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Factors Influencing Tax Awareness among E-commerce Small and MediumSized Enterprises (SMEs) in Malaysia
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
Factors Influencing Tax Awareness among E-commerce Small
and Medium-Sized Enterprises (SMEs) in Malaysia
1
Nadiah Abd Hamid, 2Nurul Fashrina Roselan, 3Tengku Fairuz Tengku Embong,
4
Nor Hasnah Mad Saheh, 5Nurshamimi Sabli, 6Soliha Sanusi,
7
Zarinah Abdul Rasit, 8*Norfadzilah Rashid
6
1
Faculty of Accountancy, University Technology MARA, Selangor, Malaysia.
2
Faculty of Accountancy, University Technology MARA, Selangor, Malaysia.
3
Faculty of Accountancy, University Technology MARA, Selangor, Malaysia.
4
Faculty of Accountancy, University Technology MARA, Selangor, Malaysia.
5
Faculty of Accountancy, University Technology MARA, Selangor, Malaysia.
School of Management, Universiti Sains Malaysia, Accounting Research Institute,
University Technology MARA, Selangor, Malaysia.
7
8*
Faculty of Accountancy, University Technology MARA, Selangor, Malaysia.
Faculty of Economics & Management Science, University Sultan Zainal Abidin,
Terengganu, Malaysia.
8*
Corresponding Author, E-mail: nikmfadzilah@unisza.edu.my
Received: 08 October 2019 Accepted: 11 November 2019
ABSTRACT:
The purpose of this paper is to examine factors influencing tax awareness among e-commerce
SMEs in Malaysia. In order to collect the data, questionnaires were used and distributed among
e-commerce SMEs throughout Malaysia. The data were analysed by using Structural Equation
Modelling (SEM). The results revealed that there are relationships between tax knowledge and
attitude with tax awareness. The result indicates that higher tax knowledge and better attitude
will increase the understanding of tax system and laws. While, trust in government and tax
system has negative relationship with tax awareness. The result of this study will assist the
government, particularly tax authorities, in finding solutions to overcome tax evasion among
SMEs involved with e-commerce.
Keywords: Tax Awareness, E-commerce, Tax System, Small and Medium-sized Enterprises
(SMEs).
exports to 23% from the current 37% and
17.8% respectively by 2020, SMEs in
Malaysia should take advantage of the Digital
Free Trade Zone (DFTZ) by using
e-commerce in their business [9]. Currently,
there are only 10% of SMEs in Malaysia
estimated to be involved in e-commerce
(SME Association of Malaysia, 2016).
E-commerce adoption among SMEs is
INTRODUCTION
The emergence of electronic commerce
(e-commerce) for business transactions is a
new revolution to all businesses around the
world, including Malaysia. As Malaysia aims
to increase Small and Medium-sized
Enterprises’s (SMEs) gross domestic product
(GDP) contribution to 41% and its share of
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
expected to grow from 23% in 2016 to 50%
by 2020 due to the increasing numbers of
current online business.
The industry is also expected to grow 11%
per annum by 2020. It accounts for 6.4% of
gross domestic product. SME Corp Malaysia
through the Go Global Malaysia programme
will ensure a strong support for SMEs in
Malaysia. The Go Global Malaysia
programme is more comprehensive since it is
a total end-to-end package for SMEs. The
programme will help them in worldwide
business [9]. By using e-commerce, SMEs are
assumed to gain significantly on market
access since internet offers equal access to
both SMEs and large corporations [16]. The
equal access may help SMEs to compete
closely with large firms. [20] highlighted that
many companies have acquired benefits
through e-commerce adoption in their firms.
These benefits are not only comprehended in
large organizations but also in SMEs.
Some benefits of adopting e-commerce
are cost reduction, expanded target market,
improved business processes and operational
efficiencies, and greater competitive
advantage [4,37,47]. Additionally, SMEs can
enjoy the unique opportunity to engage
worldwide
companies
by
adopting
e-commerce business [36]. E-commerce is
not limited to websites since the companies
may use social media such as Facebook and
Instagram as a platform for marketing. It
makes the business more easily approached
by customers. Furthermore, it helps SMEs
which have limited resources in marketing to
offer both sellers and buyers with more
information. It makes the market become
more transparent and more international [48].
In addition, ease of payment through online
pay should also be enhanced by linking
payment gateways on their websites. As a
result, adoption of e-commerce by SMEs may
improve their business sales and increase
their income.
