the implementation of the goods and services tax in ... · part of the malaysian government’s...

JournaloftheAustralasianTaxTeachersAssociation2018Vol.13No.1

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THEIMPLEMENTATIONOFTHEGOODSANDSERVICESTAXINMALAYSIA:POTENTIALISSUESPERCEIVEDBYBUSINESSTAXPAYERS

APPADUSANTHARIAH,BINHTRAN-NAM,DALEBOCCABELLAANDNTHATIRAMETSE*

ABSTRACT

Theimplementationofthegoodsandservicestax(GST)inMalaysiaon1April2015waspartoftheMalaysiangovernment’staxationreformsaimedatimprovingthecollectionofrevenueandreducingthecountry’sbudgetdeficit.Thisstudypresentssomeofthemajorissuesandconcerns thatMalaysianbusiness taxpayersperceivedaskey challenges inpreparingforGSTimplementation.AsurveywasconductedApriltoJune2013,inwhich426 business taxpayers responded fromvarious small- andmedium-sized enterprises(SMEs).Theresultsconfirmedthat,overall,businesstaxpayerswerepoorlypreparedforGSTimplementation,withonly9percentclaimingtobesubstantiallyready.Around22percentoftherespondentsstatedthattheywerewellequippedwithcomputersystemsforGSTpurposes.Over25percentofeligiblepotentialGSTregistrantsstatedthattheywould not register. Over 74 per cent of respondents felt that GST would place anadditionalcomplianceburdenonthem.Only24percentofrespondentswereconfidentthattheywouldgettherequiredhelpandassistancefromtheRoyalMalaysianCustomsDepartment,theGSTtaxauthority.Additionally,whilstlargerbusinessesconfirmedthattheywerewellpreparedforGST,smallerbusinessesexperiencedgreaterstressintheirpreparation. This article concludes with a discussion of policy implications for theMalaysian GST system, particularly those thatwould alleviate businesses’ complianceburdens.

Keywords:Malaysian goods and services tax; Compliance issues; Business taxpayers;RoyalMalaysianCustomsDepartment.

*AppaduSanthariahgraduatedin2016withaMasterofPhilosophydegreeinTaxation,UniversityofNewSouthWales,Sydney,Australia.HeiscurrentlyaPhDcandidateatRMITUniversity,Melbourne,Australia;BinhTran-NamisProfessorintheSchoolofTaxationandBusinessLaw,UniversityofNewSouthWales,Sydney,Australia,andAdjunctProfessor,SchoolofBusinessandManagement,RMITUniversity,Vietnam;DaleBoccabellaisAssociateProfessorintheSchoolofTaxationandBusinessLaw,UniversityofNewSouthWales, Sydney, Australia; and Nthati Rametse is Senior Lecturer in Entrepreneurship in the School ofManagementatRMITUniversity,Melbourne,Australia.


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I INTRODUCTION

This paper examines some of the major challenges business taxpayers1 perceived inpreparingforthegoodsandservicestax(GST)2inMalaysia.Morespecifically,fourbroadissues were investigated: (i) business readiness to implement GST; (ii) the GSTcompliance burden imposed on businesses; (iii) perceptions of the Royal MalaysianCustoms Department (RMCD, the body that administers GST in Malaysia) and theircapacity to provide financial and non-financial assistance; and (iv) determination ofwhetherbusinessperceptionsarerelatedtobusinesscharacteristics.After two failed attempts, which spread over seven years, the Malaysian Goods andServicesTaxAct2014,basedonabroad-basedconsumptiontax,wasfinallypassed,witheffectfrom1April2015.KraalandKasipillai3arguedthatthekeyfactorsforMalaysia’sdelayedGSTwerepublicoppositionin2007,andthereductionofincometaxrates,whichwere pre-emptively lowered in 2009 in anticipation of the second failed attempt atpassing the GST Bill through the Malaysian Parliament. During the long preparationperiodfrom2005,theprivatesectorandtheMalaysiangovernmentconductedvariousGST information sessions and seminars to educate Malaysian business taxpayers.However,notmuchisknownaboutbusinesstaxpayers’concernsandtheirreadinessonpre-GSTimplementationissues,sincethereisadearthofMalaysianliteratureinthisarea.NotaximpactstatementwaspublishedbythetaxauthoritiesfortheintroductionofGSTin Malaysia. To address this gap, this study aims to explore pre-GST complianceimplementation issues faced by business taxpayers in Malaysia, and attempts to putforwardsomepolicyrecommendationsforthereductionofcomplianceissues.This study focuses on business taxpayers representing small- and medium-sizedenterprises(SMEs),sincetheymakeasignificantcontributiontotheeconomyintermsof employment and output in Malaysia.4 This study is also crucial and relevant fordeveloping countries’ economies particularly in relation to the 2030 United Nations’AgendaforSustainableDevelopmentgoals.Thegoalsoftheagendaincludestrengtheningdomestic revenue mobilisation and improving domestic capacity for tax revenuecollection. It isconsideredakeydriverof thesegoals5 thatpublicrevenuefromtradetaxesshouldbegraduallyreducedandthereshouldbeashiftoftaxburdentoconsumersintheformofconsumptiontaxes.

1Businesstaxpayersincludesoletraders,partnerships,privatecompaniesandpubliccompanieswhoareeligibletoregisterfortheMalaysianGST.2GSTisalsoknownasvalueaddedtax(VAT)inothercountries,eg,JapanandtheEuropeanUnion.Theybothrefertoamulti-stageconsumptiontaxwheretaxonvalueaddedis imposedthroughthedifferentstagesofthesupplychain.3DKraalandJKasipillai,‘Finally,aGoodsandServicesTaxforMalaysia:AComparisontoAustralia’sGSTExperience’(2016)31(2)AustralianTaxForum257.4ASSalehandNONdubisi, ‘AnEvaluationofSMEDevelopmentinMalaysia’(2006)2(1)InternationalReview of Business Research Papers 1–14; T Ramayah and K P Ling, ‘An Exploratory Study of InternetBankinginMalaysia’inProceedingsofthe3rdInternationalConferenceonManagementofInnovationandTechnology(ZhejiangUniversityPress,2002)25–7.5UVNam,TransformingOurWorld:The2030AgendaforSustainableDevelopment(UnitedNations,2015).


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A BackgroundofthestudyTherationaleforthisstudywastoexploretheperceptionsandchallengesfacedbySMEsregardingtheintroductionofGSTinMalaysiaon1April2015.Thissurveywasconductedfrom April to June 2013, two years before the introduction of GST, comprising 1500businesstaxpayersfromvariousSMEs.Atotalof426responseswerereceived,resultingina response rateofover28per cent.The findingsshow thatMalaysiawasnotwellplaced for the implementationofGST,whichwas interestinggiven thatGSTwas firstannouncedforimplementationin2005.Manyinthebusinesscommunity,bothlargeandsmall,didnottaketheimplementationdateseriously,duetotheearlierpostponementsofGSTandtheir‘laissez-faire’attitudeinhopingthatGSTwouldnotbeimplementedatall.

B ObjectiveofthestudyTherewere fourparties involved in successfully implementingGST inMalaysia. Theywerebusinesstaxpayers fromvariousSMEs, theRMCD, thetaxagentsandthepublic.SinceSMEsandtaxauthoritieswereattheforefrontfortheimplementationofGST,thisstudyhasconfineditsscopetothesetwopartiesandexcludestheperceptionsofthetaxagentsandtheMalaysianpublic.BasedonaliteraturereviewofGSTimplementationinothercountriesandMalaysia,thefollowingfourbroadobjectivesweredesignedforthisstudy.

1. To investigate theperceptionsofMalaysianbusiness taxpayers in termsof theiroverall readiness to implementGST, their computer systemreadiness, and theirintention to register for GSTwhen turnover is above or below the RM500 000registrationthreshold.

2. Togainaninsightintobusinesstaxpayers’perceptionsonthepotentialcomplianceburden,stresslevels,6andtheoffsettingofcashflow7andmanagerialbenefits8thatmayhaveeventuatedduetocompliancetoGSTrulesandregulations.

3. Togatherinformationaboutbusinesstaxpayers’perceptionsoftheRMCD,andthemonetary and non-monetary assistance they sought for the reduction of theircomplianceburden.

4. To determine whether business perceptions were related to businesscharacteristics.

6Sandfordetalstatednon-economiccosts(suchaspsychicormentalcosts)arecausedbythestressandanxietyofhavingtocomplywithasetofrulesthatataxpayerdoesnotfullyunderstand,inducedbytheoperationofanewtaxsystem:CTSandford,MRGodwin,PJWHardwickandMIButterworth,CostsandBenefitsofVAT(HeinemannEducationalBooks,1981).7 Businesses normally collect more output tax than they pay in input tax during each return period.Businessesarethenallowedtoretainthisexcessfora‘graceperiod’beforehandingitovertothetaxoffice.Thisgivesthemacashflowbenefit.8Managerialbenefitsmayaccruetobusinesstaxpayersbecauseofrecord-keepingrequirementsimposedbytaxcomplianceobligations.Thesebenefitscomeintheformofimprovedfinancialinformationtoownersandmanagersandimprovedmanagerialdecision-makingforincreasingcashflowandprofitabilityofthebusiness.


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Attheendofthispaper,somerecommendationsareputforwardtopolicy-makersforthereductionofthecomplianceissuesbasedonthewishlistsubmittedbySMEs.Next,welookattheMalaysianeconomy,whichgivesthebackgroundfortheintroductionofGST.

C MalaysianeconomyMalaysia is a developing country in Asia that in the last decade has successfullytransformedfromanexporterofrawmaterialsintoadiversifiedeconomy.Mohd9notesthat Malaysia has sustained a strong economy with a gross domestic product (GDP)growth average of 5 per cent per year, mainly supported by robust investment anddomestic consumption. The economy continues to perform strongly at 5.9 per centgrowthin2017,drivenbystrongglobaldemandforelectronicsandimprovedtermsoftradeforcommoditiessuchasoilandgas.Aslowergrowthof5.3percentisforecastedin2018,duetolowerpetroleumprices.Duetostrongeconomicgrowth,theInternationalMonetaryFund(IMF)10hasforecastedalowinflationof3percentandalowunemploymentrateataround3.4percentfor2018.Thus,Malaysiaiswellpoisedforachievingahigh-incomestatusby2020.However,thegovernment needs to step up reforms to boost productivity and control publicexpenditure.AsMalaysia’spublicdebtcontinuestodecline,theIMFrecommendedthatthegovernmentshifttowardsraisingrevenue,ratherthancuttingpublicspending.Table1providessomedataonMalaysia’skeyeconomicindicatorssuchaspopulation,inflation,unemploymentanddebttoGDPratio.Table1:OverviewoftheMalaysianeconomy,2015to201711

Indicators 2015 2016 2017

Population 31.2million 31.7million 32.3million

Labourforce 14.4million 14.7million 14.9million

RealGDPannualgrowth 5.0% 4.2% 5.9%

Inflationrate 2.1% 2.1% 3.8%

Unemploymentrate 3.2% 3.5% 3.4%

Income–percapita USD5004 USD5421 USD5800

9 E AMMohd, ‘An Economic Outlook forMalaysia’ (Paper presented at the National Tax Conference,Malaysia, 17 July 2012) <http://www.ibfd.org/IBFD-Tax-Portal/Events/2012-National-Tax-ConferenceMalaysia>.10InternationalMonetaryFund,‘Malaysia’sEconomy:GettingClosertoHigh-IncomeStatus’(IMFNews,7March 2018) <https://www.imf.org/en/News/Articles/2018/03/07/NA030718-Malaysias-Economy-Getting-Closer-to-High-Income-Status>.11Treasury,MalaysianGovernment,MalaysiaKeyDataandForecast2017/18<http://www.treasury.gov.my/pdf/economy/er/1718/keydata_forecast.pdf>;Treasury,MalaysianGovernment,MalaysiaKeyDataandForecast2016/17<http://www.treasury.gov.my/pdf/economy/er/1617/keydata_forecast.pdf>.


