THE EFFECT ON TAX COMPLIANCE COST OF SMALL AND MEDIUM ENTERPRISES Essay

Introduction

Tax is a compulsory levy, imposed by authorities on ether income, outgo or capital assets for which the taxpayer receives nil specific in return. The chief intent why authorities was enforcing a revenue enhancement is to increase money for public intents. Although the scrutiny of revenue enhancement reform undertaken by most states revealed that the revenue enhancement reform is carried out with the aims of bettering the efficiency, equity, neutrality and administrative simpleness of their revenue enhancement system. Harmonizing to Kasipillai ( 2003 ) , revenue enhancements in Malaysia can be categorized into two viz. direct revenue enhancements and indirect revenue enhancements. Direct revenue enhancements are corporate revenue enhancement, single income revenue enhancement, crude oil revenue enhancement, existent belongings additions revenue enhancement and cast responsibility. While indirect revenue enhancements like import responsibility, excise responsibility, gross revenues revenue enhancement and others. For this undertaking, one of the revenue enhancements is income revenue enhancement will be touched, whereby income revenue enhancement is a amount of money collected from the income of a individual or company by the authorities for the intent of developing a state ‘s economic system. This paper more focal points a portion of income revenue enhancement viz. Self Assessment System ( SAS ) , and the intent is to see the consequence SAS on revenue enhancement conformity cost of Small and Medium Enterprises ( SME ) in Malaysia.

This paper is organized as follows. The undermentioned subdivision will specify and briefly discussed the overview of execution SAS in Malaysia. Section three compactly discussed the constructs and anterior surveies on conformity cost. The following subdivision will be discussed the constructs and the importance of SMEs in Malaysia. Section five will being discussed the issue on SAS and how it brings the impact on conformity cost to SMEs in Malaysia. This paper will stop with the subdivision which makes some brief final remarks.

SELF ASSESSMENT SYSTEM ( SAS )

SAS for revenue enhancement intents is non a new phenomenon. Canada and the United States foremost implemented SAS in the 1910s, followed by Japan in 1947. However, over the last two decennaries, there has been considerable growing in the acceptance rate of SAS by revenue enhancement governments in both developed and developing states. Example, Sri Lanka introduced SAS in 1972, Pakistan in 1979, Bangladesh and Indonesia in 1984, Australia in 1986-1987, New Zealand in 1988, Ireland in 1988, United Kingdom in 1996-1997 and Malaysia 2001-2004 ( Loo et.al 2005 ) . In each of these states, there have been differences in the extent of acceptance SAS since some of them traveling to full acceptance, while others have adopted SAS merely in portion.

Harmonizing to Palil, M. R. ( 2005 ) , in Malaysia, the new systems viz. SAS will be implemented phase by phase and Government would be implementing SAS in phases as follows:

Taxpayers Group

Year of Implementation

Companies

2001

Business, partnerships and co-ops

2003

Salaried persons

2004

Table 1: Phase of execution SAS in Malaysia

SAS is basically an attack whereby taxpayers are required by jurisprudence to find their nonexempt income, calculate their revenue enhancement liability and subject their revenue enhancement returns on bing revenue enhancement Torahs and policy statements issued by the revenue enhancement governments ( Palil, M. R. ( 2005 ) and Kasipillai ( 2000 ) ) . In a simple apprehension, SAS is the mode in which a taxpayer works out and pays his ain income revenue enhancement. It is non a new revenue enhancement but a system whereby the taxpayer is given the duty to calculate his ain liability. The debut of self assessment footing of revenue enhancement would affect a significant displacement of duty to the taxpayers in footings of their conformity duties. SAS relies to a great extent on the rule of voluntary conformity and on taxpayers ( or their advisors ) holding a good apprehension of the revenue enhancement jurisprudence in order for them to run into their duties.

