A study of the factors affecting the recurrent compliance costs of the goods and services tax (GST) of business taxpayers in Malaysia

The Goods and Services Tax (GST) was implemented in Malaysia on the 1 April 2015, yet to date the government failed to publish a GST tax impact statement.  The lack of explicit recognition of the compliance cost burden on business taxpayers, especially the Small and Medium Enterprises (SMEs) has affected them adversely. International studies have shown tax compliance costs is regressive, significant, and increasing day by day. In Malaysia, SMEs make up most of the businesses and contribute significantly to the GDP, employment, and exports. Therefore, complying with a GST puts a constraint on the development and growth of SMEs.

Consequently, the primary objective of this study is to empirically estimate the Gross GST compliance costs of businesses registered for GST from 1 April 2015 to 31 March 2016.  The author of this thesis is not aware of any academic study in Malaysia that has comprehensively estimated the GST compliance cost. It is the first independent survey conducted since the introduction of GST in Malaysia. Thus, this research makes an original contribution to the tax compliance cost discipline.

This study presents the results of a large-scale postal survey of 1,350 business taxpayers registered for the GST. The study investigated the GST compliance costs in the 2015 fiscal year and was conducted in late 2016.  This resulted in a net sample 316 usable responses which, after deduction of out of the frame and undeliverable questionnaires, translates into a response rate of around 23.4%. A quantitative methodology was adopted and employed descriptive, inferential analysis, multiple regression analysis to test the hypotheses.

The statistical analysis confirms that business size remains the single most significant predictor of tax compliance costs. The estimated mean gross GST compliance costs were RM 30,917 for per business taxpayer registered for GST and for SMEs was MYR 28,742 per firm per year. Business taxpayers claimed an amount of MYR 20,474 as compensation for meeting GST compliance costs burden.  Regressivity of the cost was evident from the study, suggesting that as a percentage of turnover, the SMEs incurred the highest cost, which corroborates with most compliance costs studies. The internal direct and incidental costs accounted for 98 % of the costs. In contrast, the external cost represented only about 2 %, implying in-house staff handled most of the compliance work rather than relying on external tax advisers.   Regarding factors that affect compliance costs, size of business in terms of turnover, the services sectors, length (age) of business and cashflow benefits were found to have a significant relationship with the level of compliance costs.

The aggregate GST compliance cost was estimated at MYR 11.4 billion for 368,681 business taxpayers and MYR 13 billion for 421,681 business taxpayers. The percentage of aggregate compliance cost to GDP was 1.03 % to 1.10% respectively. The compliance cost to total tax revenue was 5.36 % and 5.77 % and to GST revenue was 27.6% and 31.37% respectively. Thus, the compliance cost was high and significant when compared to other countries that have implemented GST.  

This study also identified several suggestions put forward by business taxpayers for the reduction of compliance costs burden. In particular, increasing the GST registration threshold, reducing the complexity of GST by reducing tax codes, the need for better service from RMCD staff in responding promptly to GST queries and a reduction in the frequency of tax changes were  perceived as  adding to confusion and complexity of the GST.

This study makes a significant contribution to the existing literature and brings hidden compliance costs to the attention of the Malaysian government. The thesis puts forward further policy recommendations for the reduction of the GST compliance burden. It suggests that the complexity of GST be reduced, the frequency of filing for small business from monthly to quarterly be introduced, GST registration threshold to be increased and compensation for GST compliance costs be awarded. Overall, the reduction of GST compliance cost should be set as a policy priority, as is the case in other developed countries. As indicated, this study adds to international research on tax compliance costs studies, particularly in developing countries yet to introduce the GST that may learn from the Malaysian experience.