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GDP–percapita USD9505 USD9374 USD9813

Currentaccount%ofGDP 3.0% 2.4% 3.0%

DebttoGDP 57.9% 56.2% 54.2%

A review of the structure of SMEs shows that they can be defined by severalcharacteristicsbasedoneconomicsizeorvalue.Aroundtheworld, themostcommonmeasuresusedareturnover/revenueandnumberofemployees,andthesecriteriaarealsousedforMalaysianSMEs.Table2showsthat,in2011,thetotalnumberofbusinessenterpriseswas662939,ofwhichSMEsrepresented97.3percent(645136),withtheremaining2.7percentbeinglargefirms.ThenumberofSMEsincreasedin2012andtheyconstituted99.2percentoftotalbusinesses(670000establishments).Themajorityofbusinessesaremicrofirms(75percent),followedbysmallfirms(19percent),mediumfirms (3per cent) and large firms (3per cent). SMEscontributeabout37per centofMalaysia’sGDP,65percentofemploymentand18percentofexports,makingthemverysignificanttotheeconomy.12Table2:Businessesbyannualturnoverandpercentageoftotalbusinesses,2010–1113

Annualturnover(RinggitMalaysia,RM) Numberofestablishments

Percentageoftotalestablishments

Microfirms:≤RM250000 496458 74.9%

Smallfirms:RM250000toRM10million 128787 19.4%

Mediumfirms:RM10milliontoRM25million

19891 3.0%

TotalSMEs 645136 97.3%

Largefirms:≥RM25million 17803 2.7%

Totalestablishments 662939 100%

12 ‘Malaysia’s SME GDP Contribution to Exceed 40%’, The Star (online), 13 July 2017<https://www.thestar.com.my/business/business-news/2017/07/13/malaysias-sme-gdp-contribution-to-exceed-40pct>.13DepartmentofStatistics,MalaysianGovernment,EconomicCensus2011–SMEAnnualReport(2014).


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Table3:Distributionofestablishmentsbybusinesssector,bypopulationandbysamples14

SectorPopulation

offirms

Populationpercentage

offirms

Totalemploymentbybusiness

sector

Percentageofemploymentbybusiness

sectorSampleoffirms

Percentagesampleof

firms

Services 591883 89.3% 2610373 71% 310 73%

Manufacturing 39669 6.0% 698713 19% 59 14%

Construction 22140 3.3% 275631 8% 44 10%

Agriculture 8829 1.3% 78777 2% 12 3%

Miningandquarrying 418 0.1% 5765 0% 1 0%

Total 662939 100% 3669259 100% 426 100%

As shown in Table 3, the services sector has grown to be a leading contributor ofbusinesses,accountingfor89.3percent,followedbythemanufacturingsectorat6percent and construction at 3.3 per cent. In terms of employment, the services sectorprovidesabout71percent,followedbymanufacturing(19percent)andconstruction(8percent).ThelargeservicesandmanufacturingsectorswillprovideagoodtaxbaseforcollectionofGST.Table4:SMEGDPandoverallGDPsharebykeyeconomicactivity,201415

SectorPercentageshareoftotal

SMEsGDP TotalGDP

Services 58.6% 53.5%

Manufacturing 21.7% 23.0%

Agriculture 12.4% 9.2%

Construction 5.7% 4.3%

Miningandquarrying 0.4% 9.0%

Plus:importduties 1.1% 1.1%

14DepartmentofStatistics,MalaysianGovernment,EconomicCensus2011–ProfileofSMEs(2011).15 SME Corporation Malaysia, SME Annual Report 2014/2015 (2015) 22<http://www.smecorp.gov.my/images/Publication/Annual-report/BI/Annual-report-2014.pdf>.


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Total 100% 100%

Table4showsthattheservicessectorcontributes58.6percentofSMEGDP,followedbymanufacturingat21.7per centandagricultureat12.4per cent. SMEs in the servicessector recordedagrowthof8.7per cent comparedwithoverallservicesvalue-addedgrowthof6.5percent.SMEvalue-addedgrowthacrossalleconomicsectorswashigherthanoverallvalue-addedGDPgrowthinallsectors.Thus,SMEsareamajorcontributorofGDPinMalaysia.

D GSTstudiesinMalaysiaThissectionfocusesonGSTstudiesinMalaysia,andhighlightssomeoftheissuesthathavearisensincetheintroductionofGST.In2010,whenthegovernmentfirstpostponedthe introductionofGST, theAssociatedChineseChambersofCommerce&IndustryofMalaysia(ACCCIM)conductedasurveyofSMEsinMalaysia.TheyfoundthatbusinesseswereclearlynotpreparedforGST.Thirty-eightpercentoftherespondentsstatedtheyhadnotyetpreparedfortheimplementationofGST.Only4percentindicatedthattheirreadinessforGSTwasabove75percent,while33percentwere1–25percentready,and25percentwere26–75percentready.16

Manybusinesses,particularly in theSMEcommunity,wereconcernedthatGSTwouldhave a profound impact on financial reporting and strategic decision-making such aspricing.17 Apart from the political considerations, the deferment of GST was due toreadinessissuesfacedbybusinesstaxpayersinMalaysia.AsurveybytheFederationofMalaysianManufacturersin2013showedthatover60percentofbusinesseswerenotreadyforGST.18Similarly,astudybySMECorporationMalaysiainJulytoNovember2014,basedon2063respondents,foundthatmanySMEswerenotreadytocomplywithGST.19Smallfirmswere leading thegroupwith53per centbeing ready to comply, followedbymediumfirmswith45percentandmicrofirmswith38percent.OnlyasmallportionofSMEsindicatedhaving full confidenceandunderstandingofGST:micro firmsat6per cent;smallfirmsat8percent;andmediumfirmsat8percent.ThemainchallengesforSMEsincludedtheestablishmentofaninternalGSTteam,trainingofstaffonGST,purchaseofGSThardwareandsettinguptheGSTcompliantaccountingsystem.20OtherGSTstudiesundertakenincludedthreebeforetheintroductionofGSTandthreeafteritsimplementationarediscussedbelow.

16 The Associated Chinese Chambers of Commerce & Industry of Malaysia (ACCCIM), SurveysQuestionnaires/Reports: Report of 2010 SMEs Survey (16 July 2010)<http://www.acccim.org.my/blog/topic/26/1/14/Report+of+2010+SMEs+Survey>.17NHMansorandA Ilias, ‘GoodsandServicesTax (GST):ANewTaxReform inMalaysia’ (2013)2(1)InternationalJournalofEconomicsBusinessandManagementStudies12–19.18PJayaraman,‘MajorityofMalaysianBusinessesNotGST-Ready’,TheSunDaily(online),17September2013<http://www.thesundaily.my/news/831481>.19SMECorporationMalaysia,aboven15.20MHanifTamin,AnalysingFinancialChallengesofSMEsontheImplementationofGoodsandServicesTax(GST)inMalaysia(UnpublishedMaster’sThesis,UniversityofWaikato,NewZealand,2015).


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The following studieswere conducted beforeGST implementation.Marimuthu et al21foundthattaxagentshadapositiveattitudeandwerewellpreparedforGST,buttheirissuesincludedalackofGSTknowledge,theburdenofrecordkeeping,andtheneedtoupgrade their computer systems. Palil et al22 examined Malaysian SMEs before theintroductionofGSTandfoundthattheirGSTcompliancecostsamountedtoRM28000(USD7000),andmostof themwerestillnotpreparedfor the implementation.MansorandIlias23statedthatGSTwouldboostrevenue,buttheRMCDneededtorectifyinitialproblemsandreduceincometaxrates.

Thefollowingstudieswereconductedafterimplementation.Ishak,OthmanandOmar24foundthatstudentswerenotsupportiveofGST,themajorityperceivingitasaburden,andtheywantedGSTcollectiontobemanagedwellforthebenefitofcitizens.RamliandIbrahim25 found that the average start-up cost for a SME in Malaysia in 2013 wasestimatedatRM15730(USD4000).Chingetal26foundthatthreefactorsinfluencedGSTimplementation for SMEs: GST taxpayers’ perceptions of fairness; GST compliancereadinessofbusinesses;andexternalfactorsthataffectthebusinesses.ThefactorsthataffectaGSTtaxpayer’sperceptionoffairnessarehighcompliancecosts,taxcomplexity,theextentof governmentsupport, and the stress costsof thebusiness.Thedegreeofreadinessdependsonthe firm’s resourcesand thebusinesstaxpayer’s ability to copewith the change. External factors include sector-specific developments and political-economicdevelopmentsthatdampentheoverallattitudeofabusinesstaxpayertowardsGSTimplementation.

NoneoftheabovestudiesspecificallyfocusedonthemainissuesfacedbySMEspriortotheintroductionofGST,whichisagapintheliterature.Next,welookatthestructureanddesignoftheproposedGSTimplementationandthereasonsforitsintroduction.

E BackgroundandcontexttoGSTreforminMalaysiaGST/VATwasfirstintroducedinFranceinthe1950s,anditspreadquicklyaroundtheworld. The number of countries adopting GST/VAT rose from 10 in 1965 to 160 by2013.27Cnossen28notedthat thoughthespecificreasons foradoptingGSTdiffer fromcountrytocountry, themainargumentput forwardwasthataproperlydesignedGST

21MMarimuthu,ZBidinandHAbdul-Jabbar,‘PerceptionsofTaxAgentstowardstheProposedGoodsandServices Tax in Malaysia’ (SIBR-UniKL 2013 Conference on Interdisciplinary Business & EconomicsResearch,KualaLumpur,2012).22MRPalil,RRamli,AFMustaphaandNSAHassan,‘ElementsofComplianceCosts:LessonfromMalaysianCompaniestowardsGoodsandServicesTax(GST)’(2013)9(11)AsianSocialScience135.23MansorandIlias,aboven17.24NIIshak,MHOthmanandMFOmar,‘Students’PerceptiontowardstheNewlyImplementedGoodsandServicesTax(GST)inMalaysia’(2015)2(6)InternationalJournalofContemporaryAppliedSciences80–99.25 RRamliandMAIbrahim,‘GSTNon-ComplianceBehaviourofSMEsinMalaysia:DeterminantsandStart-UpComplianceCosts’(8thAsiaPacificInterdisciplinaryResearchinAccountingConference,2016).26 YM Ching, J Kasipillai and A Sarker, ‘GSTCompliance and Challenges for SMEs inMalaysia’ (2017)15(3)eJournalofTaxResearch457–89.27 Royal Malaysian Customs Department, Countries Implementing GST or VAT (24 January 2014)<http://gst.customs.gov.my/en/gst/Pages/gst_ci.aspx>.28SCnossen, ‘GlobalTrendsandIssuesinValueAddedTaxation’(1998)5InternationalTaxandPublicFinances399–428.