Loo et.al ( 2005 ) , said that the chief aims of the acceptance self assessment system is to simplify the revenue enhancement appraisal system and to promote voluntary conformity. Besides that, by acceptance of SAS, it besides estimated that, this system would better the efficiency and the effectivity of revenue enhancement disposal, cut down revenue enhancement disposal cost and revenue enhancement equivocation and guarantee the seasonableness in revenue enhancement aggregations ( Sarker, T.K. 2003 ) . With the presenting this system, it ‘s average that, the revenue enhancement remunerators needs to transport out the greater duties or necessitate to be more cognizant of their ain revenue enhancement personal businesss. From the positions of revenue enhancement governments, SAS is more cost effectual instead than traditional system and may promote an earlier and timely aggregation of revenue enhancements. While, for revenue enhancement remunerators perspectives, this system allows democratic exercising of revenue enhancement remunerators rights and increase the engagement by the revenue enhancement remunerators since they are calculating themselves the sum of revenue enhancements. Harmonizing to Sandford, C. ( 1994 ) , there are two possible issues that arise as the results of the execution of SAS. The first issue is SAS could effects the addition in the revenue enhancement remunerator ‘s conformity cost and the 2nd issue is increase in revenue enhancement equivocation.

Conformity Cost

Harmonizing to Hijattullah, A.J and Pope, J. ( 2008a ) revenue enhancement conformity means conformity with revenue enhancement coverage demands, viz. that the taxpayer files all needed revenue enhancement returns at the proper clip and that the returns accurately report revenue enhancement liability in conformity with the revenue enhancement Torahs, ordinances and tribunal determinations applicable at the clip the return is filed. While, the conformity costs of revenue enhancement are defined by Sandford, C. , Godwin, M and Hardwick, P. ( 1989 ) as: “ the costs incurred by taxpayers or 3rd parties, notably concerns, in run intoing the demands laid on them by a given revenue enhancement construction ( excepting the payment of the revenue enhancement itself and any deformation costs originating from it ) ” . Conformity cost have been mostly attribute to the revenue enhancement complexness of the revenue enhancement system and these increase the effectual rate of revenue enhancement, thereby cut downing the efficiency and equity of revenue enhancement.

As mentioned by Hijattullah, A.J and Pope, J. ( 2008a ) , for a concern, the conformity costs include the cost of roll uping, remitting and accounting for revenue enhancement on the merchandises or net incomes of the concern, and on the rewards and wages of its employees, together with the cost of geting the cognition to enable this work to be done, including cognition of their legal duties and punishments, and the associated operating expense costs, including costs of hive awaying records as required by the revenue enhancement governments. Conformity costs can be divided to fiscal or non-financial, include: ( a ) direct fiscal costs ( for illustration, the cost of obtaining professional advice from a revenue enhancement agent or other revenue enhancement practician ) , ( B ) chance costs ( for illustration, the cost of disbursement clip following with self assessment duties at the disbursal of running a concern ) and ( three ) non-financial conformity costs, such as emphasis from the uncertainness about whether the right sum of revenue enhancement has been paid.

Conformity costs of revenue enhancement include three major constituents: ( a ) money costs, ( B ) clip costs, and ( degree Celsius ) psychological costs to the taxpayers. The money or fiscal costs refer to an sum spent on revenue enhancement professionals ( i.e. revenue enhancement agents, comptrollers, investing advisors and legal practicians ) and disbursals associating to revenue enhancement ushers, books, communicating and other incidental costs. On the other manus, clip costs are incurred in maintaining records of revenue enhancement information, finishing the revenue enhancement signifier or fixing revenue enhancement inside informations for revenue enhancement professionals, every bit good as clip spent in covering with the revenue enhancement governments. Psychological costs refer to the effects upon a taxpayer holding to cover with his/her revenue enhancement personal businesss, such as the anxiousness of managing complex revenue enhancement affairs.

Sandford, C. , Godwin, M and Hardwick, P. ( 1989 ) has been discussed about the development of earlier research worker on conformity costs in three stages by covering the period between the 1930s and early 1980s. Thereafter, a considerable figure of surveies on conformity cost have been undertaken globally. Despite, the outgrowth of international involvement in revenue enhancement conformity costs surveies, Evans ( 2003 ) pointed out that the first survey in the Asia Pacific part was merely published in Australia in 1990, followed by a series of four conformity costs surveies on major Australian revenue enhancements. Since so, a figure of surveies have been conducted mostly in Australia, and besides in other Asia Pacific states such as New Zealand, Singapore Malaysia, Hong Kong and India. Conclusively, all old surveies have supported that the being of a fixed costs consequence on smaller houses and resulting regressively. The same form applies for a individual type of revenue enhancement and overall concern revenue enhancements.

