefulness and low level of anxiety were likely to use the system
and vice versa. In terms of compliance costs, it was found that the overall e-filing
compliance costs were estimated at RM658 per taxpayer, while the manual
compliance costs were RM670 in 2010. This difference of less than two percent
shows that there was no significant difference between the two filing methods.
However, analysis by items of time costs indicated that the e-filing system did save
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submission time by around 70 percent compared to the manual submission of a paper
tax return.
One part of tax e-filing is the pre-filled return system, and this study also investigated
the pre-filled return system in order to understand respondents‘ perceptions of such a
system. Respondents indicated that they were concerned about the security of data in
this new system although they agreed that pre-filling would help solve the problem
of complexity.
This study is believed to be the first of its kind in Malaysia. Overall, the findings
provide valuable insights and understanding into the factors that affect e-filing usage
behaviour as well as empirical evidence regarding the effects of e-filing on tax
compliance costs. One of the main conclusions is that, at the present time, tax e-filing
provides the highest benefits for taxpayers who have relatively simple tax affairs;
however, those with more complex returns remain problematical. In addition, a
continuing and particular challenge remains in terms of both the application of
technology to the tax return system and tax policy overall.

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Table of Contents
Declaration ................................................................................................................... i
Acknowledgements ..................................................................................................... ii
Abstract .................................................................................................................. iii
Table of Contents ....................................................................................................... v
List of Tables ............................................................................................................ xii
List of Figures ........................................................................................................... xv
List of Appendices ................................................................................................... xvi
Glossary of Key Terms .......................................................................................... xvii
Glossary of Key Abbreviations .............................................................................. xix
Related Thesis Publications .................................................................................... xxi
Chapter 1 Introduction ............................................................................................. 1
1.1 Thesis Overview ................................................................................................. 1
1.2 Definition of Major Terms ................................................................................. 3
1.2.1 E-Filing System ......................................................................................... 3
1.2.2 E-Filing Usage Behaviour ......................................................................... 3
1.2.3 Perceived Usefulness ................................................................................. 4
1.2.4 Self-Ability ................................................................................................ 4
1.2.5 Anxiety ...................................................................................................... 4
1.2.6 External Influence ..................................................................................... 4
1.2.7 Pre-Filled Return System .......................................................................... 5
1.2.8 Tax Compliance Costs ............................................................................... 5
1.2.9 Exchange Rate ........................................................................................... 5
1.3 Background ......................................................................................................... 6
1.4 Research Objectives and Questions .................................................................... 8
1.4.1 Research Objectives .................................................................................. 8
1.4.2 Research Questions ................................................................................... 8
1.5 Conceptual Framework ....................................................................................... 9
1.6 Scope of the Study ............................................................................................ 11
1.7 Significance of the Study .................................................................................. 12
1.8 Thesis Structure ................................................................................................ 14
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Chapter 2 Review of Literature and Theory: E-Filing Acceptance.................... 17
2.1 Introduction....................................................................................................... 17
2.2 Overview of Personal Income Tax System in Malaysia ................................... 17
2.3 Definition and Background of Tax E-Filing System ........................................ 22
2.3.1 Definition ................................................................................................. 22
2.3.2 Background ............................................................................................. 22
2.3.3 Tax E-Filing System in Malaysia ............................................................ 23
2.3.4 Benefits of Tax E-Filing .......................................................................... 27
2.4 Previous Studies ............................................................................................... 31
2.4.1 International Studies ................................................................................ 31
2.4.2 Malaysian Studies .................................................................................... 33
2.5 Theoretical Issues ............................................................................................. 34