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raises more revenue than any other broad-based consumption tax. Sandford et al29estimatedVATcompliancecostsofbetween3.7percentand9percentofVATcollectionsin theUK.Basedon320ofAustralia’s largestcorporations,Ernst&Young30estimatedGSTimplementationcostsatbetween0.075percentand1percentofturnover.Duetochangesintheworldeconomy,Malaysianeededtoboldlyexecuteataxpolicythatcouldraiseastablerevenuestreamtomaintainacompetitiveedgeintheworldmarket.Giventhisbackground,therationaleforintroducingGSTinMalaysiaseemedlogicalandtimely.TherearefourstrongargumentsfortheintroductionofGST:itbroadenedthetaxbasetoreducebudgetdeficit;itraisedastablerevenue;therewaspressurefromtheIMFandtheWorldBanktointroduceaconsumptiontax;itreplacedsalesandservicestax(SST).

1 ReducebudgetdeficitNarayanan31statedthatMalaysiahadbeenfacingachronicbudgetdeficitproblem.Overthe43-yearperiod from1970 to2012, the federal governmentbudgetwas indeficit,exceptforthefiveyearsbetween1993and1997.Notonlywerethesedeficitsunrelatedtoeconomiccycles,buttheyconsistentlyexceededforecastssince1999.Thegovernmentwantedtobroadenthetaxrevenuebasetoreducethedeficit,andthusGSTwasagoodoption.Kasipillai,32 quoting Musgrave, argued that Malaysia, like most developing countries,reliedheavilyonindirecttaxesduringtheearlystagesofitsdevelopment.However,inmore recentyears,Malaysiamoved from thenormal tax features found indevelopingcountries and shifted its focus to direct taxes. In 1970, for example, direct taxescomprised27.3per centofMalaysia’s revenue,with indirect taxes comprising50percent.By2011,however,directtaxesincreasedto55.3percentofrevenueandindirecttaxestookadramaticdiveto17.5percent.Thus,therewasaneedtoshifttaxcollectionfrom direct taxes (such as income taxes for individuals and corporations) toconsumption-basedGST.

2 RaisestablerevenueNarayanan33addedthatGSTinMalaysiaisataxonthevalueaddedtotheoutput:itisamulti-stagetaxandhasinbuiltcontrolsbasedonapapertrailofalltransactions.First,themulti-pointcollectionandinvoicetrailminimisestaxavoidanceandevasion.Second,GST is better able to protect revenue from tax evasion by retailers as compared to asingle-stagesalestax,sincethereisapapertrailofthetransactions.ThisissupportedbyJala,34whoarguedthatMalaysiamaynothavebeentaxingallthosewhoarelegallyliable.

29 C Sandford, M Godwin and P Hardwick, Administrative and Compliance Costs of Taxation (FiscalPublications,1989).30Ernst&Young,‘PreparingfortheGST:AnAustralianSurvey’(1999)1JournalofAustralianTaxation331–43.31 S Narayanan, ‘The Impact of the Goods and Services Tax in Malaysia: Lessons from ExperiencesElsewhere’(2014)59TheSingaporeEconomicReview2.32JKasipillai,AGuidetoAdvancedMalaysianTaxation(McGraw-Hill,2010).33Narayanan,aboven31.34IJala,‘ConversationwithaMalaysianAngrywiththeGovernment’,TheStar(online),2013.


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Malaysiahasapopulationof29million,andin2012theworkingpopulationwas12.8million.Outof this,only1.7millionpaid incometaxes, that is,about6percentof thepopulation.Further,Bedi35reportedthattherewere6.4millionregisteredtaxpayersforalltaxesinMalaysia,butwithonly2.4millionpayingtheirduetaxes.Hence,GSTwouldbringmoretaxpayersintothetaxnet,sinceeventhoughtheywerenotpayingincometaxes, theywouldbepayingGSTwhentheyconsumedgoodsandservices,evenwhentherewasadownturnintheeconomy.

3 PressurefromtheIMFandtheWorldBankBird36arguedthatmanydevelopingcountriesadoptedVATduetotheperceivedsuccessofVATimplementationintheEuropeanUnion,andthe‘pressure’exertedbytheIMFandtheWorldBank.TheIMFandtheWorldBankencourageddevelopingcountriestoadoptsomeformofconsumptiontax,usingfinanceassistanceandaccesstoexpertadvice.PricewaterhouseCoopers37 reported that the IMF, the Organisation for Economic Co-operationandDevelopment(OECD)andtheEuropeanCommissionallpromotedtheshiftfrom direct to indirect taxes to help solve the financial crisis, by reducing costs onbusinessestomakethemmorecompetitive.AfterthefinancialcrisistherewaspressurefromtheIMFforMalaysiatoadoptanindirectconsumptiontaxasamethodtoincreasetheefficiencyofthetaxsystem,ratherthanrelyingontradeandincometaxes.Now,theIMF has recently recommendedMalaysia’s implementation of GST as a case study toMiddleEasterncountriesthatarelookingtoadoptaconsumptiontaxregime.38

4 ReplacesalesandservicestaxKasipillai39statedthatSSThasanarrowbase,sincecurrentlythereareabout4700typesofgoods,representingapproximately78percentofthegoodsmanufacturedlocally,thatareexemptedfromsalestax.Itiscumbersometoadministerduetoseveralexemptionsandthedifferentratesappliedtosomespecifiedgoods(5percentonnon-basicfoodstuff,20percentoncigarettesandliquor,and10percentonallothergoods).Thiscomplexityimposesextracompliancecostsonbusinesses.SSTisineffective,inefficientandinequitable(wherebytherichpaymoreandthepoorpayless).Inaddition,thegovernmenthasarguedthatgoodsandservicesarecostlierforconsumersduetotheircascadingeffect,sincethereisnocreditfortaxpaidonbusiness

35 R S Bedi, ‘Silver Lining Behind GST’, The Star (online), 10 July 2011<http://www.thestar.com.my/story.aspx>.36RMBird,‘ValueAddedTaxesinDevelopingandTransitionalCountries:LessonsandQuestions’(PaperpresentedattheFirstGlobalInternationalTaxDialogueConferenceonGST,Rome,Italy,2005).37PricewaterhouseCoopers,‘ShiftingtheBalancefromDirecttoIndirectTaxes:BringingNewChallenges’(Tax Policy and Administration – Global Perspectives series, June 2013)<https://www.pwc.com/gx/en/tax/assets/pwc-shifting-the-balance-from-direct-to-indirect-taxes-bringing-new-challenges.pdf>.38 Kamarul Anwar, ‘IMF EndorsesMalaysia’s GST Implementation as Case Study – Customs’,The EdgeFinancial Daily, 11 March 2016 <http://www.theedgemarkets.com/my/article/imf-endorses-malaysia%E2%80%99s-gst-implementation-case-study-%E2%80%94-customs>.39JKasipillai,‘Taxpayer’sKnowledgeIndexasaClueforNon-Compliance(2000)81(3)JournalonPakistan’sTaxationLaws.


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input.Also,Narayanan40argued thatrevenuegeneratedbySST inMalaysia comparesunfavourably to that raised by GST in neighbouring countries. For example, with astandard rateof10per cent,GSTproducedabout22per centof totalrevenue in thePhilippines, 21 per cent in Thailand, and 19 per cent in Indonesia. In contrast, SSTcontributedabout10percentoftotalrevenueinMalaysiain2012.Therefore,GSTwouldbeanimprovementforMalaysiainraisingamorestablerevenue.Malaysia introduced GST at 6 per cent, compared with other ASEAN (Association ofSoutheastAsianNations)countrieswheretheratesvaried(forexample,7percent inThailandandSingapore,and10percentinthePhilippines,Cambodia,Vietnam,LaosandIndonesia).TherewasaneedforMalaysiatokeepexportszero-ratedtobecompetitiveintheASEANandotherworldmarkets.Thefiscalreformpackageisaimedatlong-termstructuralreformforMalaysia,sothatitseconomycanintegratefurtherintotheglobaleconomyandbecomeahigh-incomeeconomyby2020.

TheproposedGSTof6percentwasexpectedtoreplacethesalestaxof10percentandtheservicestaxof6percentfrom1April2015,andthethresholdwassetatRM500000(USD125000).ItwasexpectedtocollectaboutRM30billioninrevenue.Around122000businesses were expected to register for GST, but as of February 2015, 345 939businesseshadregistered.41

ThisGSTmodel,broadlyspeaking,providedforthreedifferenttypesofsupplies,andacreditsystemwouldbegiventobusinessestoclaimtheinputtaxonpurchasesofgoodsandservices.TheGSTtreatmentvariedaccordingtothetypeofsupply:

a) Standard-ratedsuppliesaregoodsandservicessubjecttoGSTatthestandardrate (currently 6 per cent). A supplier is able to claim input tax credits onpurchasesrelatedtomakingthesesupplies.

b) Zero-ratedsuppliescarryazerorateoftax.Thus,noGSTwillneedtobeleviedontheirsupply.Suppliersofzero-ratedsuppliesarerequiredtoregisterforGSTandcanclaiminputtaxcreditsfortheGSTpaidonbusinesspurchasesrelatedtomakingthesupplies,suchasrawmaterials.Thesupplyofthefollowinggoodsandserviceswereexpectedtobezero-rated:agriculturalproducts;foodstuffs,suchasfreshvegetables,rice,sugar,cookingoil,etc;livestock,includingliveanimalsandunprocessedmeat(freshorfrozenmeat).

c) ExemptsuppliesarenotsubjecttoGST.However,unlikezero-ratedsupplies,noinputtaxcreditcanbeclaimedbythesupplieronrelatedpurchases.Asupplierofexempt supplies is therefore unable to claim input tax incurred on rawmaterials/services that relate to making exempt supplies. The supply of thefollowinggoodsandserviceswereexpectedtobeexempt:highwaytolls;privatehealthandeducation;domestictransportationofpassengers.

40Narayanan,aboven31.41 Bernama, ‘Highest GST Registration Rate Recorded on Feb 27’, New Straits Times, 2 March 2015<https://www.nst.com.my/news/2015/09/highest-gst-registration-rate-recorded-feb-27>.


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d) Multipleratesareapplicableinsomeindustries.Forexample,mining,plantationandforestrybusinessesneedtoregisterforGSTandarenotexempt.Thesalescanbesubjecttothestandardratedependingonhowtheiroutputismadeup.Theycanclaim input taxes forpurchases incurred for thebusiness. If thegoodsareexported,thesalesarezero-ratedandthebusinesscanclaimtheinputtax.

e) Mostof the financialservicesprovidedbybanksandfinancial institutionsarenot subject to GST, but fee-based services, such as loan processing fees, safekeepingandcustodialservices,aresubjecttoGSTatastandardrate.Zeroratesapply if the services supplied to the business are charged when the businessownerisoutsidethecountry.Ifthesupplyistaxexemptthebusinesstaxpayerisnot entitled to claim the input tax. Exempt supply covers provision of loans,exchangeofcurrencyandtraveller’scheques.

