International Journal of Academic Research in Accounting, Finance and Management Sciences

Vol. 9, No.2, April 2019, pp. 172–182

E-ISSN: 2225-8329, P-ISSN: 2308-0337
© 2019 HRMARS
www.hrmars.com

To cite this article: Sritharan, N., Salawati, S. (2019). Economic Factors Impact on Individual Taxpayers’ Tax
Compliance Behaviour in Malaysia, International Journal of Academic Research in Accounting, Finance and
Management Sciences 9 (2): 172-182
http://dx.doi.org/10.6007/IJARAFMS/v9-i2/6166 (DOI: 10.6007/IJARAFMS/v9-i2/6166)

Economic Factors Impact on Individual Taxpayers’ Tax Compliance

Behaviour in Malaysia
Nivakan Sritharan1, Sahari Salawati2
1,2
Faculty of Economics and Business, University Malaysia Sarawak, 1E-mail: [email protected]

Abstract
Individual tax payers’ tax compliance is influenced by several factors. One of the major factors, the Economic
factor, is studied in this paper. Readings with similar topics emphasises that there still exists a gap in the
developing countries. Malaysia is a multi-racial country with economic factors to influence on tax
compliance. Some of the factors impacting are: probability of being audited, perception on government
spending, perception on equity and fairness and penalty rates, which are considered to be playing an
important role on individual tax compliance behaviour. The researcher used survey method of research
design and targeted the individual tax payers across Malaysia as population. A sample of 419 respondents
had been taken for this study, using convenient sampling method. Pearson correlation and multiple
regression analysis had been employed to analyse the data. The results of the study disclose that probability
of being audited, perception on government spending, penalty rate and an individual’s personal financial
position are the main important variables that influence individual tax payers’ tax compliance behaviour in
Malaysia. This paper studied economic factor variables, which finally fills the gap existed in the literature and
contributes as a justification for policymakers.
Key words
Tax compliance, tax evasion, individual taxpayers, economic factors, LHDN

Received: 05 Jul 2019 © The Authors 2019

Revised: 29 Jul 2019 Published by Human Resource Management Academic Research Society (www.hrmars.com)
Accepted: 06 Aug 2019 This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may
reproduce, distribute, translate and create derivative works of this article (for both commercial and
Published Online: 09 Aug 2019 non-commercial purposes), subject to full attribution to the original publication and authors. The full
terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction
1.1. Background
By means of ‘Taxation’, governments finance their expenditures. To do so, they impose charges on
the income of citizens and on the profits of corporate entities. It is obligatory that all adult, salaried
employees with certain income of payment that they receive for their work, pay tax to the government as
per the enactment in the constitution of the government. The system of taxation initially originated in the
ancient Egyptian Kingdom. The current structure and the method of taxation has been practiced worldwide
by almost all the countries, ever since it was introduced and practiced in the United States of America
during World War 1, in the year 1862, for funding the war. Most countries have started to adopt the same
policy of taxation for different purposes and needs. In like manner, Malaysia also does the same with its
own regulations.
In Malaysia, the government executes taxation for two courses of development: providing “Economic
benefits”, and “Social benefits”. The Government takes charge to provide economic benefits to the nation,
by collecting the revenue, by allocating fund for the economy, and disbursing the earned income to the
national economy. It may inject back a part of the revenue into the economy; it may launch provisions of

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goods and services to the nation; or it may allocate the revenue to accomplish its objectives, as mentioned
in the budget or any other government official schedules, circulars, documents, etc.
Malaysia set up its “Self-Assessment System” in the year 2004, and ever since the taxpayers have
used it fully. The pre SAS system, Official Assessment System (OAS) and the Post SAS system are different as
SAS system, entirely used by taxpayers. The “Pre-Assessment System” (OAS) is executed manually”, and
whereas self-assessment systems are executed electronically. All the citizens in the country will draw their
own tax payables and receivables (income tax return), and decide whether they are qualified and eligible
for exemptions and reliefs or not.

