Introduction

On 1 January 2005, in order to promote voluntary tax compliance, the Inland Revenue Board Malaysia (the IRBM) has implemented the self-assessment tax system (the SAS) on individual taxpayers (Chong & Wong, 2011). Under the SAS,individual who has income accruing in or derived from Malaysia are required to disclose taxable incomehonestly, compute tax payable correctly, file tax return form and pay tax on a timely manner (Chong & Wong, 2011). In a nutshell, under SAS, the onus to assess the tax liability is on the taxpayers (Chong & Wong, 2011). As a result, taxpayers must have sufficient tax knowledge in order to assess their tax liability correctly and to file tax return forms on time (Chong & Wong, 2011).

Impact on individual tax payer

The SAS requires taxpayers to keep records and documents properly, fill the returns correctly, compute the tax accurately and finally submit the return form on time with the final payment of tax (if any) (Mahmood, 2012). Prescribed return forms such as BE (for salaried income), B (for business income) and M (for non-resident individuals) are issued to individual taxpayers in the January of the following year, or earlier, and the deadline for submission is by 30 April (Mahmood, 2012). For the business income earners, such as sole proprietors and partnerships, tax filing is due on 30 June each year (Asian Development Bank Institute, 2006). With regard to the filing process, taxpayers first have the options of using the electronic return form, whereby assessment is completed electronically through the eFiling system; printing a pre-printed form from IRBMs website; or obtaining a hard copy from the IRBM office (Mahmood, 2012). Since the inception of self assessment, taxpayers are required to file their returns at a central location (Asian Development Bank Institute, 2006). Taxpayers are required to calculate their taxes and furnished the return to IRBM as per the due date mentioned in the Act according to the categories of taxpayers (Mahmood, 2012). Under the tax law, the DGIR is deemed to have made an assessment on the day the return is filed, the return is deemed to be the notice of assessment and the

notice of assessment is deemed to be served on the date the return is filed (Asian Development Bank Institute, 2006). No notice of assessment will therefore be issued for completed returns received in time (Mahmood, 2012). However, for late returns the DGIR issues an assessment with a penalty for late lodgement (Mahmood, 2012). If the return is not filed by the due date, a penalty for late lodgement of return will be imposed (Mahmood, 2012). The amount of penalty depends on the number of offences that the taxpayer has committed (Mahmood, 2012). If individual taxpayers fail to submit tax return, the IRBM will derive their own assessment based on estimate and issue notice of assessment (Chong& Wong, 2011). Non submission of tax return form and late payment of taxes will attract monetary penalty; and for repeated offences, imprisonment will be imposed by the Court (Chong & Wong, 2011). Under section 112 (1) of Income Tax Act 1967, the penalty on failure to furnish tax return by the stipulated deadline is a fine ranging from RM200 to RM2,000 or imprisonment not exceeding 6 months or both fine and imprisonment (Chong & Wong, 2011). Individual taxpayers who fail to make income tax payments for a year of assessment within 30 days from the date of issue of the notice of assessment or deemed assessment are charged a 10% increase on the tax or outstanding tax balance (Chong & Wong, 2011). If the tax or tax balance is still unpaid after 60 days from the date the 10% increase is imposed, a further 5% increase will be charged on the tax outstanding, as stipulated in section 103(3) and (4) of the Act (Chong & Wong, 2011). In view to further intensify voluntary tax compliance, the IRBM instituted tax audit and investigation system (Chong & Wong, 2011). In January 2007, the tax audit framework and tax investigation framework were published to serve as a guide to taxpayers, tax agents and IRBM tax auditors (Chong & Wong, 2011). The probability of individual taxpayer being selected to tax audit is once in every five years (Chong & Wong, 2011). Any irregularities from the audit findings will be classified either incorrect return under section 113 or wilful evasion under section 114 (Chong & Wong, 2011).