Sairaetal42statedthattheintroductionofGSTinMalaysiamightstrengthencashflowbyprovidinga steady sourceof funding forbudget spending.However,GSTwould comewithgreateradministrativeandcompliancecosts.Wan43foundthatSMEsdeemedGSTto be amajor burden, considering the cost of software adaptation and staff training,especiallywhentheywerealreadygrapplingwiththehighcostofdoingbusiness,andcomplyingwithothergovernmentregulations.Chingetal44furthernotedthatGSTwassuccessfullyimplementedinSingaporeandNewZealand due to well-planned implementation strategies and easy-to-administerstructuresanddesigns.Tran-Nam45statedthattheimplementationofGSTinAustraliacouldbeconsideredasuccess,despitesomeearlyteethingproblems.Thissuccesscanbeattributed to broad-based community support, simple design, direct compensation,income tax cuts, and a long lead-in time, allowing ample time for taxpayer and taxpractitionereducationandassistanceprogrammes,conductedbytheAustralianTaxationOffice.In2017,GSTrevenuecollectedinMalaysiawasRM45billion.However,recently,despitethe successofGST inother countries, theMahathirMohamad-ledgovernment (whichwontheelectionon9May2018)revisedtheGSTlegislationintroducedon1April2015.Witheffectfrom1June2018allstandard-ratedgoodsof6percentwillbezero-ratedtoalleviatethehardshipfacedbythepublic,whohadvoicedtheirconcernatpriceincreasesduetotheimpositionofGST.TheMinistryofFinance46statedthatinSeptember2018SSTwillbereintroducedandexpectedtoraiseRM25billion.Therewillbeashortfallin

42KSaira,MASaraswathiandLYoke-May,‘AnExploratoryStudyofGoodsandServicesTaxAwarenessinMalaysia’(SeminaronNationalResilience,PoliticalManagementandPolicies,Langkawi,Malaysia,13–15July2010)265–76.43HCWan,‘GSTandAnti-Profiteering:TacklingthePricingIssue’,TheEdgeMalaysia,22September2014<https://www.pwc.com/my/en/assets/press/140922-theedge-gst-n-anti-profiteering.pdf>.44Ching,KasipillaiandSarker,aboven26.45BTran-Nam, ‘RecentTaxReforminAustralia:AnExaminationfromaTaxPolicyPerspective’ (PaperpreparedfortheKoreaandtheWorldEconomyVIIConference,KoreanInstituteofPublicFinance,Seoul,SouthKorea,2008).46MarthaSoezean,‘NetizensSupportMalaysiaReplacingtheGSTwithSST,VoicingBenefitoftheLatter’,The Online Citizen, 6 June 2018, <https://www.theonlinecitizen.com/2018/06/06/netizens-support-malaysia-replacing-the-gst-with-sst-voicing-benefit-of-the-latter>.


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revenue of RM20 billion that will be supported by specific revenue measures andexpenditure reduction including rationalisation, efficiencymeasures and reduction inwastages.

F GSTstudiesinthecontextofGSTreforminMalaysiaBased on the literature review of SMEs in developing and developed countries, thefollowing issues were identified when countries prepare for the implementation ofGST/VAT.47Themain issues identifiedwerethecomplianceburden, thecomplexityofGSTlegislation,computerisationforGST,andthelackofassistancefromtaxauthoritiestoreduceSMEs’complianceburden.

1 ComplianceburdenTheGST tax compliance burden is defined for this study as the time andmoney thattaxpayersexpendeachyeartocomplywithGSTrulesandregulations.Chittendenetal48statedthatSMEsfacesubstantialissuesinmanagingdocumentationpertainingtopropertaxrecords.EhrichandBillett49foundthatthetaskoflearningtoimplementGSTisoftenstressfulandlackscertaintyforbusinesses.SmuldersandStiglingh50concludedthattimeandeffortspentonpreparingforGSTwasresponsibleforthelargestpartofabusiness’scompliancecost.Lignieretal51foundthatGSTcompliancecostswerehighandregressiveonsmallerbusinesses.PricewaterhouseCoopersstudiedthedatacollectedbytheWorldBankGroupon‘theeaseofpayingtaxesindifferenteconomiesaroundtheworld’aspartof thePayingTaxes2010project.52Theyobservedthat it takesbusinessesaroundtheworldlongertocomplywithVATthanwithcorporateincometax.Inaddition,ittakeslesstimetocomplyincountrieswherebusinessesuseonlinefilingandpaymentforVAT.

2 ComplexityoftaxlegislationEvansandTran-Nam53notedthedifficultyofdefiningormeasuringtaxcomplexity,sinceitisregardedasamulti-facetedconcept.However,someauthorsattemptedtobroadly

47Valueaddedtax(VAT)isknownasgoodsandservicestax(GST)inothercountries.AlthoughGSTandVAThavedifferentnames,theyarebothbroad-based,multi-stageconsumptiontaxeswheretaxisimposedthroughthedifferentstagesofthesupplychain.ThetermGSTwillbeusedinlieuofVATinsomecasesinthispaper.48FChittenden,SKauserandPPoutziouris,‘TaxRegulationandSmallBusinessintheUSA,UK,AustraliaandNewZealand’(2003)21(1)InternationalSmallBusinessJournal93–115.49LCEhrichandSBillett,‘HowAustralianSmallBusinessOperatorsLearnedAbouttheGoodsandServicesTax’(2006)14(2)SmallEnterpriseResearch59–73.50 S Smulders and M Stiglingh, ‘Annual Tax Compliance Costs for Small Businesses: A Survey of TaxPractitionersinSouthAfrica’(2008)11(3)SouthAfricanJournalofEconomicandManagementSciences354–71.51PLignier,CEvansandBTran-Nam,‘TangledUpinTape:TheContinuingTaxCompliancePlightoftheSmallandMediumEnterpriseBusinessSector’(2014)29AustralianTaxForum217.52 PricewaterhouseCoopers andWorld Bank Group, ‘Paying Taxes 2010 – The Global Picture’ (2010)<https://www.pwc.com/gx/en/paying-taxes/assets/paying-taxes-2010.pdf>.53CEvansandBTran-Nam, ‘ManagingTaxSystemComplexity:BuildingBridgesthroughPre-FilledTaxReturns’(2010)25AustralianTaxForum245.


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definetaxcomplexity.Slemrod54identifiedfourfundamentalattributesoftaxcomplexity:predictability,enforceability,difficultyandmanipulability.McCaffery55 identifiedthreetypesoftaxcomplexity:technical,structuralandcompliance.Tran-Nam56madeadistinctionbetweenlegalandeffectivecomplexity.Legalcomplexityrefers to theeasewithwhicha tax lawcanberead,understoodandapplied.Effectivecomplexitycanbemeasuredintermsoftheoperatingcostsrequiredtoraiseacertainlevel of tax revenue. For simplicity purposes, we used Tran-Nam‘s legal complexitydefinitionforthisstudy.

Conceptually,asimpleGSTwillcompriseasingle-ratethreshold,whichisinclusiveofallgoodsandservices,exceptforexports,whicharezero-rated.However,taxlawbecomescomplex with increased sophistication of GST design and structure, including anincreasednumberof ratesand tax codesapplicable to standard-rated, zero-ratedandexemption items. Ebrill et al57 argued that VAT is an intrinsically complex tax,cumbersome to both authorities and the taxpayer. Complexitymay also increase theuncertaintyoftaxlawsandtherebyfrustratetaxpayersandreducetheirwillingnesstocomply.58McKerchar59foundthatinAustraliathemaincauseofcomplexitywasuncertaintyintaxlaw and the level of detailed information provided to the taxpayer tomeet their taxobligations. In addition, tax complexity can generate significant economic costs. It isgenerally accepted that tax systems should be simple, but tax policy principles ofsimplicity and equity cause conflict and trade-offs, which can add complexity to taxlegislation.BirdandGendron60 found thatonlya fewcountrieswithindevelopingor transitionaleconomiesoffertaxpayersassistanceincopingwithtaxcomplexity,orpayattentiontotheimpactofcompliancecostsimposedontaxpayers.Richardson,61inhisstudyof45countries, found complexity is the largest determinant of non-compliance, apart fromeducation, incomesource, fairnessand taxmorale.Headds that complexityof the taxsystemaffectstheleveloftaxpayers’compliancecosts.According to Kasipillai,62 there is a direct relationship between complexity of the taxsystemandthelevelofthecompliancecostsincurredbytaxpayers.Anyincreaseinthe

54 J Slemrod, ‘Complexity, Compliance Costs, and Tax Evasion’ in J A Roth and J T Scholz, TaxpayerCompliance:Volume1:AnAgendaforResearch(UniversityofPennsylvaniaPress,1989).55EJMcCaffery,‘TheHolyGrailofTaxSimplification’(1990)WisconsinLawReview1267.56BTran-Nam,‘TaxReformandTaxSimplification:SomeConceptualIssuesandaPreliminaryAssessment’(1999)21(3)SydneyLawReview500.57LEbrill,MKeen,J-PBodinandVSummers(eds),TheModernVAT(InternationalMonetaryFund,2001).58GACarnesandADCuccia,‘AnAnalysisoftheEffectofTaxComplexityandItsPerceivedJustificationonEquityJudgments’(1996)18(2)TheJournaloftheAmericanTaxationAssociation40.59MMcKerchar, ‘TheEffectsofComplexityonUnintentionalNoncompliance forPersonalTaxpayers inAustralia’(2002)17AustralianTaxForum3.60RMBirdandPGendron, ‘IsVAT theBestWay toImposeaGeneralConsumptionTaxinDevelopingCountries?(2006)60(7)BulletinforInternationalTaxation287.61 GRichardson, ‘Determinants of TaxEvasion:A Cross-Country Investigation’ (2006) 15(2)Journal ofInternationalAccounting,AuditingandTaxation150–69.62 JKasipillai,AComprehensiveGuidetoMalaysianTaxation:UnderSelf-AssessmentSystem(McGraw-Hill,2009).


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complexityofthetaxsystemwillescalatethecomplianceburdenfortaxpayers.Risingcomplexityinthetaxsystemalsoleadstoburdensomeadministrativecostsforthetaxauthorities.InMalaysia, a study byMustafa and Hanefah63 found that, due to self-assessment ofincome taxes, taxpayers perceived the legislation to be very complex and ambiguous,particularlyintermsofrecordkeeping.AccordingtoKasipillai,64thenewlyenactedGoodsandServicesTaxAct2014isacomplexdocumentwith165pagesand197sections,andmustbereadtogetherwithGSTordersandregulations.

Finally, based on a study by Saad,65 there are six potential causes for complexity:ambiguity,frequentchanges,calculations,details,formsandrecordkeeping.

3 ComputerisationforGSTTheuseoftechnologytoenhancetheeffectivenessoftaxadministrationandcomplianceattractsincreasingattentioninbothdevelopedanddevelopingcountries,asassertedbyEdwards-Dowe.66 Bernier and Suire67 postulated that data is the key for GST/VATreporting.MohdDaudandMohamed68positedthat informationtechnology(IT)usagewillenabletheimprovementofbothindividualandorganisationalperformance.Plamondon69inaCanadianstudy,andHasseldineandHansfordinaUKstudy,70foundthat GST/VAT taxpayerswho used computers in their accounting routines had lowercompliancecoststhanthosewhousedmanualaccountingsystems.Ontheotherhand,Hansfordetal71foundthatSMEsusingcomputersforGSTrecordkeepingincurredhighercompliancecoststhanthoseworkingmanually,implyingthatinitialcostscouldbehighduetothepurchaseofnewhardware.