1.2. Statement of Problem

Dublin (2007) recommends including the self-employed, adults in the study. There was evidence that
shows that business entities get away from paying tax, while the managers of those entities themselves
avoid paying their personal taxes. According to the two researchers, Modugu and Anyaduba (2015),
Changes of government policies might impact the tax compliance behavior. “For example, unlike in the
United Kingdom, in Malaysia the prices of petrol and some other groceries of basic needs, such as sugar,
wheat, flour, rice, cooking oil, etc. are controlled by the government and their prices are steadily on the rise,
in accordance with the global economic government and financial situations”. In the most recent study
made by Chukwadi (2017) on “Taxation”, he suggests to the future researchers as, “More research is
needed on ‘the relation between the taxpayer and the government’, in whom a lack of evidence limits the
analysis of direct policy changes”. A very thorough reading of the literature with similar topics expresses
explicitly that there still exists a gap, relating to the impact of economic factor on the individual taxpayers’
tax compliance behavior.
To support the researched gap that exists, with true examples, top headlines from the Malaysian
newspapers are quoted here as evidence. The recent main news reports, delivered to the local media by
Inland Revenue Board of Malaysia (LHDN), are as follows:
IRB ‘Cheated of billions’(Nokman 2017), 100% penalty from next year for income tax dodgers
(Surendra 2017), Tax dodgers may be put in credit blacklist (Shah 2017), Inland Revenue warns of syndicate
out to cheat tax payers (National 2017), Malaysia Tax Payers’ Responsibilities (Grewal 2019).
The general objective of this study is to examine the determining economic factor towards individual
taxpayers’ tax compliance behavior in Malaysia. The following are the specific research objectives;
 To examine the association between on probability of being audited and individual taxpayer’s tax
compliance behavior.
 To examine the association between perception on government spending and individual
taxpayer’s tax compliance behavior.
 To examine the association between perception on equity and fairness and individual taxpayer’s
tax compliance behavior.
 To examine the association between penalty rate and individual taxpayer’s tax compliance
behavior.
 To examine the association between financial position and individual taxpayer’s tax compliance
behavior.

2. Literature review
2.1. Individual Taxpayers and Tax System in Malaysia
The term “Individual” in taxation denotes a natural person (Inland Revenue Board, 2018). Individual
taxpayers pay their contribution to the government in order to attain the economic equilibrium of the
nation (Ahmed and Kedir 2015). The Malaysian tax paying system had been started to practice prior to
1910, and during the time of early Malay rulers (Kasipillai and Shanmugam 1995). Since then, the tax paying
system has undergone a number of reforms and changes on par with the nation, which has undergone
several colonization in the past. The early settlements of Malaya, which comprised Singapore, Malacca and
Penang Legislative Council, introduced and later introverted a drafted bill imposing an income tax. As the
people of former Malaya were not concerned with the contribution of tax to the government, a different