However, adopting e-commerce is not an
easy job as technology and business needs to
continuously update. [4,6] argued that the
cost of acquiring e-commerce infrastructure
in developing countries are usually high for
many SMEs. In addition, the use of ICT for
many SMEs in suburban areas is still low
because of poor ICT skills possessed by SME
owners and employees. It prevents them from
adopting e-commerce in their business (SME
Association of Malaysia, 2016). Thus, in
order to exploit this new digital business
opportunities, investments and skills to
manage ICT functions are required.
Tax is an important source of income for
the government to finance its development
projects. It will consequently benefit society
as a whole. A higher level of tax
non-compliance will bring a major revenue
loss to the government and distort the
economic growth of the country [7]. In
Malaysia, the Royal Malaysian Customs
Department (RMCD) and IRBM are expected
to lose billions of ringgit as no tax paid by the
e-commerce business owner [51]. These tax
authorities not only have their eye on the big
multi-national corporations in digital
businesses but are also considering ways to
tax individuals or SMEs engaged in digital
online businesses. Nevertheless, the rapid
growth of e-commerce nowadays has
completely created various challenges. One
prominent issue among e-commerce
practitioners is that they can simply escape
taxation because they conduct businesses
online or over the phone. They thought that
the tax authorities will not be able to detect
their business income [45].
Due to the above problem, the purpose of
the study is to identify the factors that affect
tax awareness among e-commerce companies
particularly SMEs in Malaysia. Specifically,
the objectives of the study are to determine
the relationship between three behavioural
factors which are tax knowledge, attitude, and
trust in government and tax system towards
tax compliance among e-commerce SMEs in
Malaysia. By identifying the factors that
influence tax awareness, a way or solution
could be found to encourage taxpayers to do
voluntary compliance with the tax laws and
regulation [41]. In addition, it will help policy
makers to understand the important segment
of tax knowledge and complexity of the tax
system. An appropriate improvement can be
made to increase compliance in the future.
The rest of the paper is organized as
follows. Section 2 includes a discussion on
literature review regarding e-commerce
SMEs and e-commerce taxation. Section 3
includes the research framework and
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
hypotheses development of the study.
Meanwhile, section 4 gives insights on the
research methodology. In the later section
which is section 5, empirical results are
revealed together with the discussions. Last
but not least, section 6 provides the
conclusion of the study.
Multimedia and awareness programmes
handle by both RMCD and IRMB may help
boasting tax awareness among the people.
RESEARCH FRAMEWORK AND
HYPOTHESES DEVELOPMENT
Figure 1 presents the research framework
that attempts to explain the relationship
between the four independent variables which
are tax knowledge, attitude, and trust in
government and tax system towards tax
awareness.
LITERATURE REVIEW
SMEs and E-commerce in Malaysia
In Malaysia, SMEs depend on
government incentives to provide adequate
infrastructure for online business transactions
[28]. In order to promote the growth of
Information and Communication Technology
(ICT), an agency related to e-commerce
development is established by Malaysian
government with the support of several
agencies such as Malaysian Communications
and Multimedia Commission (MCMC) and
Multimedia
Development
Corporation
(MDEC) [4]. Malaysian government efforts
via MCMC by providing mobility, better
internet, logistics, and security will be a
significant element in boosting the local
e-commerce development. This is in line with
a study by [16] that highlighted SME location
as one of the crucial factors for them to adopt
e-commerce. It is because SMEs need to be in
the area with good public transportation
services and efficient delivery methods. Thus,
[33] commented that the development of
e-commerce in Malaysia will turn to more
encouraging in the future.
Figure 1: Research Framework
Tax knowledge is an important element
to achieve high awareness on tax system [22].
This is because the taxpayer’s ability to
understand the tax system depends on his/her
knowledge on the tax system and law. For
instance, the Self-Assessment System (SAS)
requires taxpayers to be accountable to
declare and compute their own tax. In
addition, it requires taxpayers to have
additional record-keeping, advanced tax
estimates, and monthly advanced tax
payments. High knowledge in understanding
of tax law will certainly help taxpayers to
compute the tax when using SAS [24]. Due to
that, [38] mentioned that understanding tax
payers’ knowledge is a core problem for any
government and tax authority especially in a
self‐ assessment system environment.