Lim72foundthatmostSMEsinMalaysiaarefamilybusinessesandoperateonacashbasiswithverylittlecomputerisation.Lowcomputerusewasalsoduetohighstaffturnover

63 HMustafa andMHanefah,AnEvaluation of theMalaysianTaxAdministrative SystemandTaxpayersPerceptions towards Assessment Systems, Tax Law Fairness and Tax Law Complexity(Unpublished PhDDissertation,UniversityUtaraMalaysia,1996).64JKasipillai,AGuidetoMalaysianTaxation(McGraw-Hill,2015).65NSaad,‘TaxKnowledge,TaxComplexityandTaxCompliance:Taxpayers’View’(2014)109Procedia–SocialandBehaviouralSciences1069–75. 66 D Edwards-Dowe, ‘E-FilingandE-Payments –TheWay Forward’ (Paper presented at the CaribbeanOrganizationofTaxAdministration,CaribbeanRegionalTechnicalAssistanceCentre,2008).67GBernierandJSuire,‘MeetingtheVATE-auditChallenge’(IndirectTaxBriefing:Issue11,EYGMLimited,December2014).68NMohdDaudandISMohamed,‘EvaluatingtheIntranetAcceptancewiththeExtendedTask-TechnologyFitModel:EmpiricalEvidenceinMalaysianMaritimeIndustry’(2010)3InternationalJournalofArtsandSciences294–306.69RPlamondon,DepartmentofFinance,GovernmentofCanada,GSTComplianceCostsforSmallBusinessinCanada(1993).70JHasseldineandAHansford,‘TheComplianceBurdenofVAT:FurtherEvidencefromtheUK’(2002)17AustralianTaxForum369.71AHansford,JHasseldineandCHoworth,‘FactorsAffectingtheCostsofUKVATComplianceforSmallandMedium-SizedEnterprises’(2003)21(4)EnvironmentandPlanningC:GovernmentandPolicy479–92.72TMLim, ‘Outsourcing toEnsureSuccessful ICTSystems ImplementationandMaintenance’ (MonashUniversity,24August2006).


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andalackofITexpertise.Seow73foundthatonly30percentofSMEsinMalaysiahaveaweb presence and use IT in their daily operations, and found that SMEs seemmoreconcerned with appearance in the marketplace than getting into new technology toincreasetheefficiencyoftheirbusiness.Tan74alsonotedthatSMEsinMalaysiaareslowinadaptingtoITtoincreasetheirglobalcompetitiveness.

4 GSTtaxauthoritiesThetaxauthoritiesplayanimportantroleforthereductionofcompliancecosts.Apartfrom the simplification process of the tax legislation, they can provide friendly andprompt services to taxpayers’ queries at no cost. Alm et al75 argued that supportingprivatetaxpayersthroughservicesprovidedbytaxauthoritiesreducestheircomplianceburden, since there is no need for the taxpayer to seek help from costly external taxexperts.Zumbo76arguedthatauthoritiesdohavearesponsibilityinassistingtaxpayerstocomplywithtaxrequirements.Franzoni77arguedthat taxauthoritiesshouldavoidtheviciouscircle of countering evasion by introducing complex tax legislation, which increasescompliancecostsandfostersnon-compliance.Frey78statednegativeexperienceswithtaxofficialsleadtotaxpayerslosingfaithinthesystem.

BerhanandJenkins79arguedthatwhilstgovernmentsofdevelopingcountriesareeagerto createmodern tax systems, they are often saddledwithweak tax administrations.These governments normally experiment with tax administration mechanisms thatresult in large compliance costs for taxpayers.Faridy,quotingFranzoni,80 argued thatbusinessesmay resent taxauthorities for creatinghigh leviesandavery complex taxsystem. Eichfelder and Kegels81 found evidence that customer-friendly Belgian taxauthorities established ways to reduce the compliance burden of their businesscustomersbyabout20percentonaverage.

Someof theabovestudieshavehighlightedthe issues facedbybusinesses fromsomedeveloped and developing countries prior to the introduction of GST,which have thecapacity to prevail in Malaysia. However, Sandford82 warned that international

73TCSeow,‘SMEsNeedtoEmbraceICT’,ComputerworldMalaysia(online),2006.74CTan,‘TowardsProgress’,ComputerworldMalaysia(online),July2006.75JAlm,TCherry,MJonesandMMcKee,‘TaxpayerInformationAssistanceServicesandTaxComplianceBehavior’(2010)31(4)JournalofEconomicPsychology577–86.76FZumbo, ‘TaxAssessmentsand JudicialReview:Do theCourtsHaveaSupervisoryRole?’ (1996)79CanberraBulletinofPublicAdministration97.77LFranzoni, ‘TaxCompliance’ inBBouckaertandGDeGeest (eds),EncyclopediaofLaw&Economics(EdwardElgar,1999).78BSFrey,‘DeterrenceandTaxMoraleintheEuropeanUnion’(2003)11(3)EuropeanReview385–406.79BABerhanandGPJenkins,‘TheHighCostsofControllingGSTandVATEvasion’(2005)53(3)CanadianTaxJournal720.80NFaridy,‘VATComplianceCostsandVATEvasionofSmallandMediumEnterprises(SMEs)SectorsinBangladesh:IsThereaLink’(Paperpresentedatthe25thAnnualAustralasianTaxTeachersAssociationConference,Auckland,NewZealand,23–25January2013);seealsoFranzoni,aboven77.81 S Eichfelder and C Kegels, ‘Compliance Costs Caused by Agency Action? Empirical Evidence andImplicationsforTaxCompliance’(2014)40JournalofEconomicPsychology200–19.82CSandford(ed),TaxComplianceCosts:MeasurementandPolicy(FiscalPublications,1995).


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comparisonsaremorelikelytomisleadthanenlighten,becausetherearedifferencesinthetimeperiods,qualityofdata,definitionsusedandunitsofmeasurement.

II RESEARCHMETHODOLOGY

Sandfordetal83conductedvariousstudiesintocompliancecostsofVATintheUKusingextensivemailsurveys.SandfordandHasseldine84alsoinvestigatedthecompliancecostsofNewZealand’sGSTusingamailsurvey.Postalsurveysfeaturemostprominentlyintaxationstudies,withtwo-thirdsofstudieswhollyorpartlyusingthismethod.Forthisstudy, aquantitativemethodwasadopted: todetermine the legal form, size, industrysectorandyearofestablishmentforeachbusiness;toanalyseandgeneraliseabouttheissues; and todetermine the relationshipbetweenbusinessperceptionsandbusinesscharacteristics.TheresearchquestionsweremadesimpletoencompassabroadrangeoftopicsonGSTmatters.SomewereselectedfromEvansetal’s‘AReportintoIncrementalCostsofTaxCompliance’.85Afocusedsurveyofbusinesstaxpayerswasundertakenusingastructuredquestionnaire, with 36 questions. Questionnaires were distributed to 1500 businesstaxpayers in a sample of business enterprises throughoutMalaysia, covering variousbusinesssectors.

A Surveysampleselection,designandpilotingThe designof the survey instrument comprised three sequential steps involving dataselection,questionnairedesignandthepilotingofthesurveyquestionnaire.

1 DataselectionInsteadofpostalsurveys,thissurveywasadministeredthroughaface-to-faceapproachatGSTseminars,toparticipantsfromthreemajorbusinessorganisations.86Surveyformsweregiventolecturerstodistributetoparticipants.ThismethodwasadoptedbecausepreviousMalaysiansurveyexperienceshaveproveditdifficulttogetresponsesthroughpostal/emailsurveys.Mohdali87statedthatformosttaxsurveysinMalaysiatheresponserate ispoor,ataround14–22percent.Thereisa fearamongstrespondents thatdataprovidedmaybeforwardedtorevenueauthorities.

83Sandford,GodwinandHardwick,aboven29.84CTSandfordandJHasseldine,TheComplianceCostsofBusinessTaxesinNewZealand(TheInstituteofPolicyStudies,Wellington,1992). 85CEvans,KRitchie,BTran-NamandMWalpole, ‘AReport into IncrementalCostsofTaxCompliance’(RevenueAnalysisBranch,AustralianTaxationOffice,21November1996).86 (1) Associated Chinese Chamber of Commerce and Industry of Malaysia; (2) Kuala Lumpur MalayChamberofCommerce;(3)MalaysianAssociatedIndianChamberofCommerceandIndustry.87 RMohdali, ‘The Effects of Religiosity and Taxpayer’s Perception towards Government on VoluntaryCompliance’(PaperpresentedatSchoolofEconomicsandFinance,CurtinUniversity,2010).


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2 QuestionnairedesignThesurveyquestionnairesweredesignedtobeuser-friendly,simpleandcomprehensive.Mohd-Sani88 stated that it is well known that the government controls the press inMalaysia.Mediafreedomandtherighttoexpressopinionsislimited,andpublicdebateson government decisions and policy matters are nearly non-existent, limiting publicdebatesonGSTissues.Thus,tomakethesurveymoremeaningfulandrealistic,mostofthe material for the questionnaire was fine-tuned to capture various reactions innewspapers articles and blogs. (Blogs are an important channel of communication inMalaysia,astheyareunauthorised,andtheirauthorscannotbeheldliableforcriticisingthegovernment.)

3 PilottestingThe proposed questionnaire was pilot-tested using six participants, including onepractisingaccountant,twolecturersandthreerevenueofficials.Usingtheirfeedback,thequestionnaire was refined and finalised. Please refer to Appendix 1: SurveyQuestionnaire.

B SurveyimplementationFowler89statedthatarandomsampleof150woulddescribeapopulationof15000or15millionwiththesamedegreeofaccuracy.Assumingaplausibleresponserateof20percent,asurveysampleof1500wasselectedtogenerateaneffectivesamplesizeofatleast300respondents.Inthisstudytheeffectivesamplewas426–aresponserateof28percent,whichisagoodrateforstatisticalsampling.Afurthertestwasapplied,usingtheRaosoft90samplesizeselector,andshowedthatforapopulationof662939Malaysianbusinessesasamplesizeof384wouldbeareasonableminimum(assumingaresponsedistributionof50percent,ata95percentlevelofconfidencewitha5percentmarginoferror).Thus,thesamplesizeof426inthisstudymorethanmeetstherequirement.Table5:Distributionandcollectionofsurveyforms

AssociatedChineseChamberofCommerceandIndustryofMalaysia 300

KualaLumpurMalayChamberofCommerce 300

MalaysianAssociatedIndianChamberofCommerceandIndustry 200

KualaLumpurIndianChamberofCommerce 100

GSTseminarlecturers 600

Total 1500

Responsesreceived 426

Responserate 28%

88MAMohd-Sani,‘MediaFreedominMalaysia’(2005)35(3)JournalofContemporaryAsia341–67.89FJFowler,SurveyResearchMethods(SagePublications,2nded,1993).90Raosoft,SampleSizeCalculator(2004)<http://www.raosoft.com/samplesize.html>.


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AsshowninTable5,thesurveyformswereevenlydistributedamongstthethreemajorbusinessorganisations.Theeffectivesampleof426,aresponserateof28percent,isagoodnumberforstatisticalsampling.ItalsocomparesfavourablytoothersurveysconductedinMalaysia:Mohdali91found that, based on tax research carried out in Malaysia by Abdul and Pope92 andHanefah,AriffandKasipillai,93responseratestosurveysofthisnatureinMalaysiatendtobe low,usuallybetween14percentand22percent;AbdulandPope94statedthatbusinesssurveystargetingSMEsorlargefirmsinMalaysiaoftenyieldapoorresponserateofbetween10percentand20percent.