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funding system came to substitute it in order to meet the government’s expenditures. It was a failure for
the Government to pass the bill again in the year 1922, due to the misconception in the minds of the
people that the revenue would be for the maintenance of the war and not for the development of the
nation. However, during the period of Japanese ruling (1942-1945), taxation had come under restructuring
and been implemented effectively. Later in 1947, during the British ruling, a special officer known as
Heasman, was appointed to deal with Malaysian Tax system. Four years after the establishment of
Malaysian federation, the existing income tax paying system came into being and was made more
comprehensible, after being replaced with a new law “Income Tax Act 1967 (ITA)”.
Like other commonwealth countries, Malaysia also practices its own income tax collection under
‘Official Assessment System’ (OAS), whereby, the assessment of taxpayers as well as the tax payables is
carried out by the tax authority of Malaysia (LHDN). The manual preparation of ‘OAS’, has been
transformed into a new system, called “Self-Assessment System”, by the Prime Minister Hon. Tun Dr.
Mahathir Mohamad in the year 2001, and in the year 2004 for corporate sectors and personnel
respectively. Many developed and developing nations had started to adopt Self-Assessment System even
before Malaysia started to adopt it. For example, the United States of America (1913), Japan (1947), Sri
Lanka (1972), Pakistan (1979), Indonesia (1984), Canada (1985), Commonwealth of Australia (1987), Ireland
(1988) and the United Kingdom (1997). The SAS system offers two-way role, whereby the taxpayers have
the responsibility to perform all the taxation procedures before undergoing assessment by the tax
authority. Since the taxpayer is trusted and given the responsibility, the behavior of every individual
taxpayer determines the level of tax compliance behavior in the country. The Malaysian Self-Assessment
System has its own objectives, which are to collect the exact tax amount under an effective method, to
uphold the trust and integrity of Malaysian taxpayers, and to encourage the voluntary compliance
behavior. The study, conducted right after the introduction of SAS, and measured the perception of
taxpayers towards the Self-Assessment System, shows that the taxpayers find more comforts with the SAS
than with the OAS (Kasipillai 2004).
It is sure that the governments of countries, all around the world, place so much of deliberation on
collecting taxes. However, the governments are going through hard time in collecting the taxes. Most
individual taxpayers hesitate to pay taxes, and so they perform a variety of actions to cut-down their tax
obligations (Ahmed and Kedir 2015). One of the main causes is the taxpayers’ tax non-compliance behavior.
According to McBarnett’s tax determinants behavior model, tax compliance (capitulated, committed and
avoidance) and non-compliance (tax evasion) are the key components of a taxpayer’s behavior (Alabede,
Ariffin and Idris 2011).
‘Tax compliance with the tax law’ means true and honest tax reporting with accurate calculation of
liability, timely filing of return, and timely payment of amount due (Walsh 2012). ‘Non-compliance of tax’ is
a social destruction as it reduces the national revenue, misleads the labor market, and declines the strength
of the state’s stability by encouraging cheat and fraud. It is significant for the tax authorities to comprehend
the motivation of the taxpayers in reducing the non-compliance rate. Tax non-compliance is viewed a
violation of tax laws, and is classified into three main classes, known as crude form, manipulation, and
adulteration (Kasipillai and Shanmugam 1995). Under-reporting the actual income and overstating the
expenditures are crude form of non-compliances. Manipulation of figures in the accounts of the corporate
sectors occurs, where they maintain duplicate or produce forged papers to reduce the payables. Money,
hidden or hoarded outside the country, is one of the examples for alteration, mostly found more among
the corporate sectors than among the individuals.

2.2. Probability of being audited

There exists a positive association between tax audit and tax compliance (Modugu and Anyaduba
2014) as well as tax evasion (Shanmugam 2003). Further, the studies clarify that the probability of, being
audited generate an illusion to the taxpayers, creating fear of being monitored by an authority. Some other
researchers find that higher rates of audits usually increase the compliance or income tax reporting, but it
has not been statistically significant (Evans et al., 2005).

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2.3. Penalty Rate

Taxpayers mostly comply with the tax system because they have enough knowledge to realize the
consequences and penalties, enforced by the authorities, once they violate the law and regulation (Mohani
2001). Therefore, both variables are found to be positive and are correlated with each other, that simply
shows that the taxpayers are in fear of being penalized (Ming et al., 2004; Loo et al., 2010).

2.4. Perception on Equity and Fairness

Consistent with equity theory, fairness of tax system became an influential tool to determine the
voluntary compliance with tax system. If the perception towards the tax system changes, that changes the
compliance behaviour as well (Mohd-Hanefah 1996; Mottiakavandar et al., 2003; Loo, 2006).

2.5. Perception on Government Spending

Very narrowed studies have focused attention on the perception people have towards government
spending. It is a fact that people who pay additional tax to the government always have the tendency to
monitor the government and its expenditures diligently, as to why the money is spent and what the money
is spent for, and how it is depleted, etc. (Mohani, 2001). So far, no empirical evidence has been uncovered
to justify the claim on the government’s spending and tax compliance behavior.

2.6. Individual’s Financial Situation

People regard the financial position of an individual as the determining factor towards Tax
Compliance with the Tax System. An individual is expected to focus his/her attention more on the
expenses, incurred for the fulfillment of basic needs and necessities, such as foods, clothing, shelter, etc.,
and then make the choice on the tax liabilities (Mohani 2001). The people, whose financial position is very
poor, tend to evade tax more than those whose financial position is better. An earlier study, conducted by
Vogel (1974), and Warneryd and Walelrud (1982), claims that an individual’s financial position makes no
impact on tax compliance, and further, the above study expresses its view that the people, regardless of
their financial positions, are alike in complying with tax system. Therefore, the mixed concept from many of
the study results creates an uncertain conclusion regarding financial situation towards tax compliance.