2.5.1 Major Theories ........................................................................................ 34
2.5.2 E-Filing Start-Up and Recurring Compliance Costs ............................... 38
2.5.3 E-Filing and Tax Preparers ...................................................................... 40
2.5.4 Pre-Filled Return System ........................................................................ 41
2.6 Chapter Summary ............................................................................................. 43
Chapter 3 Review of Literature and Theory: Compliance Costs ....................... 45
3.1 Introduction....................................................................................................... 45
3.2 Concept and Definition ..................................................................................... 45
3.3 Previous Studies ............................................................................................... 48
3.3.1 United States ............................................................................................ 48
3.3.2 Canada ..................................................................................................... 50
3.3.3 United Kingdom and Europe ................................................................... 51
3.3.4 Australia and South-East Asia ................................................................. 52
3.3.5 Malaysia .................................................................................................. 55
3.3.6 Major Findings of Previous Studies ........................................................ 57
3.4 Theoretical Issues ............................................................................................. 58
3.4.1 Components of Tax Compliance Costs ................................................... 58
3.4.2 Classification of Tax Compliance Costs ................................................. 60
3.4.3 Valuation of Time ................................................................................... 61
3.4.4 Offsets to Compliance Costs ................................................................... 65
3.4.5 Reporting Compliance Costs ................................................................... 66
3.5 Chapter Summary ............................................................................................. 68
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Chapter 4 Research Methodology .......................................................................... 69
4.1 Introduction....................................................................................................... 69
4.2 Research Objectives.......................................................................................... 69
4.3 Research Approach ........................................................................................... 70
4.4 Survey Research Design ................................................................................... 71
4.4.1 Selected Survey Method and Rationale ................................................... 71
4.4.2 Survey Instrument ................................................................................... 75
4.4.3 Selection of Participants .......................................................................... 77
4.4.4 Pilot Testing ............................................................................................ 79
4.4.5 Measures to Increase the Response Rate ................................................. 80
4.4.6 Survey Execution .................................................................................... 81
4.5 Measurements ................................................................................................... 83
4.5.1 Development of E-Filing Usage Behaviour Model ................................. 83
4.5.2 Measuring the E-Filing Usage Behaviour (Dependent Variable) ........... 85
4.5.3 Measuring the Determinants (Independent Variables) ............................ 86
4.5.4 Measuring the Awareness of a Pre-Filling System ................................. 87
4.5.5 Measuring Tax Compliance Costs .......................................................... 88
4.5.6 Measuring Personal Taxpayers‘ Time ..................................................... 91
4.5.7 Measuring Costs Difference .................................................................... 91
4.6 Data Analysis .................................................................................................... 92
4.6.1 Overall Approach .................................................................................... 92
4.6.2 Data Screening ........................................................................................ 92
4.6.3 Determinants of E-Filing Usage Behaviour ............................................ 95
4.6.3.1 Introduction ............................................................................... 95
4.6.3.2 Factor Analysis and Reliability Test ......................................... 95
4.6.3.3 Logistic Regression ................................................................... 98
4.6.4 Compliance Costs Estimation ............................................................... 100
4.6.5 Non-Response Bias ............................................................................... 100
4.6.6 Response Representativeness ................................................................ 101
4.7 Methodological Assumptions ......................................................................... 101
4.8 Chapter Summary ........................................................................................... 101
Chapter 5 Analysis of Taxpayers’ Questionnaire Responses ............................ 103
5.1 Introduction..................................................................................................... 103
5.2 Response Rates ............................................................................................... 103
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5.3 Demographic Profile of Respondents ............................................................. 105
5.3.1 Gender and Marital Status ..................................................................... 105
5.3.2 Age and Employment Status ................................................................. 106
5.3.3 Ethnicity and Geographical Area .......................................................... 107
5.3.4 Annual Income and Tax Liability ......................................................... 109
5.3.5 Level of Education, Tax and Information Technology Knowledge ...... 109