Interview’s result from a study by [40]
identified that the taxpayers seemed to lack
knowledge on technical aspects of the income
tax system. Thus, tax knowledge is an
essential factor as it may affect the
understanding of taxpayers. Education is very
important in assisting the taxpayers to
voluntarily comply with taxation [1 3 ].
Knowledge about tax law or regulation’ is
vital to have in order to create positive
attitude among taxpayers of SME especially
in SAS regime. It may reduce the inclination
to evade taxes [12,15,39].
Tax Awareness
Taxes are a major source of government
revenue which is used to fund expenditures
and development programs such as provision
of infrastructure like roads, stable power
supply and stable water supply. Tax is a
compulsory contribution to state revenue,
levied by the government on workers' income
and business profits or added to the cost of
some goods, services, and transactions [31].
Study by [29] indicated that tax revenues
allocated for welfare purposes to reduce
extreme poverty. As e-commerce is rapidly
growing around the world, tax compliance
challenge is becoming more complex.
Awareness on the obligation of taxpayers to
pay tax to government is important to
improve tax compliance in the future [17].
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
Tax knowledge can be self-learnt,
through formal education, or informal ones
[18]. Unfortunately, acquiring tax knowledge
is a time consuming process [24]. Even
though the result obtained by [50] indicated
that an increase in tax knowledge did not have
a significant impact on perception of fairness
and tax compliance attitudes, a number of
studies discovered that there is a positive
influence of tax knowledge on tax compliance
behavior [5,25,42]. Hence, this led to the
following hypothesis:
H1:
Tax
knowledge
positively
influences the tax awareness among
e-commerce SMEs in Malaysia.
Attitude is defined as a function of
behavioural belief or significant information
[29]. It is a perceived possibility that
performing certain behavior will subject to
certain implications, weighted by the extent to
which these consequences are valued.
Another study by [52] defined that ethical
behaviour as an act influenced by moral
principles. It includes honesty, fairness,
equality, dignity, diversity and right of the
individual. Rationally, taxpayers always want
to maximize their income and minimize their
expenditure.
Taxpayers would likely under report
their income purposely to minimize their tax
liability. Thus, enjoying tax savings if they
are not detected by the tax authorities [34].
Meanwhile, the tax authority’s main objective
is to improve tax compliance and maximize
revenue collection [10]. [49] stated that
IRBM has the responsibility of maximizing
the collection of taxes for the benefit of the
country. As a result, there is conflict between
government’s interests to raise tax revenue
and the citizen’s interest to minimize tax
payment.
Taxpayers’ awareness is closely
associated with their ethical values [52]. [19]
suggested that tax authorities focusing on
individual psychological variables, such as
moral beliefs and attitudes as they cause
non-economic influences on tax awareness.
Moreover, [35] argued that ethics is a strong
tool and opportunity for the realization
towards tax awareness. A person with good
ethics such as feeling guilty and knowing
what is right and wrong may willing to pay
taxes without any enforcement. Several
researchers have identified factors that shape
the individuals’ tax morale. Their findings
imply that social norms and attitudes are the
two most critical factors that influence
individual
taxpayer’s
willingness
to
voluntarily comply with tax regulations.
Perceptions of tax fairness and attitudes
towards tax may be more influential on tax
compliance behavior in Malaysia [14]. Based
on this, it is hypothesized that:
H2: Taxpayers’ attitude positively
influences the level of tax awareness
among
e-commerce
companies
in
Malaysia.
[53] stated that e-commerce usually
involves borderless transactions. It is
sometimes confusing on the tax jurisdiction to
be applied. This might raise questions on the
principle destination of e-commerce as to be
more economically efficient. [26] mentioned
that tax laws are not always clear. It is further
highlighted by [46] that although legality can
assert differences between evasion and
avoidance, in practice the line is
indistinguishable. It is either because the law
is clear but not known by the taxpayers or due
to the tax administration’s ignorance.
The important concept of fairness,
efficiency, simplicity and neutrality of
income tax systems have been recognized by
most governments around the world. Tax
awareness blooms when there are strong
institution. For instance, governments should
aim at building strong institutions such as tax
authorities, as isomorphism has been found to
improve tax compliance [30]. Simplification
on tax law and having clearer procedures may
encourage awareness [21,24]. Based on a
survey done to 150 Small Medium Enterprise,
[7] found that higher tax rates and complexity
of filing procedures were the most serious
factors causing non-compliance. Prior studies
found that there is a positive significant
relationship between complexity and
non-compliance [34,39].