3. Methodology of research

Probability of being audited

Penalty rate

Perception on equity and

fairness Individual Taxpayers’ Tax Compliance
Behavior

Perception on Gov. spending

Individual Financial Position

Figure 1. Conceptual Framework

H1: High probability of being audited is positively correlated with individual taxpayers’ tax compliance
behavior.
H2: Better perception towards government spending is positively correlated with individual taxpayers’
tax compliance behavior.

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H3: Better perception of equity and fairness is positively correlated with individual taxpayers’ tax
compliance behavior.
H4: Higher penalty rate from tax authority is positively correlated with individual taxpayers’ tax
compliance behavior.
H5: Better individual financial position positively correlated with individual taxpayers’ tax compliance
behavior.

3.1. Data Measurement

A survey will be distributed targeting individual salaried taxpayers from public, private sectors and
sole proprietors across Malaysia using convenient sampling method. The population of this study is the
working adult taxpayers across Malaysia. Department of Statistics Malaysia mentions that around 14
Million people are employed in across Malaysia. According to Krejce and Morgan (1970) as well as Cohen
(1969), the sample size is selected based on the table discussed under their studies. If the population is
greater than seventy-five thousand, a sample size of three hundred and eighty-four (384) is reasonable.
A survey questionnaire used to collect data from the population. A questionnaire is a pre-formulated
written set of questions to which respondents record their answers, usually within rather closely defined
alternatives. Survey questionnaires are user friendly and evoke honest response and simple to
administrative (Evans et al., 2005). Since a high response rate is recorded using survey questionnaire in the
previous studies carried out by Loo and Ho (2005) and Junainah (2002) with 42.5% and 65% response rate
respectively encouraged this studied to apply similar method. According to Elffers et al. (1992) self-
reporting by respondents regarding their tax compliance position is the most popular method for tax
evasion studies. The questionnaire will be prepared in English containing four sections. In order to make
ease of the access and completion of surveys, E-survey is used as well. Generally, companies in Malaysia
with large number of employees consist employees with mixed ethnicity and different level of salaries,
which eliminate the bias, irrupts on selecting the low and higher amount taxpayers.
This survey was carried out during March to May 2019 in Malaysia. A total number of 2,400 E-surveys
were sent to several individual taxpayers through Malaysia whose e mail addresses were pulled out from
Staff Directories of every work place’s official websites. Further, 100 printed questionnaires were
distributed to self-employers or sole proprietors in few Cities
The opening section of the questionnaire contained demographic information such as age, gender,
income level, education background, race and some other background information about the respondent’s
tax history and experience. Section B, comprises five different scenario typed questions associated to
compliance behavior with tax system. Gerxhani (2007) and Ching (2013) justify that in order to reduce the
dishonesty of respondents answers, an indirect tax related questions should be adopted in the form of
scenario. Scenario based questions forms conditions where respondents are asked to make decision for
one choice. Scenario based questions also based on Choice of Dilemma Questionnaire (CDQ) developed by
researchers Kogan and Wallach (1964). CDQ are the most suitable method for gaining and produces real
respondent’s position, specially testing the respondents’ risk taking decision. According to Kirchler (2008),
tags the tax compliance behavior economic factor predictors into five such as: probability of being audited,
perception towards government spending, perception of equity and fairness, penalty rate and individual’s
financial position.
Respondents required to answer “Yes/No” for the scenario based question pretending them on the
same situation said in the scenario. Followed by respondents are required to mark the probability (from
low probability to high probability) that the respondent will perform the same action said in the scenario
using 5 points Likert scale. The Likert scale is designed to assess how strongly respondents agree or
disagree with statements on a 5 points scale (Sekaran 2005).
To measure the questions, 40% is allocated for Yes, No questions where Yes=2 score and No=1 score.
The “Yes/No” type question does not require the respondents to spend much time to establish their choice
but then the probability question do require the respondents to spend few moments to derive their
decision. As the Probability questions require the respondents to select their position, it is allocated with
60% where probability 1=5 score and probability 5=1 score. This percentage allocation for the questions
increases the results validity.

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A sample calculation for the measurement of the questions is as follows:

If a respondent answer “Yes” and tick “5” as the probability of being carry out the same action said in
the scenario, he/she will be scored (1*0.4) + (1*0.6) = 1 score that indicate the respondent is highly non-
compliance. If a respondent answer “No” and tick “1” as the probability of being carry out the same action
said in the scenario, he/she will be scored (2*0.4) + (5*0.6) = 3.8 score that indicate the respondent is
highly compliance.