C RepresentativenessofobservedsampleAsMilesandHuberman95argued,theabilitytodrawstatisticalinferencesfromsamplestoreferencepopulationsislargelydependentonhowwelltheattributesofobservedsamplesrepresent the attributes of the population. To establish if the survey sample wasrepresentativeofthepopulation,threeattributes–namely,turnover,sectorandlocationbyregion–wereincludedinthesurveyquestionnaire.

Thesample for thisstudy included55percentofrespondentswitha turnoverabove theRM500000(USD125000)compulsoryregistrationturnoverthreshold,andtherest(45percent)werebelow the threshold. This is a good representation of business taxpayerswhowouldcompulsorilyandoptionallyregisterforGST.Regardingthelengthofoperationofbusiness,14percentofthesamplewerenewbusinessesthat had been operating for fewer than three years, with 86 per cent being establishedbusinessesoperatingformorethanthreeyears.Thus,agoodpercentageofestablishedandnewbusinesseshavebeenincludedinthesurvey.

Thesurveyresponseswillnowbesummarisedinmoredetail,startingwithaprofileoftherespondents’legalform,turnover,industrysectorandothermajorvariables.Table6:Respondentsbylegalform(fromSurveyQuestionnaire,Question1)

Legalform Number Percentage

SoleTrader 133 31%

Partnership 63 15%

Company–Private 177 42%

Company–Public 53 12%

Total 426 100%

91Mohdali,aboven87.92JHAbdulandJPope,‘ExploringtheRelationshipbetweenTaxComplianceIssuesinMalaysia’(2008)1(1)JournalofAppliedLawandPolicy.93MHanefah,MAriffandJKasipillai,‘ComplianceCostsofSmallandMediumEnterprises’(2002)4JournalofAustralianTaxation73.94AbdulandPope,aboven92.95MMilesandAMHuberman, ‘QualitativeDataAnalysis:ASourcebookofNewMethods’(1984)56(2)QualitativeResearchJournal2.


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Table6showstherespondentsbylegalformofbusiness.Thelargestcategorywasprivatecompanies, which accounted for 177 (42 per cent) of respondents, followed by soletraders at 133 (31 per cent), partnerships at 63 (15 per cent), and publicly listedcompaniesat53(12percent).Thisrepresentedagoodmixofthevariouslegalformsofbusiness.Table 7: Respondents by legal form and industry sector (from Survey Questionnaire,Questions1&3)

Industrysector Legalform Totalsample

Totalpopulation

SoleTrader Partnership PrivateCompany

PublicCompany

*N *% N % N % N % N % N(‘000)

%

Manufacturing 6 5 3 5 43 24 7 13 59 14 40 7

Construction 8 6 9 14 23 13 4 8 44 10 22 3

Agriculture 7 5 1 2 3 2 1 2 12 3 9 1

Mining 0 0 0 0 1 1 0 0 1 0 0 0

Services 112 84 50 79 107 60 41 77 310 73 591 89

Total 133 100 63 100 177 100 53 100 426 100 662 100

*Ndenotesnumberofrespondents;%denotespercentage.

Table7showstherespondentsbylegalformandindustrysector.Thetotalsamplesweregrouped into 15 industry categories, based on the Malaysian Statistics Department’sStandardIndustrialClassification2008.Further,thetotalsamplewassummarisedintosectors,withservicesat73percent,manufacturingat14percent,constructionat10percent,andagricultureat3percent.Theservicessectorrepresented73percentofthebusinessesinthesample,comparedwith89percentofthetotalpopulationofSMEs.Themanufacturingsectorrepresented14percentofthesample,comparedwith7percentofthetotalpopulation.Thus,thesamplewellrepresentedthedistributionofsectorsinthetotalpopulation.Table8:Respondentsbylegalformandturnover(fromSurveyQuestionnaire,Questions1&4)

SoleTrader Partnership

PrivateCompany

PublicCompany Total

Turnover N % N % N % N % N %

UptoRM200000 65 49 12 19 20 11 3 6 100 23

RM200001–249999 16 12 8 13 13 7 3 6 40 9


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RM250000–499999 22 17 14 22 17 10 2 4 55 13

RM500000–4999999 19 14 26 41 54 31 9 17 108 25

RM5000000–9999999 1 1 1 2 13 7 2 4 17 4

RM10000000–24999999 5 4 1 2 14 8 5 9 25 6

RM25000000–49999999 2 2 0 0 8 5 2 4 12 3

RM50000000ormore 3 2 1 2 38 21 27 51 69 16

Total 133 100 63 100 177 100 53 100 426 100

Table 8 shows 195 businesses (45 per cent) with turnover below the compulsoryregistrationthresholdofRM500000,withtherest(231;55percent)abovethethresholdand therefore required to register forGST.The sample selectedwas thereforeagoodrepresentationofbusinesseswithdifferentturnoversthatwouldregisterforGST.Itisworthnotingatthisstagethatthe45percentofrespondentswhooperatedbelowthethreshold would prefer to stay out of the GST net to avoid the compliance burdenassociatedwithregistration.Inconclusion,thesampleresponsesfromthesurveyfindingswereagoodrepresentationofthepopulationinMalaysia,intermsoflegalform,industrysectorandturnover.Thus,thestudyfindingsprovidedareliablesetofdataforfurtheranalysis.

III FINDINGSANDANALYSIS

The findingsof this studyarediscussed inrelation to the four studyobjectives: (i) toanalysebusinessreadinesstoimplementGST;(ii)toanalysetheGSTcomplianceburdenimposedonbusinesses;(iii)togathertheperceptionsofthecapacityofRMCDtoprovidefinancial and non-financial assistance; and (iv) to determine whether businessperceptionsarerelatedtobusinesscharacteristics.Severalspecificconclusionscanbedrawnforeachoftheobjectives,asexplainedbelow.

A Objective1:BusinessreadinesstoimplementGST,comprisingoverallreadiness,computerisationreadiness,andreadinesstoregisterforGSTif

turnoverexceedsthreshold

1 OverallreadinessfortheimplementationofGSTOverallreadinessisgenerallymadeupofthebusinesstaxpayer’sabilitytocopewiththechange,thefirm’sresourcesandtheavailabilityofsupportfromexternaltaxagentsandtheRMCD.Figure1belowshowsoverallreadinessfortheimplementationofGST.Only9percentofrespondents stated they were at least 75 per cent ready, while about 19 per centconsideredthemselvesmorethan50percentready,and81percentwerelessthan50per cent ready. The poor preparation for GST was mainly due to the businesses’


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perception that GSTmay not be implemented, since it was postponed twice and thestartingdatewasunknown(atthetimeofthissurvey).ThismadeitmoredifficultforbusinessestoproperlyprepareforGST,andthiswasreflectedinthesurveyfindings.The findingsof this studyare confirmedbya similar studybyACCCIM.96Their studyfoundonly4percentperceivedthattheyweremorethan75percentreadyforGST.Inthisstudy,threeyearslater(in2013),therehadbeenamarginalincreasefrom4percentto9percent.Figure1:OverallreadinessfortheimplementationofGST

LargerbusinesseswithaturnoverofoverRM50millionseemedtobemorereadythansmallerbusinesses.Thisstudyfurtherdiscoveredthatthemanufacturingsectorandtheaccountingprofessionweremoreready thanother industrysectors.Largebusinesseshaveinternationalconnections,moreresources,bettertrainedstaffandinmostcasesaseparatetaxdepartment,thustheyarebetterequippedforGSTpreparation.

PersonsresponsibleforimplementingGSTcomprisedinternalaccountants(46percent),external tax agents (26 per cent), owners/directors (22 per cent), and internalbookkeepers(6percent).Thisispositive,sinceitisbettertoutiliseinternalstaff,whoarelesscostlyandcan,atthesametime,trainothersupportingstaffinternally.

2 ComputerhardwareandsoftwarereadinessforGSTimplementationFigure2belowindicatesthatoverallonly22percentofbusinesstaxpayersbelievedthattheywerereadywiththeircomputerhardwareandsoftware forGST implementation.Again, larger businesses (with a turnover of over RM50 million), the manufacturingsector,aswellasaccountingfirms,hadtheircomputersystemsreadiercomparedwithsmaller businesses and other sectors. Since the manufacturing sector had theiraccountingsystemsalreadysetupforreportingsalestax,itwaseasierforthemtoupdate

96 Tan SriWilliamCheng, President ofACCCIM, ‘President Speech:Media Conference on theReport ofACCCIM2010SMEsSurvey’ (Speechdeliveredat theMediaConferenceon theReportofACCCIM2010SMEs Survey, ACCCIM Conference Room, 16 July 2010)<http://www.acccim.org.my/blog/topic/27/1/36/Media+Conference+on+the+Report+of+ACCCIM+2010+SMEs+Survey>.


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theirsystemsforGST.Similarly,sincetheaccountingprofessionwasalreadyactingasadvisorsforthenewGST,theircomputersystemsweremorereadythanothersectors.Itisaconcerningissuethat78percentofbusinesses,mainlySMEs,believedtheircomputersystemswerenotready.LowcomputerusagesuggeststhatalargeproportionofSMEsstilloperateonacashbasis.ThisisinlinewiththefindingsofKasipillaiandLiew,97whopointed out that many small businesses operate on a cash basis and do not usecomputerisedaccountingorcashregisterstomaintainrecords.Figure2:Computerhardwareandsoftwarereadiness

An earlier study by ACCCIM98 highlighted the same issue, where 80 per cent ofrespondents indicated that their computer systems were not ready to meet theircomplianceobligations.Inaddition,71percentoftherespondentsindicatedthattheywouldnotelectronicallyfileGSTreturns.Only42percentofbusinesstaxpayersindicatedtheywoulduseelectronicfilingtosubmitGSTreturnstotheRMCD,with21percentusingexternaltaxadvisers,17percentfilingmanualreturns,and20percentundecided.Eventhough42percentwasagoodstart,theremaining58percentofbusinesstaxpayersseemed to be uncomfortable using computers to submit returns, even with theknowledgethatmanualfilingwascostlierthanelectronicfiling.ThelackofconfidenceinusingelectronicfilingleadstolessinvestmentincomputersystemsandashortageofITstafftorunthesoftware.Thisisanareaofconcern,asSMEsmaynotmeetthereportingobligations,andthusmayincurheavyRMCDpenalties.

3 CompulsoryregistrationforGSTturnoverabovethresholdofRM500000Figure 3 shows that 58 per cent of businesses stated they would register for GST.However, one of the most worrying results of this research was that 25 per cent ofrespondentswith a turnover above the RM500 000 threshold stated theywould notregisterforGST,whichisaclearbreachofthelaw.Another17percentsaidtheywerenotsureiftheywouldregister.Onehopesthattheserespondentssimplymadeamistake

97JKasipillaiandRLiew,‘TheSmallandMediumEnterprisesunderaGSTRegime’(2004)17AccountantsToday10–13.98Cheng,ACCCIM,aboven96.