SMALL AND MEDIUM ENTERPRISES ( SME )

Small and Medium Enterprises ( SMEs ) in Malaysia have played significance map in the economic growing of the state. Over the last decennary, an increasing acknowledgment of the importance of SMEs has been apparent in Malaysia, peculiarly in 2005 through the constitution of the National SME Development Council ( NSDC ) . In 2005, there were about 520,000 SMEs comprised around 99 per cent of all endeavors in Malaysia, contributed about 48 per cent of the entire value-added of concern constitutions and around 65 per cent of entire employment. SMEs contributed the big part of corporate income revenue enhancement to Malayan income revenue enhancement gross ( Hijattullah, A.J and Pope, J. 2008b ) . SMEs is being measured utilizing assorted measuring including the figure of full clip employees, one-year gross revenues turnover, sum of assets or stockholder ‘s financess, paid-up capital, and combinations of these methods.

The Small and Medium Industries Development Corporation ( SMIDEC ) , a primary authorities bureau responsible for the development of SMEs in Malaysia, has defined SMEs as concerns with an one-year gross revenues turnover non transcending RM25 million, and with full-time employees non transcending 150. While, National SME Development Council ( NSDC ) defined SMEs based on two standards, they are figure of employees or one-year gross revenues turnover. The SMEs are farther categorized chiefly into four sectors: fabrication, fabrication related services, services ( including information and communications engineering ) and primary agribusiness. A sum-up for the NSDC definition of SME in footings of those sectors is shown in Table 2.

Sectors

Employees

Annual Employee turnover

Manufacturing

Manufacturing-related services

a‰¤ 150

a‰¤ RM25 million

Servicess

Primary Agribusiness

a‰¤ 50

a‰¤ RM 5 million

Table 2: National Small and Medium Enterprise Definition

Issue ON SAS AND THE EFFECT ON THE TAX COMPLIANCE COST OF SME

The execution of the SAS, the regular amendment of the assorted revenue enhancement Torahs and possibly the increasing complexnesss of the revenue enhancement system may hold had an inauspicious impact on SMEs. Harmonizing to Hanefah, M. , Ariff, M and Kasipillai, J. ( 2001 ) , during the early old ages of SAS, the conformity load and associated costs under the SAS government were expected to increase extensively. Therefore, to see the effects of execution SAS towards Malaysian SMEs on conformity cost, I convey the comparing survey between anterior and post execution SAS in Malaysia by looking for the elements in conformity cost whether the cost is addition or lessening after SAS is being implemented in Malaysia.

Prior acceptance of SAS

Harmonizing to Hijattullah, A.J and Pope, J. ( 2008b ) , in Malaysia there have been two published conformity costs surveies conducted prior to the debut of the self-assessment system. The first survey, conducted by Loh et Al. ( 1997 ) estimated the income revenue enhancement conformity costs of public listed companies in Malaysia. And, the 2nd survey, conducted by Hanefah, M. , Ariff, M and Kasipillai, J. ( 2001 ) , focused on SMEs, but was limited to companies in the northern peninsular of Malaysia. Where, both of the surveies found that, the regressive nature of revenue enhancement conformity costs among smaller companies. A sum-up of the consequences of both surveies is presented in Table 3.

As shown in Table 3, the mean conformity costs of SMEs in absolute values are about one-third of the big companies. Hanefah, M. , Ariff, M and Kasipillai, J. ( 2001 ) , emphasized that the composing of both internal and external costs, as measured by costs per centum, of SMEs were wholly different from big companies.

Large Companya

SME Companyb

Internal Costss

RM19,176 ( 28 )

RM15,493 ( 75 )

External Costss

RM49,660 ( 72 )

RM 5,210 ( 25 )

Extra Costss c

Overall Costss

RM68,836 ( 100 )

RM20,703 ( 100 ) vitamin D

Table 3: Average conformity costs in Malaysia prior to the ego appraisal system

The costs per centum is given in parenthesis.

Beginning:

a 1995 Loh et Al. ( 1997 ) figures ; and

B 1999 Hanefah, Ariff and Kasipillai ( 2001 ) figures.

c Both surveies did non describe their extra or other costs individually.

vitamin D This sum was non equal to overall reported average conformity costs of RM21,964 due to differences in the response figure. Refer footnote 35 of Hanefah, Ariff and Kasipillai ( 2001 ) for inside informations.

