LITERATURE REVIEW Results and analysis
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Prepare own tax returns accurately including assessing own income to determine correct tax liability;
Understand and follow all procedures defined by IRB which include complying to relevant provisions in the Income Tax Act 1967 as amended ITA 1967;
Inform the IRB of all their financial affairs; Interpret IRB schedules and forms;
Getting their submissions right first time as the self-completed returns are deemed as the notice of assessment;
Adhere to strict timetables and deadlines which include submitting the returns together with correct tax payment on the prescribed date i.e. 30 April each
year or else will be subject to penalties; and Keep detailed records and documents pertaining to annual tax computation
for the period of seven years.
With the new responsibilities placed on taxpayers, it is viewed that SAS emphasises and works on knowledge-oriented basis. Alexander 1974 listed the necessary aspects for taxpayers to
perform their responsibilities which include the following: Mathematical accuracy;
Familiarity of allowable exemptions and deduction; The format of tax return form;
Simple tax laws and regulations; and Taxpayer assistance provided by tax authority.
Knowledge on the above-listed are necessary as the preparation of tax returns involves income assessment and computation of tax liability which is considered quite cumbersome Alexander,
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1974; James, 1983. Under the old assessment system, it is the tasks previously carried out by a well-trained person i.e. the Inland Revenue officers who possess the knowledge of an expert.
In Malaysian, the process of assessing income is specified under Section 5 of the ITA 1967. It involves various steps with four main calculations as follow:
i total income;
ii total allowable deductions i.e. personal relief;
iii chargeable income by subtracting ii from i; and iv tax payable.
In order to assist and facilitate taxpayers in interpreting the relevant provisions of ITA 1967 correctly, the IRB issues various Public Rulings. Public Ruling is a statement issued to inform
the taxpayers of the acceptable manner to interpret certain provisions in the ITA 1967. Each Ruling consists of i the relevant tax law that is to be applied; ii the application of the Ruling;
ii the correct manner to apply the law and iv interpretation of key words used in that particular Ruling.
It is therefore, in assessing their income, it is compulsory for taxpayers to refer and comply with the Public Rulings. In fact, they are required to acknowledge in the return form whether in
completing the form they had complied with the relevant Public Rulings. This is to ensure that they have followed and understood the relevant Rulings governing their tax matters or else the
form is considered as inaccurate. A penalty will be imposed if a taxpayer disregarded certain Public Ruling. However, it is not easy for ordinary taxpayers to fully understand the Rulings and
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to keep themselves up to date with all the Public Rulings issued by the IRB Veerinderjeet, 2005
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.
In addition, taxpayers must keep proper records and documents in order to facilitate them to perform the income assessment tasks i.e. to complete their tax return form correctly. Each item
appears in the tax return must be supported with a valid document. For instance, a valid receipt of payment is needed to support the deduction made for purchasing reading materials. The
records and documents must be kept for seven years from the last date of each assessment year. They have to be produced upon request by the IRB such as during an enquiry in tax audit.
In Australia, it was reported that the record-keeping requirement is the major cost for individuals in complying with their personal income tax obligations Turner, Smith and Gurd, 1998.
Realizing the responsibilities under the new assessment system, taxpayers might need assistance from tax agents. Based on the Australian experience, taxpayers do need assistance
from tax agents upon the implementation of SAS. It was reported that more than 70 of taxpayers placed heavy reliance on tax agents to handle their tax matters due to their inability to
perform their duties themselves Sakurai and Braithwaite, 2003; Marshall et. al., 1997. However, seeking assistance from tax agents denotes incurring extra compliance costs Walpole,
Evans, Ritchie and Tran-Nam, 1999; Sandford and Wallschutzky, 1994.
Although there is a small number of taxpayer might be willing to pay for the extra costs, majority of them reluctant to spend extra money as this will affect their financial standings. Empirically,
studies by Hajah Mustafa 1997 and Loo and Juan 2005 found that more than 60 of employment income earners completed their own tax returns. This is certainly encouraging as
the IRB emphasizes that under SAS, the Board will ensure that taxpayers are able to perform
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To date, IRB has issued 42 Public Rulings in relation to individual tax matters including 19 for non-business individuals.
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the responsibilities themselves with minimum help from tax agents
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in order to avoid burdening them with extra costs. However, in order to accomplish this objective, imparting knowledge to
taxpayers is an essential effort. The question of which aspects of tax knowledge are necessary and must be made familiar to each taxpayer has to be of concern.
Tax Knowledge Definitions and Measures
Tax knowledge has been studied by various researchers in relation to tax compliance with various focus and interests. However, it is noted that different researchers employed different
definition and measurement of tax knowledge, thus leading to the inconsistent findings. This is evidenced by the claim made in Richardson and Sawyer 2001 and Devos 2005 as they
concluded that the main reason for mixed findings and the failure of previous studies to demonstrate an obvious effect of tax knowledge on taxpayer compliance was due to the
measurement used in the studies. For instance, Song and Yarbrough‘s 1978 measured tax
knowledge in terms of the extent of taxpayer‘s knowledge about fiscal and tax matters. Similar
definition has also been used in Groenland and Veldhoven 1983. Specifically, they defined tax knowledge as the degree of general fiscal knowledge and knowledge concerning realistic
possibilities to commit fiscal frauds. This measurement consisted of a number of questions regarding the structure of income tax and value-added tax apart from the amount of tax payable
and deduction possibilities.
A different definition is used in the study by Cullis and Lewis 1985 as tax knowledge is assessed based on knowledge regarding sources of government revenue, preferences whether
to increase taxes in order to improve services and whether the increase in taxes should be based on income or expenditure. This measurement of tax knowledge was specified within the
economics perspectives.