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and were not aware of the compulsory registration threshold, but given that theregistrationthresholdunderSSTwasbelowthatforGST,thisisunlikely.Nomatterwhatthereason,theRMCDshouldbeconcerned.Asignificantlevelofnon-compliancewith the compulsory registration requirementofGSTwouldbe incrediblydamagingtoitsongoingsuccess.Itseemssomebusinesstaxpayerswereadoptinga‘waitandsee’approach,andwerewillingto takethechance innotregisteringandfacetheconsequencesarisingfromRMCDactionthroughtheirauditprocesses.Figure3:CompulsoryregistrationforGSTturnoverabovethresholdofRM500000

TheRMCDhadpreviouslybeenusingapersuasiveapproach,advocatingcollaborationwithbusinesstaxpayerstoregister forGST,but,duetobusinesstaxpayers’continuednon-compliance,andtheychangedtoadeterrenceapproachandstarted imposingtaxpenaltiesafterDecember2014(deadlineforregistrationforGST).

B Objective2:Complianceburden,stresslevels,managerialandcashflowbenefits

1 ComplianceburdenFigure4summarisesthecomplianceburdenofbusinesstaxpayers,with74percentofrespondents agreeing that GST placed an additional compliance burden on theirbusinesses. In this regard, itshouldbe remembered that international research foundthat a high compliance burden leads to high costs, which fall more heavily on smallenterprises.99

99CEvans,‘TaxationComplianceandAdministrativeCosts:AnOverview’inMLang,CObermair,JStruch,CStaringerandPWeninger(eds),TaxComplianceCostsforCompaniesinanEnlargedEuropeanCommunity(KluwerLawInternational,2008)447–70.


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Figure4:Complianceburdenofbusinesstaxpayers

2 GST-inducedstresslevelsFiftypercentofrespondentsstatedthattheirstresslevelswouldincrease,and36percent were not sure, due to the increased compliance burden, the lack of generalinformationandthespecifictrainingrequiredforGST.Anotherconcernisthat,duetostress levels, business taxpayers could voluntarily defer registration and be non-compliantwithGSTlaw.

In2010,ACCCIM100foundthat33percentoftherespondentstotheirstudyexpressedhighstress ingettingready forGST,duetoa lackof information.Another22percentstated that theGSTBillwas too technical andcomplicated. It seemsstress levelshadincreasedasthedateofintroductionofGSTwasgettingcloser,giventheresponseof50percentinthisstudy.BusinessesmayhavebeenhiringexternaladviserstosetuptheGST systems and train staff, and, thus, stress levels would have increased when theresponsibilityofreportingobligationsfellbacktotheinternalaccountantsandownersofbusinesses.However,itshouldbenotedthatthisstudyandthatbyACCCIMreflectafairlyrudimentarymeasureofstresslevels,sinceGSThadnotbeenimplementedatthetime,andthereforebusinesseshadnotexperiencedthe‘real’stressofGSTcompliance.

3 ManagerialbenefitsManagerial benefits refer to the potential for better and more informed businessdecision-making. These benefits can bemaximisedwhen record keeping is of a highquality.GSTcomplianceforcestaxpayerstokeepbetterandtimelierrecordsofbusinesstransactions.Managerialbenefitsexistbutaredifficulttoquantify.Accordingly,asTran-Nam and Glover101 pointed out, these benefits are normally omitted in empirical

100Cheng,ACCCIM,aboven96.101BTran-NamandJGlover,‘TheGSTRecurrentComplianceCosts/BenefitsofSmallBusinessinAustralia’(2005)1(2)JournaloftheAustralasianTaxTeachersAssociation237.


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compliance coststudies.However,Lignier102uncovered that somebusiness taxpayerswerederivingmanagerialbenefitsintheformofimprovedknowledgeoffinancialaffairs,mainlythroughincreaseduseofcomputeraccounting.Thesurveyresults indicatedonly44percentofrespondentsbelievedtheymayenjoysomemanagerialbenefits,while30per centwerenotsureand26per cent felt therewouldbenomanagerialbenefitforthem.Itwouldbedifficulttomeasuretheimpactofmanagerialbenefitsenjoyedbybusinesstaxpayers,sinceGSTwasnotimplementedatthetimeofthesurvey.Therefore,thesefindingsmaynotbeusedtodrawanycredibleconclusions.

4 PositivecashflowbenefitsThebusinesstaxpayerenjoysashort-termcashflowbenefitduetothetimelagbetweenwhen GST is collected from customers and when it is remitted over to revenueauthorities.Only28percentofrespondentsbelievedtheywouldenjoysomeshort-termcashflowbenefits,while33percentwerenotsure,and40percentbelievedtheywouldnotenjoyanycashflowbenefits.Fromanaccountingpointofview,positivecashflowsare very important for businesses, but respondents felt that, overall, GST would notcontributepositivecashflowbenefitsfortheirorganisation.Again,sincethesurveywascarriedoutbeforeGST implementation, itwouldbedifficult to forecast any cash flowbenefits.

C Objective3:Businesstaxpayers’perceptionsoftheRMCDChow103statedthat theOECDconsiders increasingresponsiveness insolvingtaxpayerissues as one of the major challenges for revenue authorities. Increasing theresponsivenesscanincludeconsistentlydeliveringqualityinformationtotaxpayers,anddealingwithinquiriesandappealsfromtaxpayersinatimelyfashion.Singh104statedthatsomeofthepublicarestilllackingknowledgeandinformationregardingtaxation,whichleadstolowawarenessoftheirresponsibilitytopaytaxes.So,taxpayersneedtohavesufficientknowledgeofthecurrenttaxationsystemtocomplywithlawsandregulations,as there seems tobea close relationshipbetweenknowledgeandcompliance.Also, agood positive relationship between taxpayers and revenue authorities is vital for thedisseminationofknowledgeandinformationtotaxpayers.

102 P Lignier, ‘The Managerial Benefits of Tax Compliance: An Empirical Study of Small Businesses inRegionalAustralia’(Paperpresentedatthe8thInternationalTaxAdministrationConference,UniversityofNewSouthWales,Sydney,2008).103WSChow,‘TaxAdministrationintheHongKongSpecialAdministrativeRegion:BenchmarkingagainstInternationalStandards’inATAXTaxAdministrationSeries,Vol3:TaxAdministration:SafeHarboursandNewHorizons(FiscalPublications,2008).104VSingh,‘GoodsandServiceTax,ItIsTime’,TheMalaysiaInsider(online),21September2013.


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Figure5:Businesstaxpayers’perceptionsoftheRMCD

Figure5demonstratesthat,unfortunately,only24percentofbusinesstaxpayersfeltthatthe RMCD officers would provide friendly, courteous and helpful assistance to themduringtheinterimperiodforimplementationofGST,while52percentwereunsureiftheywouldgetanyhelp,and24percentindicatedthattheRMCDmaynotprovidetherequiredhelpandassistance.Thislowlevelof‘approval’mayindicatethatbusinesstaxpayerswerenotconfidentthattheycouldgethelpandassistancetosorttheirqueriesinatimelymanner.ACCCIM105foundthat50percentoftherespondentstotheirstudydidnotcommentontheattitudeoftheofficershandlingtaxaudit,sincethebusinesseshadnotbeensubjectedtoanauditwithin the past five years. Thiswas an area of concern, since a lack of trust and theabsenceof agood relationshipbetweenbusiness taxpayersand theRMCDstaff couldhampertheadministrationandcollectionofGSTrevenue.

ItisimportanttonotethatiftheRMCDfailstoextendtherequiredassistance,taxpayersmayhavetoseekassistancefromexternaltaxadvisers,butthiscanbecostly.ItiscrucialthattaxpayershaveaccesstoinexpensiveandaccurateinformationfromtheRMCDtoencouragethemtobecompliantwithGSTrulesandregulations.Prohibitivecostspaidtoexternaltaxadvisersshouldbeavoided,sincethiscaninducenon-compliancewhenthesametaxadvicecouldbeobtainedfree-of-chargefromRMCD.

D Objective4:BusinessperceptionsinrelationtobusinesscharacteristicsThe fourth objective of this studywas to determinewhether businesses’ perceptionsabout GST were related to various characteristics of those businesses. The chisquarestatistic was used for testing relationships between perceptions andcharacteristics.Theresultsofallthechisquarestatistictestshavebeensummarisedforcharacteristicssuchaslegalform,turnoverandindustrysectorandthecorrespondingthreeperception

105Cheng,ACCCIM,aboven96.


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variables,namelyoverallGSTreadinessofbusinesstaxpayers,thecomplianceburden,andGST-inducedstress levels.Theresultsofthecorrelationanalysiswerecarriedoutusingthebusinessturnovervariableandninebusinessperceptionvariables.Onlythreeperceptions–ie,theoverallreadinesstoimplementtheGST,computersystemreadinessandstressfactor–seemtohaveasignificantassociationwithturnover.Thelegalformand industry sector variables were ignored, since they were not considered ordinalvariables for the statistical analysis. Table 9 shows the correlation between annualturnoverandbusinessperceptions.Table9:Correlationbetweenannualturnoverandbusinessperceptions

Variables Pearson(r) Spearman(rho) Significance

Overallreadiness 0.311 0.312 0.000***

Computerreadiness 0.121 0.114 0.012**

Compulsoryregistration 0.086 0.076 0.191

Optionalregistration 0.025 0.021 0.724

Complianceburden 0.037 0.049 0.446

Managerialbenefits 0.060 0.057 0.218

Cashflowbenefits 0.016 0.012 0.744

GST-inducedstress -0.090 -0.081 0.062*

RMCD 0.070 0.076 0.147

*Significantat10%**Significantat5%***Significantat1%

As shown in Table 9, the significant correlation coefficients for the variables overallreadinessandcomputersystemreadinesssuggestthatthelargerthebusiness,themoreready they were for GST overall and the more likely they were to have an updatedcomputer system. The negative sign of the correlation coefficient for stress factorindicatesthat,asexpected,smallerbusinessesfeltmorestressabouttheimplementationofGSTthanlargerbusinesses.The Cronbach’s alpha is defined by researchers as ‘reliability of measurement’. Thismethod isusedtoestimatethe levelofreliabilityand internalconsistencyof thedata,sincetherewereseveralLikert-typequestionsinthesurvey.Analphavalueofabove0.75isgenerallytakentoindicateascaleofhighreliability;avalueof0.5to0.75isgenerallyacceptedasindicatingmoderatereliability;andavaluebelow0.5generallyindicateslowreliability.TheCronbach’salphaestimateofthisstudywasabout0.64,suggestingthatthedatawasmoderatelyreliable.Thus,itcanbeconcludedthatthecollectedsampledatawasreliableforfurtherstatisticalanalysis.