Post acceptance of SAS

Hijattullah, A.J and Pope, J. ( 2008b ) , who is done a survey about the effects of the ego appraisals system on the revenue enhancement conformity cost of little and average endeavors in Malaysia. They found that, the mean conformity costs of RM9,295 ( 58 % ) is lower than the mean conformity cost of RM21,964 in the pre-SAS survey. Surprisingly the cost is lower in the context of the SAS environment, perfectly contrast to the presumed outlook. Table 4 presents the comparative findings of the pre-SAS and post-SAS surveies on Malayan SMEs.

Pre-SAS a

Post-SAS B

Tax twelvemonth

1999

2006

Scope

Corporate Income Tax

Corporate Income Tax

Coverage

Northern part of

Peninsular Malaya

Peninsular Malaya

Tax Conformity Cost degree Celsius

Average per Firm

RM21,964

RM9,295

Component of Costss c

Computational

Planing

RM12,960 ( 59 % )

RM7,217 ( 74 % ) vitamin D

RM7,217 ( 74 % ) vitamin D

RM2,474 ( 26 % ) vitamin D

Beginnings of Costss c

Internal

External

RM15,493 ( 75 % ) vitamin E

RM 5,210 ( 25 % ) vitamin E

RM5,509 ( 59 % ) degree Fahrenheit

RM3,786 ( 41 % )

Table 4: Comparative conformity costs of Malaysian little and average endeavors

Beginning ;

a 1999 figures from Hanefah, Ariff and Kasipillai ( 2001 ) .

B 2006 information from Hijattulah and Pope, ( 2008 ) .

c All values are in current twelvemonth monetary values ( The comparing was made at nominal value. If inflationary effects were to be considered, the annual rising prices rate, over the period of 1999 to 2006 was around 2 per cent, except for 3.0 and 3.6 per cent severally in 2005 and 2006 ( Economy Reports 2003-2004, 2004-2005, 2005-2006, 2006-2007 and 2007-2008 issued by the Treasury of Malaysia ) . The per centum is given in parentheses.

vitamin D This sum was non equal to RM9,295 due to differences in the response figure.

vitamin E Refer Table 3, note vitamin D.

f Inclusive of extra costs constituent.

From the consequence of the survey above, it evidently shows that, the statement stated by Sandford, C. ( 1994 ) that the execution of SAS will increase the conformity cost among the revenue enhancement remunerators is non wholly true. Because, after execution SAS in Malaysia, the conformity cost incurred by Malayan SMEs was significantly decreases. This is proved by the findings found in the survey of Hijattullah, A.J and Pope, J. ( 2008b ) . And the writers come out with a few grounds sing the decreasing in the conformity cost incurred by Malayan SMEs. The chief ground that lead to the diminution in conformity cost is may be because SAS has been implemented more than six old ages in Malaysia.

Furthermore, the anterior survey conducted by Hanefah, M. , Ariff, M and Kasipillai, J. ( 2001 ) , related to the revenue enhancement twelvemonth 1999 and the information was collected in 2000. It is of import to foreground that there were two major revenue enhancement alterations announced by Ministry of Finance in 1999, viz. the debut of SAS and the application of a current twelvemonth footing to replace the bing preceding twelvemonth footing. The timing of the old survey itself may hold stimulated the respondents to overstate their conformity costs. However, the addition in the proportion of external work, from 25 % to about 41 % in the station survey conducted by Hijattullah, A.J and Pope, J. ( 2008b ) , provides grounds that revenue enhancement professionals, as expected, now play a important function in the SAS government and straight lead to the decreasing in conformity cost incurred by Malayan SMEs. Additionally, the increasing nature of everyday income revenue enhancement work under the SAS ( from 59 % to 74 % ) , as measured by computational per centum, adds consistence to the current estimation.