3.2. Data Analysis

3.2.1 Descriptive Statistics
The descriptive analysis represents the characteristics of variables (Piaw, 2013). Ahangar et al.
(2011); Fagbemi et al. (2010); McGee and Gelman (2009) were some of the researchers have previously
applied the similar statistics in their studies.

3.2.2 Validity/ Reliability Test

The reliability of measure specifies the extent to which it is without bias and ensures consistent
measurement across time and across the various items in the instrument. The reliability of measure is an
indication of the stability and consistency (Sekaran 2000).

3.2.3 Correlation and Regression Analysis

The data also tested by using the spearman correlation analysis and multiple regression analysis
using SPSS statistic software. Regression analysis to further determine the compliance behavior against
social factor. The equation is estimated using the multiple regression-based framework.

TAXCOM=β+ β₁PAUDᵢ+ β₂GOVSᵢ+ β₃EQFRᵢ+ β₄PRATᵢ+ β₅FPOSᵢ+ε (1)

Whereas:
TaxCom is refer to Tax Compliance Score, β is refer to population coefficient, PAUD, GOVS, EQFR,
PRAT and FPOS are referring to probability of being audited, Perception on government spending,
perception on equity and fairness, penalty rate and financial position respectively. ε is refer to random
error term.

4. Results and discussions

Programmed Google E-Surveys were sent to respondents whose e mail address was taken from their
particular work place official website under the staff directory. 2,400 E-mails were sent and 100
questionnaires were distributed by hand in Kuching and nearby suburbs in Malaysia. 647 e mails were not
delivered due to incomplete e mail address or non-active or the employee resigned or no more work at
that office. Out of 1,853 successfully delivered e mails 319 responses along with 100 by-hand responses
were received representing 22.6%.
Among the respondents, 237 are Females and 182 are males representing 57% and 43% respectively.
Most of them from Malay community representing 196 (47%) followed by Chinese 84 (20%), Indians
81(19%). 14% representing others who are none of the discussed main three communities in Malaysia.
Four age groups were planned for data collection and which are set up with the age gap of 10 years
in between. The majority respondents are between 31 and 40 years old representing 39% (165
respondents). The lowest respondents age group were 51 and above representing 16% (65 respondents).
Also, 61% (257 respondents) of the respondents are married followed by 31% (142 respondents) singles
and 5% (20 respondents) divorced or separated.
Majority respondents are followers of Islam 54% (225 respondents). In Malaysia, not only Malay
community also Few Indian follow Islam who made the majority among others. Cristian and Hindu
respondents represent 17% each representing 70 respondents and 71 respondents respectively. 10% (42
respondents) are followers of Buddhism and other religious which are not popularly followed in Malaysia
represents 3% (11 respondents).

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297 (71%) respondents hold a good academic qualification (Degree/Professional). Second largest
group hold Master/PhD, 91 respondents (22%), which is higher than Degree qualification. 22 respondents
(5%) reported holding Certificate/Diploma level qualification whereas only 9 respondents (2%) hold
SPM/STPM qualification.
Majority respondents earn RM 5,001 and RM 7,000. The combination of respondents between RM
3,001 and RM7,000 make up 76% (317 respondents). At the same time, the combination of respondents’
income level more than RM 7,001 represents 20% (82 respondents). The lowest group among other
respondents is reported representing less than RM 1,000 were 5% (20 respondents). The tax chargeable
income in Malaysia commence from RM 5,001 and above. Therefore, the classification of income group
helped to track the number of income makers who are eligible for tax payment.
Majority of the respondents 81% (338 respondents) have never attended any tax courses and 70% of
the respondents (292 respondents) have no experience of being audited by LHDN. In the meantime, 19 %
of respondents (81 respondents) stated that they have attended tax courses. Moreover, 30% of the
respondents (127 respondents) stated that they have experience being audited by LHDN.

