Factors Affecting Compliance with Tourism Taxes: Evidence from Malaysia

Factors Affecting Compliance with Tourism Taxes: Evidence from Malaysia

Md Nazmil bin Md Nasir, Yusri Hazrol Yusoff, Nadiah Abd. Hamid

Faculty of Accountancy, Universiti Teknologi MARA, Cawangan Selangor, Kampus Puncak Alam, Selangor, Malaysia.

DOI: https://dx.doi.org/10.47772/IJRISS.2024.8090220

Received: 23 September 2024; Accepted: 01 October 2024; Published: 16 October 2024

ABSTRACT

Due to the fact that tax noncompliance directly impacts the source of national income, the Malaysian government and academic researchers have critically discussed the topic of tax noncompliance. Indirectly, noncompliance has an impact on a nation’s social and economic development. The Royal Malaysian Customs Department (RMCD) is in charge of overseeing and implementing Malaysia’s indirect tax laws. Existing initiatives include boosting penalties, increasing operations and inspections, hiring more enforcement agents, and pursuing tax obligations in court. These activities are largely tied to economic factors. The purpose of the study is aligning with the research’s goal which to highlight the fact that tax payers and policymakers should view and address this issue from non-economic viewpoints for a variety of reasons. First, non-economic variables’ actions are more closely tied to those that can be taken to control taxpayers’ behaviour before noncompliance occurs. Second, noncompliance prevention and control procedures can be improved because they reduce the amount of time, effort, and money needed to resolve the problem after it arises. A conceptual framework on factors that influence the compliance with tourism tax in Malaysia by using the Theory of Planned Behaviour (TPB). The study intends to characterise the behaviour and activities taken by the noncompliant tax payers in Malaysia in order to comprehend their noncompliance behaviour. This research contributes to the broader understanding of tourism tax dynamics and offers practical recommendations for policymakers aiming to enhance compliance and foster sustainable tourism practices.

Keywords: Tax Compliance; Tourism Tax; Indirect Tax; Taxation; Conceptual Framework

INTRODUCTION

In Malaysia, indirect taxes include export and import duties, sales and services tax, tourism tax, excise tax, and vehicle tax. Only import and export duties are considered international taxes because they affect international trade and require trading nations to sign agreements. Other taxes, such as the excise tax, sales and services tax, tourism tax, and motor vehicle tax, are local taxes that are not subject to international treaties. Each local tax is administered and enforced by the applicable legislation. Many developing countries’ tax administrations are unable to monitor taxpayer compliance, so it is critical to establish professional and realistic expectations for tax revenue levels (Kirchler et al., 2008). Because tax noncompliance reduces government revenue, it is necessary to maximise tax collection by focusing on tax noncompliance following the 2008 global economic crisis. Tax authorities face a significant challenge because tax noncompliance is severe and escalating in all economies, especially in developing countries (Rosid et al., 2017), most notably in Malaysia (Palil, 2016). Tax compliance remains a top priority for all nations (Mascagni, 2017; Alm & Torgler, 2011). More attempts to motivate tax compliance would boost tax collection, mainly government revenue.

Background of the Study

In 2017, the Tourism Tax (TTx) Act was passed and put into effect. For the tourism tax, it comprises of laws and administrative processes. The tourism tax, which costs RM10 per room each night, is levied against visitors staying in any type of lodging offered by an operator. The operator will accept TTx from tourists. When a visitor vacates a lodging, the manager is required to collect the tourism tax from the visitor and send it to the Royal Malaysian Customs Department (RMCD). The cost of overnight stays is taxed. There must be a bill produced. If the operator does not charge the visitor a room rate, which is the nightly rate per room, day-use rooms are exempt from TTx.

The Ministry of Finance, taxes represent a sizable source of income for the Malaysian government, making up an average of 75.8% of all revenues between 2015 and 2019. Direct taxes account for 50.9 percent (RM134.7 billion) of the total tax income in 2019, while indirect taxes account for 17.4 percent (RM45.8 billion) and non-tax revenue accounts for 31.7 percent of the total tax revenue in 2019. (RM83.8 billion). To raise government income and promote economic stability and progress, an efficient tax administration is crucial. As a result, compliance behaviour should be focused on in order to achieve a successful and effective tax administration. Despite the obstacles, indirect tax in Malaysia has been the subject of a few studies, such as service tax evasion on imported vehicles (Miskam et al., 2013) and tax gap measures in the services industry (Jamaluddin et al., 2013). However, only the economic effects of the tax disparity are addressed in these studies.