Another possible account may associate to the economic clime when the anterior survey was conducted. The major Asiatic fiscal crisis during Hanefah, Ariff and Kasipillai ‘s survey may hold encouraged SMEs to extremely exaggerate their conformity costs. The timing of the current survey is possibly suited given that no major income initial costs or start-up effects were removed as the SAS has been in topographic point for more than six old ages. It is besides possible that this important diminution is due to the success of legion simplification steps taken by the Inland Revenue Board ( IRB ) . The most of import of these are the significant decrease of capital outgo classs for capital allowance intents, the simplification of the concern footing period, the debut of double revenue enhancement rates for SMEs, and allowing 100 % capital allowance for little value assets during the relevant purchased twelvemonth.

In article by Hijattullah, A.J and Pope, J. ( 2008b ) , they besides mentioned about the survey that conducted in Singapore by Ariff, Ismail and Loh ( 1997 ) . That survey found a important lessening of 30 % in the revenue enhancement conformity costs for merely one twelvemonth ( 1994 to 1995 ) after execution SAS. Thus, the research workers strongly believed that the lessening was mostly attributable to the simplification measures taken by the Inland Revenue Authority of Singapore ( IRAS ) . Therefore, it is most likely that the legion attempts taken by the IRB have resulted important benefits for the concern community straight will take to the decreasing in the conformity cost incurred by the companies in each state.

Another 1 that I think which might take to the decreasing in conformity cost incurred by the Malayan SMEs is due to the increasing in the revenue enhancement cognition among the revenue enhancement remunerators. As defined by Loo et.al ( 2009 ) , revenue enhancement cognition refers to a taxpayer ‘s ability to correctly describe his or her nonexempt income, claim alleviation and discounts, and calculate the revenue enhancement liability. Tax cognition is one of the most indispensable parts so that the revenue enhancement remunerators will be enabled to measure their revenue enhancement payable at their ain. Harmonizing to Palil, M.R. ( 2005 ) , revenue enhancement cognition is a major factor in finding the truth of the revenue enhancement return. In peculiar, the survey conducted by Loo et.al ( 2009 ) showed that the deficiency of revenue enhancement cognition did cause legion mistakes in the revenue enhancement returns furnished by those who prepared their ain. These mistakes resulted in unwilled disobedience and indirectly will take to the increasing in conformity cost. In other words, I can reason that taxpayers who holding more revenue enhancement cognition could enable them to exert better revenue enhancement planning and therefore will ensue to diminishing in conformity cost.

CONCLUSION AND SUGGESTION

Based on the treatment above, the determination has shown that the income revenue enhancement conformity cost of SMEs has decreased significantly under the SAS, likely by 50 % to 60 % . As mentioned by Hijattullah, A.J and Pope, J. ( 2008b ) , this tendency partially surprising, the diminution is reasonably sensible taking into consideration the timing of the pre-SAS survey.

The past survey was carried out during the period when some major income revenue enhancement alterations had merely been initiated, and more significantly, during the period when a major fiscal crisis affected the Asiatic part. On the other manus, the station survey was carried out during a period of comparative stableness in the revenue enhancement system. This difference will take to the difference consequence found from the past and station survey.

In footings of cost nature, the computational constituent under the SAS had increased every bit good to 74 % , compared to 59 % in the pre-SAS government. However, the regressive nature of conformity costs upon little concerns remains an of import country in revenue enhancement policy considerations. The IRB ‘s success in simplifying income revenue enhancement jurisprudence should be emphasized. It is expected that the IRB will go on its attempts in presenting farther revenue enhancement simplification steps.

After comparing both past and station survey, I can concluded that, the statements stated by Sandford, C. ( 1994 ) , where the execution of SAS will increase the conformity cost among revenue enhancement remunerators is non wholly true of SMEs context in Malaysia. This is proved by the findings found in the survey of Hijattullah, A.J and Pope, J. ( 2008b ) . Therefore, for SMEs context in Malaysia, the execution of SAS does non give bad impact for Malayan SMEs in term of giving high conformity cost. Hopefully this treatment paper provides some utile penetrations sing the effects of SAS on conformity cost to Malaysian SMEs. However, farther surveies on conformity costs are perchance needed to convert the IRB in this respect. Currently, the IRB does non hold a specific policy on conformity costs of SMEs. Therefore, there is the bigger undertaking of the IRB, to acquire the taxpayers to understand and follow with SAS voluntarily. Further research into other concern taxpayers, with considerable attending towards revenue enhancement conformity costs, is strongly recommended.