4.1. Reliability Test

Table 1. Cronbach’s Alpha Reliability Test
Cronbach’s Alpha Cronbach’s Alpha Based on Standardized Items N of Items
.938 .892 5

Reliability test is conducted to make sure the internal consistency and stability of the testing
variables and measure to what extent the variables in the questionnaire are biased (Hong 2005). Table 1
shows the Cronbach’s Alpha score which is 0.938. According to (Eriksen and Fallen 1996) Cronbach Alpha
more than 0.5000 recommends that instruments used in the questionnaire are valid and also high degree
of reliability.
Table 2. Correlation between Economic Factors and Tax Compliance Behaviour
Variables Coefficient Correlation
Probability of being Audited (PAUD) 0.648**
Perception on Gov. Spending (GOVS) 0.667**
Perception on Equity and Fairness (EQFR) 0.002
Penalty Rate (PRAT) 0.304**
Financial Position (FPOS) 0.401**
Tax Compliance (TCOMP) 1
Notes: ** Correlation is significant at the 0.01 level (2-tailed).

4.2. Correlation between Variables

According to Table 2, all variables such as probability of being audited (PAUD), perception on
government spending (GOVS), penalty rate (PRAT), and individual financial position (FPOS) are significantly
correlated with tax compliance (TCOMP) at 1% significant level (p<0.001) except perception on equity and
fairness (EQFR). Perception of equity and fairness is positively correlated but not significant (r= 0.002,
P<0.001). Therefore, probability of being audited, perception on government spending, penalty rate and
financial constraint are significantly correlated with individual tax payer’s tax compliance behavior.

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4.3. Multiple Regression Analysis

Table 3. Correlation between Economic Factors and Tax Compliance Behaviour
Variables Beta Tolerance VIF
(Constant) 0.44
Probability of being Audited .988 .949 1.053
Perception on Gov. Spending 1.006 .974 1.027
Perception on Equity & .970 .991
1.009
Fairness
Penalty Rate .993 .995 1.005
Financial Position 1.009 .963 1.039
Notes: a. Dependent Variable: Tax Compliance.

According to the regression output Table 3, all the variables examined in the study are relevant since
the tolerance value is more than 0.1 and the VIF (Variance Inflation Factor) factors are all below the
benchmark 10. These benchmarks under statistics clarifies that there is no multi-collinearity among
variables examined. Moreover, the P value of 0.0000 reveals that the model is statistically significant.
High probability of being audited has a positive (β=0.988) and significant relationship with tax
compliance behavior. Thus, H1 (High probability of being audited has a positively correlated with tax
compliance behavior) is accepted. According to Allingham and Sandmo (1972), taxpayers highly comply
with tax system if they find the probability of being caught or detect is high. Hence, it was hypothesized
that higher probability of being audited by tax authority (LHDN) is positively correlated with tax compliance
behavior. The hypothesis is accepted since this research output support the relationship. The similar
outcome also found in a study conducted by Slemrod et al. (2001), concludes that probability of being
audited is an important determining factor influencing the tax compliance behavior.
Moreover, perception on government spending result also has a positive (β=1.006) and significant
relationship with tax compliance behavior. Hence, H2 (Better perception on government spending is
positively correlated with tax compliance behavior) is accepted. Higher income taxpayers have a careful
observation towards the government spending to determine how the government utilizing their
contributions. Negative perception of government spending leads to tax non-compliance and vice versa.
Due to the limited empirical evidence found in the previous studies, researchers assume that taxpayers will
have a tendency to avoid tax if they predict or find the government spending does not fruitful. This study
accepts the hypothesis and concludes that better perception taxpayers’ have towards government
spending will encourage them to comply more with tax system.
Further, perception of equity and fairness (β=0.970) and significant relationship with tax compliance
behavior. According to the correlation output Table 2, perception on equity and fairness is still positive but
shows a weak correlation with tax compliance behavior. Therefore, H3 (Better perception of equity and
fairness is positively correlated with tax compliance behavior) is partially accepted. If the taxpayer feels
discrimination or other form of victimization, the possibility to evade the tax is higher (Richardson 2006).
Thus it was hypothesized that equity and fairness will encourage tax compliance with tax system. This
research shows a positive relationship but not significantly correlated with tax compliance behavior. The
previous studies also found mix conclusion regarding the relationship between taxpayers’ perception of
equity and fairness and their compliance behavior. For instance, Jackson and Milliron (1986) and Spicer
(1976) present different arguments by mentioning the relationship as positive and negative respectively.
High penalty rate also shows a positive (β=0.993) and significant relationship with tax compliance
behavior. Therefore, H4 (High penalty rate is positively correlated with taxpayers’ tax compliance behavior)
is accepted. Taxpayers mostly comply with the tax system because they have the knowledge enough to
realize the consequences and penalties imposed by the authorities once they violate the law and regulation
(Mohani, 2001). Therefore, both variables are found positive correlated which simply shows that taxpayers
are fear of being penalized (Ming et al., 2004; Loo et al., 2009). According to Specific deterrence theory, it
emphases on incentives or it points out the profit maximization with minimum cost (Brooks, 2001). A
rational taxpayer calculates the costs and benefits on evading taxes (Walsh, 2012; Olaoye, 2017). If the
benefits outnumber the costs (probability to be penalized for non-compliance) then the taxpayers tend to
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evade the tax. Hence, deterrence based theory proposes that penalties for non-compliance must be
increased since tax penalty and tax compliance forms a positive relationship and vice versa (Olaoye, 2017;
Chukwadi, 2018). In this model, taxpayers were put in a risk facing position due to the likelihoods of being
audited by the tax authority and they were assuming as utility maximizes. According to the model, the level
of tax evasion can be assessed by either the penalty rate or the probability of being caught evading
increased (Yitzhaki, 1974). Further, this theory developed a relationship between the level of legal action
taken place and the level of tax evasion occurs (Bhavish et al., 2017). This model suggests the taxpayers to
comply with the tax laws and it is based on a simple expected utility function.
Finally, individual’s financial position shows a positive (β=1.009) and significant relationship with tax
compliance behavior. As per the results, H5 (Better financial position is positively correlated with individual
taxpayers’ tax compliance behavior) is accepted. Financial obligation, which leads an individual to face
financial problems, will always choose the personal payables first before the tax payables. Mohani (2001),
states that individual taxpayers with financial struggles involve more on evasion intentionally than
individual who could afford to resolve the tax payables. Hence, it was hypothesized that better financial
position has positive correlation with tax compliance behavior and this study accepts the hypothesis. An
earlier study conducted by Vogel (1972), emphasizes that the situation irrupts due to economic status than
an individual personnel condition. An economic status of an individual will directly motivate to think
weather comply with the tax system or not, no matter how the personal condition is. With the introduction
of Self-Assessment System, some taxpayers assume that still they need to access with an advisor regarding
the user friendliness of the system as well as for the computation of their compliance (Sapiei and Abdullah,
2008).