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E WhatarethechallengesforbusinesstaxpayerswhenGSTisimplemented?Bernardi,FumagalliandGandullia106arguedthattheadoptionofGSTisoftenseenasanopportunity indeveloping countries tomodernise taxadministration.However,manydevelopingcountriesfoundGSTmoredifficulttoadministerthantheyinitiallythought,andproblemswithadministrationandenforcementoftenundermineditseffectiveness.Ching et al107 stated that in Bangladesh, even after more than two decades ofimplementation, businesses have difficulty in understanding GST legislation, due toexcessivedocumentation,poorcomputerisationanddelaysingettingrefunds.Even developed countries had difficulty in selling theGSTmessage, despite extensiveconsultation with business taxpayers and business organisations. For example, inAustraliatherewasstrongoppositionbythepublicandbusinesstaxpayers.Afterseveralattempts,GSTwaseventuallyimplementedatarateof10percentin2000.InNovember1999(ayearearlier),asurveywasundertakeninAustraliatoseekbusinesstaxpayers’responsestoGSTcomplianceissuesfortheproposedJuly2000startdate.Evans108listedsome of the responses of business taxpayers, the key concern being that the GSTcomplianceburdenwouldbehigh.Manytaxpayersexpressedconcernthattherewouldbe less time torun theirbusiness, less time for their familyandreducedprofitability.OtherswereworriedaboutthecomplexityofcomplyingwithGST.ThemajorityfeltthattheydidnotknowenoughtojudgehowGSTwouldaffectthem,andmanybelievedthatitwouldbedifficulttofindadequateinformationonGST.Basedonthesurveyfindings,itseemstherearenumberofchallengesMalaysianbusinesstaxpayerswouldfacefortheintroductionofGST.ThemainissuesaregettingreadyforGST,computerisationforGST,complexityofGSTandtherelationshipwiththeRMCD.So,toovercomethesechallenges,Question28inthesurveyaskedwhatbusinesstaxpayerswishedfromthegovernment for thesmooth introductionofGST.Normally, thiscouldincludemonetaryassistancetooffsetGSTcompliancecosts,orfreetrainingtoenhancetax knowledge. Kasipillai109 stated that tax knowledge is an essential element inmaximising voluntary compliance, and thereby affects the compliance behaviour ofbusinesstaxpayers.PopeandJabbar110suggestedproviding freeworkshops.Kasipillaiand Liew111 recommended providing free software packages to business taxpayers.Singh,112 taking the exampleof theAustralian experience, proposed introducing a taxadvisoryboardtoassistbusinesstaxpayersinraisingtheirissueswiththeRMCDduringtheimplementationstage.Basedonthequestionspertainingtorequestsformonetaryandnon-monetaryassistancefrom the RMCD: 37 per cent of respondents hoped that the government wouldcompensate them for GST start-up costs, which ranged from RM5000 (USD1250) for

106LBernardi,LFumagalliandLGandullia,‘TaxSystemsandTaxReformsinSouthandEastAsia:OverviewoftheTaxSystemsandMainTaxPolicyIssues’(2005)Societàitalianadieconomiapubblica.107Ching,KasipillaiandSarker,aboven26.108DEvans,‘ConcernoverCompliance,FewSeeBenefits’(1999)34(1)TaxationinAustralia10–12.109Kasipillai,‘Taxpayer’sKnowledgeIndex’,aboven39.110 J Pope and H A Jabbar, ‘Small and Medium Size Enterprises and Regulatory Burden in Malaysia.Alleviating the Compliance Costs of Goods and Services’ (Paper presented at the Global EconomyConference2007,Malaysia).111KasipillaiandLiew,aboven97.112VSingh,TaxThoughtsonTodayAreTaxingTimes(DigibookSdnBhd,2005).


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SMEs to RM20 000 (USD5000) for larger businesses; 22 per cent hoped that thegovernmentwouldprovidefreeGSTtraining;20percentwantedGSTpostponeduntilatax impactstatementwaspublishedbytheRMCD;17percentwantedagraceperiodbeforethe impositionofGSTpenalties;and4%wanted lesserpenaltiesuntilGSTwasaccepted.Itseemstherewasanurgentneedforfundingfortrainingandforpurchaseofcomputerhardwareandsoftware.One of the concerns of the newly enactedGoods and Services Tax Act 2014 is the taxcomplexity.Ithas165pageswith197sectionsandmustbereadinconjunctionwithGSTordersandGST-relatedregulations,withtheaddedburdenof35taxcodes.113Saad114arguedcomplexityoftaxlawscanleadtohighcompliancecosts,whichcanprovidestrongincentives for business taxpayers to illegally stay out of the system, damaging theintegrityofGST.Thereseemstobereluctanceonthepartofbusinesstaxpayerstogetnecessaryhelpandassistance from theRMCD.Thismaybedue toa lackof clarity inrelationtotheapplicationofthedraftGSTlegislation.RMCDhasreleasedseveralcustomsregulations on GST matters that have not yet been explained clearly to businesstaxpayers.ThepotentialcontradictionbetweenRMCDpositionsandthelawmayaddtoconfusion,leadingtotaxpayerreluctanceinseekingassistancefromRMCDofficialsandtheadoptionofa‘waitandsee’approachuntilGSTisimplemented.

IV LIMITATIONSOFTHESTUDY

Thisstudyhadsomestrengthsandweaknesses.Someofitsstrengthsincludedagoodresponse rate of 28 per cent and the support of the survey from major businessorganisations. In addition, several major variables were identified to capture theperceptionsoftheunderlyingGSTissuesusingdifferentlegalforms,sizesandindustrysectors.Someoftheweaknessesofthestudywere:thesurveywascarriedoutduringtheheatofageneralelection,sotheresponsesmaybepoliticallybiasedandnotobjective;sincetheGSThadnotbeenimplementeditisdifficulttoknowtowhatextentrespondentsreallyunderstood the questions to respond effectively, without having a practical workingknowledgeofGST; there is no input from theRMCDoperational team to validate thefindings; importantly, the surveywas carriedout fromApril to June2013,21monthsbeforeGSTwasimplemented.Accordingtothefindingsatthistime,businesstaxpayerswerepoorlypreparedfortheimplementationofGST.ThismaynotbethecaseinJune2015, as the RMCD had by then carried out numerous GST education programmes.Hosni115 stated that by the end of February 2015, 6443 training programmes wereconductedby theRMCDand61600peoplehadattended.CurrentlyGST trainingandexaminationsarestillbeingconductedtoincreaseGSTknowledgeofbusinesstaxpayers.Itseemsalltheseeducationaltrainingprogrammesmayhavehelpedtoincreasethetaxknowledgeofbusinesstaxpayersandthatcircumstancesmayhaveimprovedsomewhatsince2014.

113Kasipillai,AGuidetoMalaysianTaxation,aboven64. 114Saad,aboven65.115H Husni,‘350,054CompaniesGST-ReadyasofMarch11’,NewStraitsTimes,11March2015.


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V CONCLUSION

The findingsof this studywill contribute to the tax compliance literature in terms ofexplainingtheGSTissuesfacedbySMEsinadevelopingcountry.Specifically,thisstudyhighlightstheissues,namely,readinessforGST,computerisationforGST,complexityofGSTandthehelpandassistancefromthetaxauthoritytomeetcomplianceobligations.Overallconclusions fromthisstudy’s findingsarebroadly in linewithotherstudies inMalaysiaandaroundtheworld.

In theend, taxpayersare legallyobligedtobe ready forGST.But,nomatterwhat thereasonsforthelowpreparedness,thisresearchrevealsthattherewereareaswherethegovernment,perhapsthroughtheRMCD,couldbedoingmoretohelpprepareMalaysianbusinesses. There is no doubt that GST could be simplified for taxpayers facingunwarranted complexity, and this could be done without unduly compromising theintegrityoftheGSTsystem.Forexample,AustraliahasbeenverysuccessfulindesigningsimplifiedGSTaccountingmethodsformanybusinessesthatmakebothtaxableandnon-taxablesupplies,therebyavoidingthecostlyproblemofindividuallyclassifyingasupplyatthepointofsale.Indeed,itisarguablethatthegovernmentshouldbedrawingmoreonexternalexpertisetoaddressthenumerousGSTimplementationchallenges.In short, thesurvey in this studyappears tobeagoodrepresentationof theviewsofbusinessesacrossMalaysia.Whiletheresearchdatastillneedstobestatisticallyanalysedfordeeperandmoretargetedresults,overallthesurveyresultsindicatethatSMEswerepoorly prepared for the implementation of GST, while larger businesses were betterpreparedoverall.Finally, an important point to note is that this datawas collected around21monthsbeforeGSTwasimplemented.Itseemsthatthecircumstanceshaveimprovedsomewhatsincethesurveydatein2013.Yong,116theDeputyFinanceMinister,announcedthatasof16August 2014 only 12 500 businesses had registered. RMCD expected 122 000 toregisterforGSTandlaterthisfigurewasrevisedto240000.Registrationsthenincreasedsharply, as noted by Maslan,117 and by June 2015, 380 313 business entities hadregistered.Onthefaceofit,onewouldpresumethatGSTeducationtrainingprogrammeshadhelpedtoincreaseregistrationofbusinesstaxpayersthroughbettertaxknowledge,but,onthecontrary,itseemsthedeterrenceor‘carrotandstick’approachbytheRMCDtoimposeheftyfineshadforcedsubstantiallyincreasedregistrationnumbersby2015.BusinessesthatchosenottoregisterforGSTareaconcernforRMCD.AsHashim118stated,someSMEsinMalaysiaoptednottoregistertheirbusinessesforfearofbeingtaxedforincome taxandGST.TheseSMEsare consideredpartof thenon-formal sector,whichaccountsforabout31percentofGDPandthuscouldleadtoasignificantlossofrevenueforthegovernment.GST should be incorporated with the larger objective of achieving long-term fiscalsustainability, despite any initial implementation problems. The following short- andlong-termpolicyrecommendationsareputforwardtoalleviatesomeofthemajorissues

116CTYong,‘RegistrationforImplementationofGSTPicksUpSpeedTime’,TheStar(online),16August2014.117AMaslan,‘GovtCollectsMoreThanRM6Billion,inGST’,TheStar(online),12June2015.118HHashim,‘WhySomeSMEsRefusetoRegister’,NewStraitsTimes,20July2015.


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uncovered from this study.TheRMCDshouldstudy these recommendationsand takeappropriateaction.Theshort-termrecommendationsare:

1. Expedite ways and means to spread GST tax knowledge and education to thebusinesstaxpayers,forexample,providingindustry-basedtargetedseminars.

2. Extendfinancialassistancetobusinesstaxpayers forpurchaseofcomputersandsoftware.

3. Takemeasures thatwill reduce the complianceburdenby reducing theGST taxcodesfrom35toalowerfigure,reducingthefrequencyofreporting,andincreasingthethresholdfromRM500000(USD125000)toRM1million(USD250000).

4. Put in place procedures for the improvement of the RMCD’s relationship withbusiness taxpayers, forexample,byemployingmoremulticulturalstaffwhocancommunicateinChineseandTamillanguages.

5. Conduct an independent survey on GST compliance issues faced by businesstaxpayerstofindout‘firsthand’theissuesconfrontingbusinesstaxpayers.

Long-termrecommendationsare:

1. TheGovernmentofMalaysiashouldpublishaGSTtaximpactstatement.

2. ThegovernmentshouldestablishaGSTResearchCentrewiththeuniversities.

3. Thegovernmentshouldestablishonetaxauthorityfortheadministrationofdirectand indirect taxes,whichshouldreducecompliancecosts forbusinesstaxpayersandadministrationcostsforthegovernment.

DealingwithtaxationmattersinMalaysiaremainsachallenge,sinceverylittleresearchispublishedontaxation issues.At thetimeofthisstudy, thereseemedtobea lackofcommitment by the government to allocating resources for taxation research, sincerevenuecollectionhadbeen their focusdue to the fiscaldeficit.The introductionof abroad-basedGSTwasoneofthemostsignificantreformsMalaysiahadmadetoitspublicfinance regime. The experiences of other countries have taught us that theimplementation of GST must be carefully managed. This is not only regarding thestructuraldesignoftheGST,butalsoregardingtheinitialimplementationoftheGST.Itisworthinvestingconsiderableresourcestogettheimplementationrightfromthestartasfailurestocorrecttheweaknesseswillleavealegacythatwillbefeltforsometimeandprovecostlytocorrectinthefuture.

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