Equity theory suggests that individuals
are more likely to comply with rules if they
recognise the system that determines those
rules to be fair. Study by [7,40] noted that the
perception of public regarding fairness of tax
system and equitable is essential if the success
of system depends on the significant degree
of voluntary compliances. When the
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
individual perceived inequities, they will alter
their participation to the exchange until equity
is reinstated [8]. The perceived use of the
money collected by the government affects
tax compliance behaviour and taxpayer’s
attitude towards tax authority. If the
government is wisely spent the tax collection,
it is likely that tax awareness will increase.
[32] found that taxpayer’s decision that is
well-informed by perceptions. Awareness, for
instance, can be enhanced when the taxpayers
perceive the government’s process in
determining how tax revenues are spent as
effective. Based on this, the last hypothesis
derived is as follows:
H3: Trust in Government and tax
system positively influences the level of
awareness among e-commerce companies
in Malaysia.
e-commerce SMEs taxpayers in Malaysia
have moderate tax knowledge, tax awareness,
attitude, and trust on government and tax
system (mean score=2, standard deviation
insignificant). The mean score of tax
knowledge indicated that e-commerce SMEs
companies have understood the tax system in
some conditions such as when to furnish
CP204, their responsibility to keep records or
documents and to submit tax returns and tax
rates even though they still have some
difficulties to do tax returns.
The e-commerce taxpayers are also
moderately aware of the tax system. They
understand their obligation to report and
calculate their own income tax liability, to
inform and declare actual income received to
tax authorities. Meanwhile, the attitude factor
was evaluated in terms of negative attitudes
such as tax evasions, claims for more
deduction than entitled to, paying less tax if
not penalised. Positive attitude like paying
taxes voluntarily without force also a part of
the items being asked.
Trust in the government and tax system
also one of the factors that influenced the
level of tax awareness among e-commerce
SMEs in Malaysia. Most of the respondent
moderately trusted the government and tax
system.
RESEARCH METHODOLOGY
This study used the questionnaire which
is the most suitable method for data collection
since the current study wants to identify tax
awareness among e-commerce taxpayers in
Malaysia. Questionnaires were distributed to
300 e-commerce SMEs randomly selected
around Malaysia, registered with IRBM as
taxpayers. The questionnaire consisted of five
parts. First part of the questionnaire is
specifically designed to collect demographic
information of the respondents, such as age,
gender, education level and job position,
working experience as well as their
experience as tax payer.
Meanwhile, part two until part five
consisted of forty-three (43) statements
designed to evaluate tax knowledge, attitude,
and trust in government and tax system of
taxpayers towards tax awareness. A
five-point Likert scale (from 1 strong
agreement to 5 strong disagreement) was used
to indicate agreement or disagreement of the
subject with each statement. The Statistical
Package for Social Sciences (SPSS) version
20.1 and R Software for SEM were employed
in conducting the statistical analyses.
EMPIRICAL
DISCUSSION
RESULTS
Correlation Analysis
Pearson correlation analysis was carried
out to investigate the multicollinearity
problem among independent variables. Table
2 shows the results for Pearson correlation on
independent variables. The two variables are
considered highly correlated to each other and
redundantly explain the dependent variable
which causes a multicollinearity problem if
the value of coefficient is 0.8 or 0.9 and above
[13]. As the result shows that the figure is
below than 0.8, therefore it suits to proceed
with the next analysis.
Table 1: Correlation Test among
Continuous Independent Variable, N=111
AND
The results from the estimations of 111
observations by using R software shows at
Table 2.
Descriptive Analysis
The descriptive analysis of
independent
variables
revealed
the
that
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
covariance of factors. The important
information that can be obtain from the
diagram is, it can be seen there are positive
relationships between tax awareness and tax
knowledge (0.677) and tax awareness and
attitude (0.086). While there is negative
relationship between tax awareness and trust
in government and tax system (-0.055).
There are several methods to test fit the
model with 458 degree of freedom. As can be
seen from the Root mean square of
approximation (RMSE), the value is greater
than 0.05 which is 0.127 with a 90%
confidence interval from 0.119 to 0.135. The
P-value for the model is less than 0.05 which
is significant. Hence, the model is close fit.