Penalties ranging from 100% to 300% and/or imprisonment up to 3 years will be imposed on tax defaulters (Chong & Wong, 2011). On submission of Form BE/B/M, the forms are deemed to be the notice of assessment for which tax is due and payable on the same date as the filing deadline (Mahmood, 2012). Under the SAS regime, IRBM monitors taxpayers compliance with the law through a desk audit and, if necessary, would conduct a field audit to check on some of the documents (Mahmood, 2012). As stated in the Tax Audit Framework, taxpayers are required by the law to keep for seven years all the financial documents or receipts for payments they have claimed, for the purpose of tax relief (Mahmood, 2012). IRBM officials would request the receipts and documents if any claims being made by taxpayers are suspicious (Mahmood, 2012). Payment of tax liability should be made at the latest on the due date, either 30 April or 30 June depending on the category of taxpayer (Asian Development Bank Institute, 2006). However, to ease the burden of payment on taxpayers, they are allowed to pay in instalments (Mahmood, 2012). Non-business income taxpayers are allowed to pay through Monthly Tax Deduction (MTD) system from their payroll, while businessincome tax payers are permitted to pay instalments every two months according to the instruction provided by IRBM under Section 107B of ITA, 1967 (Mahmood, 2012). To be tax compliant, taxpayers need to be tax literate (Chong & Wong, 2011). At minimum, individual taxpayers need to posses some basic knowledge of personal taxation, with respect to the taxability of income, deductibility of expenses, entitlements, reliefs, rebates and exemptions (Chong & Wong, 2011). For those who operate a business, they must have some basic understanding of taxability of income from business and non-business source and the deductibility of expenditure (Chong & Wong, 2011). However, in the Malaysian education system, only accounting and some business management students are exposed to taxation at tertiary levels (Chong & Wong, 2011). Many young Malaysians (the future taxpayers) are not formally exposed to taxation in schools (Chong & Wong, 2011). What make it worst is the Malaysian tax laws are inherently voluminous and complex; and the constant changes make it difficult even for

tax officers, tax academics, tax practitioners to keep abreast of the latest development, let alone the ordinary people such as the petty traders (Chong & Wong, 2011).

Impact on Inland Revenue Department

The introduction of the current year basis of assessment and the self assessment system is a huge and complex undertaking (Asian Development Bank Institute, 2006). The only consolation is SAS was implemented in stages thus allowing some time for the IRB to prepare for the change (Asian Development Bank Institute, 2006). For the IRB this major tax reform requires: The introduction of the legislation for the current year basis of assessment, the transitional provisions as well provisions for waiver of tax on the 1999 income and the self assessment legislation (Asian Development Bank Institute, 2006). Reengineering of work processes and procedures as the current practice is no longer suitable (Asian Development Bank Institute, 2006). Redesigning the computer systems to take care of the new concept of return examination and to monitor the accounts payable more effectively (Asian Development Bank Institute, 2006). Disseminating of information through education and publicity programs to tax agents and taxpayers so that the new requirements of the law is well understood for better compliance (Asian Development Bank Institute, 2006). Training of officers on the new law, new processes and procedures that have to be coordinated throughout all the IRB branches (Asian Development Bank Institute, 2006). Changing the mindset had been a difficult task (Asian Development Bank Institute, 2006). The transition from tick and flick work process to full acceptance of tax returns submitted is not an easy one (Asian Development Bank Institute, 2006). Retraining of staff for field audit is another challenge for the IRB (Asian Development Bank Institute, 2006). The period from concept to implementation had a very short time frame and many things had to be pushed through quickly (Asian Development Bank Institute, 2006)

IRBM faces challenges in fostering voluntary compliance amongst individual taxpayers due to lack of understanding in taxation amongst the taxpayers (Mahmood, 2012). Most individuals feel that taxation is a complex matter and some of them refuse to enhance their knowledge in tax system (Mahmood, 2012). To be successful, SAS requires voluntary compliance and self-regulation from the taxpayers (Mahmood, 2012). Thus, sufficient knowledge in taxation enables taxpayers to file return form correctly and accurately and be aware of their tax obligations (Mahmood, 2012). Further, appropriate regulatory responses by tax regulators are encouraged to motivate voluntary compliance (Mahmood, 2012). The key challenges faced by the IRB in implementing SAS include providing appropriate customer service and restoring taxpayers positive perception of IRB officers (Sharkey, 2012). Prior to the introduction of SAS, the IRBs approaches to taxpayers mainly emphasised the law and the IRB was seen as unfriendly and authoritative in dealing with taxpayers problems (Sharkey, 2012). A key challenge for the IRB is to make the paradigm shift necessary if it is to service taxpayers adequately under the SAS (Sharkey, 2012). In addition, the IRB needs to recognize that taxpayers rights must be protected (Sharkey, 2012). A balancing act in terms of service and enforcement is required (Sharkey, 2012). To achieve this, the IRB needs to review the procedures involved in tax filing and tax payment and, at the same time, make it easier to administer the operation process (Sharkey, 2012). This would require the IRB to tackle the major human resource issues of redeployment and retraining (Sharkey, 2012). As a revenue collecting agency, one of the IRBs challenges is to maintain its strong tax collection achievements (through either normal tax collection or enforcement activities) (Sharkey, 2012). This may be difficult as the government tends to reduce tax rates and businesses continue to demand more tax relief and tax incentives (Sharkey, 2012). To sustain the achievement in tax collections, proactive and innovative steps to increase revenue by IRB are critical and require much attention (Sharkey, 2012).