According to Bărbuţă-Misu (2011), researchers must consider economic and non-economic elements to comprehend tax compliance behaviour. Nonetheless, research on non-economic factors is sparse, particularly in developing nations like Malaysia. Therefore, it is proposed that additional exploratory research on non-economic issues is required. In summary, non-economic variables such as publicity, tax knowledge, and perception of tax fairness in problem settings are crucial for a comprehensive understanding from both academic and practical perspectives. Including these variables allows for exploration of their effects, relationships, and potential consequences, leading to more informed decision-making and policy formulation.

Problem Statement

Tourists who book accommodations in Malaysia that are registered are subject to the country’s tourism tax. The tax that was implemented in 2017 has caused controversy and drawn criticism from a variety of sources. Government regulations and significant taxation are big issues for the business and tourist industries globally. The factual foundation for compliance has not yet been stated by the RMCD. So, RMCD needs to identify the variables affecting this indirect tax compliance behaviour. It enables RMCD to prepare and carry out solutions to deal with the issue’s root cause. It will be possible to alter other taxes and stop wasting resources, including time, money, and effort, by identifying the true source of compliance. According to the RMCD’s annual report, there are numerous accounts receivable that will total RM4 billion in 2020, including unpaid tourism tax.

A few academics have put forth components for analysing taxpayers’ non-compliance behaviour in order to understand non-economic problems. One of the non-economic factors is the perception of tax fairness (Sinnasamy, 2017). According to Kasipillai (1999), non-economic factors can be employed to address the problem if economic factors have no impact on disobedience since they might influence taxpayers and encourage them to voluntarily comply with tax laws. Additionally, a permanent component makes the “volunteer” element more successful because taxpayers will see paying taxes as a societal responsibility that must be fulfilled in any case. Taxpayers will feel bad if they don’t pay their taxes.

In their study, Sinnasamy et al. (2015) looked at indirect taxes’ non-economic features. The Official Secrets Act of 1972, which makes it challenging to conduct in-depth study on indirect tax, is one of these issues. Therefore, this study explores several non-economic factors that affect Malaysian taxpayers’ non-compliance behaviour.

The Gap in Research

Despite the growing importance of tourism taxes in funding sustainable tourism initiatives, there is a significant lack of empirical research on the factors influencing compliance with these taxes in Malaysia. Existing literature frequently examines tax compliance in general or across sectors, but few studies delve into the specific context of tourism taxation, particularly in developing countries such as Malaysia. Furthermore, while some research emphasizes the importance of awareness and perception in tax compliance, there has been little investigation into how knowledge, socioeconomic, and institutional factors interact to influence compliance behaviors among various tourism demographics. This study aims to fill this gap by providing a comprehensive analysis of the specific determinants of tourism tax compliance in Malaysia, thereby contributing to the broader discourse on effective tax administration in the tourism sector.

Factors that Influence Compliance Tourism Tax in Malaysia

An attitude of Compliance Behaviour

When describing tax compliance behaviour, attitude is a key factor. Compliance behaviour is influenced by positive or negative opinions toward the implementation of the tax system. The likelihood of a penalty and the taxpayer’s opinion of the taxing system determine whether they are positive or negative (Bidin et al., 2015). According to Bidin et al. (2015), a taxpayer’s experience, expertise, trust, and value all affect how they behave when it comes to filing their taxes. In order to promote tax compliance, Silver (1995) suggested encouraging a positive attitude among taxpayers toward the taxation system. It is essential to have an effective tax administration to increase the government’s revenue and foster economic growth and stability. Consequently, compliance behaviour should be centred on accomplishing successful and efficient tax administration. The components of Malaysia’s federal government revenue from 2019 to 2021 are depicted in Table 2.1.

Table 2.1: The Component of Malaysia Federal Government Revenue 2019 – 2021

Source: The Ministry of Finance 2021

Perception of Tax Fairness

Fairness and trust account for why the majority of people follow tax laws and why some people are motivated to commit tax fraud. In order to achieve voluntary compliance, Braithwaite (2009) emphasised the importance of trust and collaboration between taxpayers and tax authorities. According to research by Damayanti et al. (2015), the degree of taxpayer confidence in government spending determines how much of an impact views of tax fairness have on voluntary compliance.

The perception of the taxpayer is crucial to the sustainability of the agreement between the taxpayer and the government. Taxpayers are more likely to follow tax laws if taxes and government services are fair, which has a beneficial impact on compliance. As a result, the perception of taxation’s fairness among taxpayers influences their decision to disobey, which in turn determines how the taxpayer feels about the government. Numerous direct taxation studies, such the one by Gberegbe et al. (2015), have shown a significant relationship between tax compliance and one’s perception of tax justice. Taxpayers will compare their presents to those of their friends because they are highly sensitive to how the government distributes its funds. Additionally, they will keep an eye on the nation’s spending to see if it benefits the populace.