Table 2: R Lavaan Package Analysis
Number of observations
Estimator
Minimum Function Test Statistic
Degrees of freedom
P-value (Chi-square)
Root Mean Square Error of
Approximation:
RMSEA
90 Percent Confidence Interval
P-value RMSEA <= 0.05
111
ML
1276.274
458
0
Value
0.127
0.119 to
0.135
0.000
From the path diagram at Figure 1, it
shows the parameter estimation from
Figure 2: Path diagram of structural equation model used to fit the tax awareness data
The positive relationship illustrates that responsibility to keep records are
e-commerce SMEs in Malaysia with higher significantly correlated with tax compliance
tax knowledge have the potential to be more behavior. Previous research has discovered
aware on taxation, thus H1 hypothesis is that tax knowledge has a very close
supported. This result also suggested that relationship with taxpayers’ ability to
knowledge on how taxable income is understand the tax law and regulations, as
computed, charge, tax rate, time to submit tax well as their ability to comply [44].
A question that has been raised by
return, when to furnish estimation of taxable
(CP204), due of tax payment and previous researchers, [44,43,11] is whether
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Int. J. Manag. Bus. Res., 9 (4), 237-246, December 2019
enhancement in tax knowledge will increase
tax awareness. [11,27] suggested that lack of
fiscal knowledge correlates with negative
attitudes towards taxation. Therefore, tax
behavior can be improved by having better
understanding in tax laws. This result is in
line with previous study by [27] that low tax
knowledge correlates with negative attitudes
towards taxation. Attitudes can be improved
through better tax knowledge [11]. Thus, this
will in turn increase compliance and reduce
inclination to evade taxes. The level of
education received by taxpayers is an
important factor that contributes to the
awareness about taxation especially regarding
the laws and regulations of taxation. Attitude
also play an important role in improving the
level of awareness among taxpayers. It can be
seen from the path diagram result and
therefore Hypothesis 2 is supported.
Lastly, the result showed that there is
negative relationship between trust in
government and tax system. Based on the
result, it showed that e-commerce SMEs in
Malaysia with higher trust on government and
tax system have the potential to be less aware
on taxation. Therefore, H3 hypothesis is not
supported. Prior research by [31] stated that
taxpayers who had more experience in the tax
system will be more co-operative and
compliant with tax law requirements.
Furthermore, not all taxpayers agreed with
the tax system; some may dislike the tax
system and others may have more confidence
in tax system [32]
Equity theory also explained that the
public is more likely to follow the rules if they
recognise the system that determines those
rules to be fair. The study by [35] noted that
the perception of the public regarding fairness
of the tax system and equitable is essential if
the success of the system depends on the
significant degree of voluntary compliances.
Meanwhile in relation related to government
factors, the government must be transparent
and efficiently spend tax money that has been
paid by taxpayers. Taxpayers will become
more sensitive on the government spending.
Prior study by [32] indicated that taxpayers
will have more trust in the government if they
are well-informed on how the money is spent.
CONCLUSION
From the results of the study, it is
discovered that two variables from three
independent variables, which are tax
knowledge and attitude has positive influence
on level of tax awareness. Higher tax
knowledge, and better attitude will result in
high level of tax awareness among
e-commerce SMEs in Malaysia. Therefore,
the result of this study will assist the
government, particularly tax authorities, in
finding a solution to overcome the factor that
will lead to tax evasion, by focusing on
behavioural factors that could increase the
level of tax awareness among the e-commerce
SMEs, [29].
For example, since tax knowledge is
found to be crucial in enhancing tax
awareness among taxpayers, IRBM should
improve the quality of tax education to
taxpayers especially e-commerce SMEs from
now onwards [56]. IRBM must continue with
their efforts to educate taxpayers regarding
their tax affairs and entitlements. Tax
education is important as it may help to
increase taxpayers’ knowledge and awareness
of the tax system, [32]. Furthermore,
appropriate tax education will also increase
their confidence in fulfilling their
responsibilities as taxpayers. For instance, tax
education programs organized by tax
authorities will enhance taxpayers’ ability to
understand the importance of tax on the
country’s economic and social development.
As a result, high knowledge of taxpayers of
the tax system will increase their voluntary
compliance.
ACKNOWLEDGMENT
The authors would like to express their
gratitude to Universiti Teknologi MARA for
granting
LESTARI
grant
ref
no:
600-IRMI/RD5/3/LESTARI
(0165/2017).
Special thanks also goes to the Faculty of
Accountancy and Research Management
Centre (RMC) of Universiti Teknologi
MARA for their trust and continuous support.
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