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Annual Report 2001, Inland Revenue Board of Malaysia.
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In the early 1990s, many researchers employ experimental method to examine the impact of tax knowledge. In this kind of study, tax knowledge is assessed based on the attendance to a
formal tax class. For instance, White, Curatola and Samson 1990 and Christensen, Weihrich and Newman 1994 measured tax knowledge using attendance to the introductory federal
income tax course for undergraduates in a few universities in the United States. In these studies, tax knowledge is referred to the knowledge of tax laws. It is measured by conducting
pre-test and post-test to students attending introductory class in individual taxation.
Another study which also falls under this category is Eriksen and Fallan 1996. They used a questionnaire to measure tax knowledge of individuals before and after attending tax class. The
questions were constructed based on two aspects i.e. deductible expenses and taxable income. Similarly, Hughes and Summers 2004 also followed the same method. Nevertheless, their tax
knowledge measurement consists of 31 items which were divided into nine different groups according to Adam Smith‘s Canon of Taxation 1776. Subjects were asked to response to each
statement on a one to five Likert scale where one indicates ‗strongly agree‘, three indicates
‗neutral‘ and five indicates ‗strongly disagree‘.
In Malaysia, the first attempt to measure tax knowledge is reported in Barjoyai 1992. There were two different sets of tax knowledge measured in the study i.e. perceived and actual
knowledge in taxation. The first set measuring perceived knowledge used a series of perception questions about the necessary basic rules and regulations on taxation to calculate tax liability.
The second set of measurement was a tax quiz to test taxpayer‘s actual understanding of rules and regulations on taxable receipt and allowable expenses. These two aspects tested in
Barjoyai 1992 were similar to those tested in Eriksen and Fallan 1996 however the method of
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testing is different. The former used quiz questions while the latter employed Likert-type perception statements.
Another study that examined tax knowledge of individual taxpayers in Malaysia was the study by Hajah Mustafa 1997. In his study taxpayer is considered to possess the necessary knowledge
in taxation if heshe understands the tax laws and able to compute tax payable. However, one of the limitations acknowledged by the researcher was concerning the measurement of tax
knowledge. It was noted that the knowledge variable was not operationalised to the fullest extent and it was not captured as a separate variable in the study. Rather, it was measured as
part of the other variables under study such as perception towards tax fairness, tax administrative system and tax law complexity.
Apart from Hajah Mustafa 1997, there was another study on tax knowledge by Kasipillai 1997 which adapted a measurement introduced by Price 1992 to measure taxpayer understanding
and knowledge in taxation. Price‘s measurement was designed to assess knowledge on basic tax responsibilities in filing and paying federal income taxes of taxpayers in Texas, United
States. The measurement consisted of 20 test items with seven multiple-choice and 13 true and false questions. Kasipillai
‘s 1997 measurement assessed the understanding and knowledge of Malaysian income tax laws focusing on taxable income, allowable deductions, tax rebates and
tax administrative aspects. It contained 26 items of multiple-choice and true false questions.
Another study on tax knowledge in Malaysia was carried out by Palil 2005. He measured knowledge using 33 statements regarding general income tax administration, business income,
employment income, dividend and interest income, personal relief and rebates. Respondents were asked to choose ‗Yes‘ if the statement was correct and ‗No‘ if it was incorrect or the
respondents could choose ‗Do not know‘ if they were uncertain of whether the statement is
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correct or incorrect. Each correct response was given one mark and zero for incorrect or ‗do not
know‘ response. The maximum mark was 33 which represent the maximum total score for the test.
Adding to the list, there was a study by Loo and Juan 2005 which measured tax knowledge of salaried and non-business income earners in Malaysia. The measurement consisted of
statements on relief, rebates, tax credits, type of assessment, chargeability of income and exemptions. The respondents were required to indicate ‗Yes‘, ‗No‘ or ‗Not sure‘ towards the
particular statements. The study also measured knowledge on tax liability computation, chargeable income remitted to Malaysia and correct year to charge bonus income using
scenario questions . The respondents were required to indicate ‗Yes‘, ‗No‘ or ‗Not sure‘ for the
first two scenario while for the last one, they were asked to state the correct year to charge bonus income.
There were also studies in Malaysia which employed experimental method. Similar to some overseas studies such as White et al. 1990 and Christensen et al. 1994, a study by Kasipillai,
Aripin and Amran 2003 also used attendance to undergraduate tax class as a measure of tax knowledge. The similar approach of assessing individual tax knowledge has also been used in
Loo 2006, however instead of using students who attended tax classes, Loo 2006 chose two groups of undergraduate students that had not studied any subject related to income tax and
delivered special two-hour lectures pertaining to individual income tax. One group was given a lesson on income tax for non-business income earner while the other was given lesson on
income tax for business income earner. The subjects were asked to fill in the tax return form including computing tax liability based on a given case. Tax knowledge was measured based on
the score calculated on the answers to the case.
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So, it is obvious that not many literatures discussed on the issue of what tax knowledge for a layman should be constituted. These divergent of definitions among the researchers lead to the
difficulty in comparing the findings and as such would develop a mixture of what is known Churchill, 1979. Realizing this deficiency, it is viewed that in order to ensure successful
implementation of SAS, there is a need to establish a generally accepted tax knowledge measure for individual taxpayers. The measurement should consist of the necessary aspects
of knowledge in taxation for ordinary taxpayers to assess their own income. This measurement will benefit not only the researchers but also the policy makers. It could be used for the purpose
of developing and structuring education programs and providing relevant services to various groups of taxpayers depending on their level of knowledge. Besides, it can be used by
researchers in their studies which will reduce ambiguity in comparisons of the findings.
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