Subjective Norms

Subjective norms, societal pressure, and influences from family, friends, and leaders. If those around the taxpayer exhibit favourable attitudes regarding tax compliance, thus endorsing it as a subjective norm, the taxpayer will pay taxes. Conversely, they will avoid paying taxes if those around them disapprove of compliance as their subjective norm (Damayanti et al., 2015). Several empirical studies have demonstrated that subjective norms play an important role in explaining compliance intentions.

Publicity

Publicity enhances awareness of the RMCD’s tax education and enforcement programmes in Malaysia. It requires the disclosure of tax information to the public. The RMCD distributed information about newly adopted tax policies via electronic and print media through press conferences and news releases. The RMCD continues to educate the public about taxes, tax awareness, and tax expertise.

Publicity refers to the extent to which an individual believes that their behaviour will be known by others or made public (De Clercq, 2023). It is a perception of the visibility and exposure of one’s actions to others. This is because individuals may modify their activities based on the anticipated social repercussions or reactions from other people. The amount of attention that is paid to a certain behaviour can have an effect on a person’s ability to make decisions and their level of openness to participating in particular activities. The level of publicity associated with a behaviour can impact an individual’s decision-making and their willingness to engage in certain actions.

Publicity in newspapers often includes warnings of tax return filing dates, discussion of company censuses, and non-compliance litigation. Tax information was also made available on the RMCD’s official website, which supplied the public with basic taxation information and a schedule of the agency’s numerous services. Although all the media coverage, communications among tax operators also need information accuracy. It is also important so that the publicity given will be more positively accepted. If those around the taxpayer exhibit favourable attitudes regarding tax compliance, thus endorsing it as a subjective norm, the taxpayer will pay taxes (De Clercq, 2023 & Edward, 2022).

Perceived Behavioural Control

Perceived behavioural control in taxation refers to the extent to which a taxpayer has control over exhibiting a specific activity, such as declaring a lower income, deducting expenses that are not income, and other tax non-compliance behaviour (Bobek & Hatfield, 2003). It is also crucial to note that taxpayers’ experience influences their intention to comply. Thus, as demonstrated by experience, obedience ability will determine intentions and compliance behaviour.

Tax Knowledge

According to Cechovsky (2018), who focuses on fundamental tax knowledge, there is a significant correlation between tax knowledge and tax compliance. A lack of information is related to negative tax attitudes, and a greater comprehension of tax regulations will increase tax compliance behaviour. Understanding of tax compliance difficulties will increase as tax expertise increases (Sanusi et al., 2021). Those with greater tax expertise are more concerned about the consequences of non-compliance.

The primary goals of tax education are to eliminate barriers between tax authorities and citizens, increase public knowledge, and combat tax illiteracy. Savitri (2015) argued that a more comprehensive understanding of taxation would enhance tax compliance behaviour. Therefore, to boost tax collection, it is essential to raise taxpayers’ tax awareness so they will fulfil their tax duties. With proper knowledge, taxpayers may comprehend the tax system and policies in greater depth. With a good education, people are more likely to fulfil their obligations. According to a study by Kamil (2012), taxpayers’ on-time tax payments may be influenced by their tax expertise and public awareness. The results demonstrated a significant positive correlation between tax awareness, tax knowledge, tax authority services, and tax compliance behaviour.

The Proposed Conceptual Framework for Factors Influence Compliance of Tourism Tax in Malaysia

A crucial social psychology theory that aims to explain human behaviour is the Theory of Planned Behaviour (TPB). This idea comes from Ajzen (1991). In accordance with this theory, a community’s behaviour is influenced by distinct elements that have definite causes and develop in a predefined way (Mutai, 2011). However, an individual’s motive for engaging in a particular behaviour determines their capacity to do so. Three factors—attitude toward the behaviour, subjective norms, and perceived behavioural control—affect how that behaviour is intended (Tamer et al., 2011). Additionally, behavioural views, normative beliefs, and control beliefs have an impact on the aforementioned variables (Ajzen, 1991).

As seen in Figure 3.1 of the TPB, this study thus presents a framework model of compliance behaviour. The function of behavioural intent as a mediator between independent variables and compliance behaviour is highlighted by this hypothesis. Intentional behaviour can be affected by the behavioural components (attitude, social norms, and perceived behavioural control). The study thus examines the contributions of the new factors of publicity and tax knowledge as well as the perception of tax fairness in predicting compliance with the tourism tax. Figure 3.1 depicts the research structure. In addition, it shows the position and relationship of the variables in this study.