5.3.6 Paid Preparer, Free Helper or Self-Prepared ......................................... 110
5.4 Response Representativeness ......................................................................... 111
5.5 Non-Response Bias ......................................................................................... 113
5.6 Chapter Summary ........................................................................................... 115
Chapter 6 Determinants of E-Filing Behaviour ................................................. 116
6.1 Introduction..................................................................................................... 116
6.2 Descriptive Results for Predictors .................................................................. 116
6.2.1 Introduction ........................................................................................... 116
6.2.2 Perceived Usefulness ............................................................................. 117
6.2.2.1 Frequency ................................................................................ 117
6.2.2.2 Mean, Median and Standard Deviation ................................... 118
6.2.3 Self-Ability ............................................................................................ 119
6.2.3.1 Frequency ................................................................................ 119
6.2.3.2 Mean, Median and Standard Deviation ................................... 120
6.2.4 Feeling of Anxiety ................................................................................. 121
6.2.4.1 Frequency ................................................................................ 121
6.2.4.2 Mean, Median and Standard Deviation ................................... 122
6.2.5 External Influence ................................................................................. 123
6.2.5.1 Frequency ................................................................................ 123
6.2.5.2 Mean, Median and Standard Deviation ................................... 123
6.3 Comparison for Predictors by Demographic Variables .................................. 124
6.3.1 Introduction ........................................................................................... 124
6.3.2 Gender ................................................................................................... 125
6.3.3 Filing Methods ...................................................................................... 125
6.3.4 Employment Status ................................................................................ 126
6.3.5 Use of Tax Agents ................................................................................. 127
6.3.6 Age ........................................................................................................ 127
6.3.7 Ethnicity ................................................................................................ 128
6.3.8 Level of Education ................................................................................ 129
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6.3.9 Annual Income ...................................................................................... 130
6.4 Determinants of E-Filing Usage Behaviour ................................................... 131
6.4.1 Introduction ........................................................................................... 131
6.4.2 Overall Model‘s Goodness-of-Fit ......................................................... 132
6.4.3 Evaluations of the Logistic Regression Model ...................................... 132
6.4.4 Predictors Significantly Affecting the E-Filing Usage Behaviour ........ 133
6.5 Perceptions on Pre-Filled Return System ....................................................... 134
6.6 Chapter Summary ........................................................................................... 138
Chapter 7 Tax Compliance Costs and E-Filing .................................................. 140
7.1 Introduction..................................................................................................... 140
7.2 Overall Results on Compliance Costs ............................................................ 141
7.2.1 Compliance Time .................................................................................. 141
7.2.1.1 Introduction ............................................................................. 141
7.2.1.2 Distribution of Compliance Time ........................................... 141
7.2.1.3 Average Compliance Time Spent and Costs by Components 142
7.2.1.4 Average Compliance Time by Gender .................................... 143
7.2.1.5 Average Compliance Time by Marital Status ......................... 144
7.2.1.6 Average Compliance Time by Age ......................................... 144
7.2.1.7 Average Compliance Time by Employment Status ................ 146
7.2.1.8 Average Compliance Time by Ethnicity ................................. 147
7.2.1.9 Average Compliance Time by Educational Attainment ......... 148
7.2.1.10 Average Compliance Time by Annual Income Group and Tax
Liability ................................................................................... 149
7.2.1.11 Average Compliance Costs by Number of Income Source .... 150
7.2.1.12 Average Compliance Costs by Use of Tax Professional and
Filing Methods ........................................................................ 151
7.2.1.13 Valuing Compliance Time ...................................................... 152
7.2.2 Monetary Costs ...................................................................................... 153
7.2.2.1 Distribution of Monetary Costs ............................................... 153
7.2.2.2 Average Monetary Costs ......................................................... 154
7.2.3 Total Compliance Costs ........................................................................ 157
7.3 Effect of E-Filing on Compliance Time ......................................................... 159
7.3.1 Effect of E-Filing on the Distribution of Compliance Time ................. 159
7.3.2 Effect of E-Filing on Average Total Compliance Time Costs .............. 161
7.3.3 Effect of E-Filing on Compliance Time by Time Components ............ 162
7.3.4 Effect of E-Filing on Average Compliance Time by Gender, Marital
Status and Age ....................................................................................... 162
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