5. Conclusions
Based on the Pearson correlation output, it is clear that probability of being audited, perception on
government spending, penalty rate and financial position were significantly correlated with individual
taxpayers’ tax compliance behavior. However, perception on equity and fairness is not significantly
correlated with individual taxpayers’ tax compliance behavior under the Pearson correlation output but still
results positive relationship with the tax compliance behavior. Further, the above-mentioned variables also
tested through multiple regression analysis output. This study evidence that the examined variables under
the economic factor play an important role on influencing the individual taxpayers’ tax compliance
behavior in Malaysia.
The finding of this study contributes tax compliance literature by fulfilling the existing gap and
clarifies the association between economic factors and individual taxpayers tax compliance behavior in
Malaysia. On the basis of findings, economic factor is the most important factor to be considered in terms
of tax compliance with tax system. Thus, an improvement in individual taxpayers’ economic determinants
will eventually encourage them to comply with the tax system. This study collected data nationwide and
also tested the variables which were recommended by earlier studies. The recent news articles evidence
that Malaysia still experience tax non-compliance and under reporting. Due to the limited resources it is
impossible to carry out enforcement activity for Inland Revenue Board to detect the real reasons behind
non-compliance. Issues related tax evasion or tax non-compliance behavior is the foundation for policy
makers. Therefore, this paper fulfills the need that existed earlier to find the root cause why non-
compliance is still prevails. Hence, this study identifies the most important factor, economic factor,
determinants that encourage and discourage taxpayers decisions towards tax compliance with the tax
system in Malaysia. This research emphasizes the strict application of higher penalty rate that leads the tax
payers to comply with tax system. Further, this finding support the deterrence based theory and Allingham
and Sandmo model which highlights that probability of being audited and penalty rate will enhance the tax
compliance pattern. The collected findings will assist the government, specially the tax authority, during
policy designing. At the end, this study has made a significant contribution to the field of taxation and
specially tax compliance focusing individuals.

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