Figure 3.1: Schematic Diagram of the Conceptual Framework.

The perception of the fairness of the tourism tax is the model’s first independent variable. One key factor influencing taxpayer attitudes and behaviour is their view of tax fairness. Subjective norms make up the second component, and perceived behavioural control, the third, deals with the internal and external forces that shape behaviour. Tax knowledge typically serves as the internal factor for behavioural control while publicity serves as the external factor. The sense of tax fairness (a subcomponent of attitude), publicity (a subcomponent of subjective norms), and tax literacy are all examined in this study (part of the perceived behavioural control element). The impact of each variable on tourist tax compliance behaviour is assessed.

The quantitative method will be use to collect and analyse data for this study. The quantitative method works well because it needs a large sample size and different levels of research. The study utilise primary data collect via a questionnaire to a study’s population comprises tourism tax operators, with 400 questionnaires will be distribute to all tax operators. Tax operators are the management team consisting of directors, managers, and even tax consultants. Tax operators are directly involved in administrating, collecting, and enforcing tax regulations. They play a crucial role in implementing tax policies and interacting with taxpayers. Choosing tax operators as a target population provides a focused lens for studying taxation.

RECOMMENDATION, LIMITATION AND CONCLUSION

Compliance with tourism taxes is crucial for sustainable tourism development and revenue generation. By understanding the factors that affect compliance, policymakers and stakeholders can devise effective strategies to promote tax compliance in the tourism industry. Tourism plays a significant role in Malaysia’s economy, contributing to employment, foreign exchange earnings, and economic growth. To support the sustainable development of the tourism industry, the Malaysian government has implemented tourism taxes aimed at generating revenue for tourism-related infrastructure and promotional activities. However, ensuring compliance with these taxes poses challenges. Clear and transparent tax regulations, efficient tax collection systems, and effective enforcement mechanisms contribute to higher compliance rates.

Many studies have been done on how taxpayers act and whether they follow the rules, but most of the results are unclear or contradictory. As a result, more of these kinds of studies need to be done until a complete model of tax compliance is made from the information they gather. So, the point of this study is to add a little bit—hopefully usefully—to the large body of research that has already been done. Many experts agree that tax compliance or noncompliance is a complicated issue that requires careful consideration and decision-making. There is no doubt that legal or formal consequences affect how tax-abiding people act, but most non-economic tax compliance models don’t look at other equally important factors.

Even though much research on tax compliance behaviour is now available, more studies have yet to provide the precise information tax authorities would find helpful in real-world situations. Consequently, there is an ongoing need to make incremental contributions to the body of knowledge, with a new emphasis on a combination of non-economic and economic issues. By attempting to explain tourism tax operators’ tax compliance behaviour, the research model used in this study has also opened up several avenues for future investigation. The replication of previous research adds valuable information to the body of knowledge. According to Hessing et al., finding the same thing repeatedly is “the most convincing evidence that a variable plays a key role in affecting taxpayers’ decisions to file taxes; otherwise, we cannot be sure if the findings reflect the state of nature or simply an artefact of the research method used” (1988, p. 534). Given this, it would be beneficial to repeat the study using different research methods in the future and add it to what is known about tax compliance (McKerchar, 2010).

One of the most common criticisms levelled against survey research is the possibility of nonresponse bias, which occurs in most surveys. Nonresponse bias affects potential responses from recipients who have yet to complete and return the survey instrument, which can only be calculated. All feasible efforts will be made to minimise some of the restrictions mentioned above to improve the generalisability of the statistical findings. Furthermore, most constraints mentioned earlier cannot be avoided and are present in most comparable research designs. However, as long as caution is used when extrapolating the findings to different contexts, the limitations do not lessen the significance of the findings or the contributions made by the current research.

To summarise, additional research is still required to validate this investigation’s results and ascertain a workable strategy for incorporating them into policy instruments. Despite abundant research, it still needs to be easier to comprehend tax compliance behaviour. Even though there is a lot of writing on the subject, tax authorities, policymakers, and researchers are still looking into the global agenda of taxpayer compliance behaviour. McKerchar (2003), on the other hand, says that we can only fully understand how complicated tax compliance behaviour is by looking at it from all angles and using a variety of methods. Because of this, the current study used ideas and methods that have worked well in behavioural research but aren’t often used in tax compliance research. So, the researcher believes that this study will be added something useful by giving more details about the things that affect people’s plans to behave and their actions when they are required to pay taxes.

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