With the implementation of SAS, tax audit and investigation were positioned as the main functions of tax officers (Sharkey, 2012). Another key challenge for the IRB is to improve the quality of tax audits (Sharkey, 2012). This means improvement in the infrastructure of audit and the audit capability of IRB officers and better utilization of all available reference materials (Sharkey, 2012). As for audit capability, IRB officers need to be equipped with all the necessary technical knowledge to handle the tax audit professionally (Sharkey, 2012). Tax investigators, too, must have skills in evidencegathering and investigation before prosecuting the potential tax evaders (Sharkey, 2012). As with the official assessment system, most small and medium-sized businesses are not familiar with keeping books of accounts, which in turn poses a significant challenge for the tax authority (Sharkey, 2012). These poor record-keeping skills make dealing with sole proprietors particularly difficult for the IRB officers (Sharkey, 2012). Hence, improving bookkeeping practices among businesses and promoting taxation based on actual figures requires much effort and support (Sharkey, 2012). For compliant taxpayers, the IRB needs to make it as easy as possible to comply (Sharkey, 2012). For taxpayers who chose not to comply, there is a need to inform them about the risks associated with non-compliance and also possible enforcement actions (Sharkey, 2012). Perhaps tax audits should focus more explicitly on serious tax evasion and tax avoidance and thereby assist in building taxpayers trust in the system and their belief that tax is applied fairly (Sharkey, 2012).

How IRB make sure tax compliance is made

The essence of self assessment is voluntary compliance (Asian Development Bank Institute, 2006). The IRB realized that new compliance strategies and activities are needed to ensure tax collection continues to be on the upward trend (Asian Development Bank Institute, 2006). Some of the measures taken are as follows: At the headquarters level the audit department was set up and responsible for policies (eg. coverage, work norms, targets, performance evaluation criteria), standards and procedures, case selection and monitoring overall implementation of compliance programmes that include street surveys (Asian Development Bank Institute, 2006).

Reorganization of IRB branches (Asian Development Bank Institute, 2006). Basically 70% of all the IRB auditors are assigned to do field audit while the balance are for desk audit (Asian Development Bank Institute, 2006). The branches are responsible to carry out compliance activities in order to meet targets as determined by the headquarters (Asian Development Bank Institute, 2006). Enforcement activities are carried out more extensively through tax audits and business surveys (Asian Development Bank Institute, 2006). Although tax audits involve detailed examination of cases it is also aimed at small companies and traders to declare income correctly rather than solely to recover understatement of tax or to increase tax revenue (Asian Development Bank Institute, 2006). The IRB is adopting the process now and check later approach of return

examination (Asian Development Bank Institute, 2006). Information in the return form will be captured in the computer system (Asian Development Bank Institute, 2006). The taxpayer assessment is recorded according to the tax computation made by the taxpayer (Asian Development Bank Institute, 2006). After returns are processed, a small percentage will be selected for audit based on risk analysis from the information captured in the computer system (Asian Development Bank Institute, 2006).

Conclusion
The implementation of SAS had increased the amount of Malaysian tax defaulters tremendously (Chong & Wong, 2011). Thus, the study proposes some strategies that

could be implemented by the IRBM, such as enhancing education programmes for tax personnel and taxpayers (Mahmood, 2012). Besides, IRBM could review and revise some of its procedures regularly to improve its service delivery, as taxpayers satisfaction with the services rendered may influence their tax morale and may contribute to an increase in compliance (Mahmood, 2012). Training in audit work and customer service are also crucial in ensuring compliance (Asian Development Bank Institute, 2006). With a customer friendly approach, it is expected that taxpayer will be more willing to come forward to the IRB and declare their tax voluntarily (Asian Development Bank Institute, 2006).

References
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