TAX PENALTIES AND TAX COMPLIANCE OF SMALL MEDIUM ENTERPRISES (SMEs) IN MALAYSIA

Taxation has become an important source of revenue for the government all over the world. The collection of tax revenue is essential for the government to ensure its funding. Thus, any activities encourage tax noncompliance such as tax fraud has placed government under pressure to prevent revenue leakage. In 2014, it is estimated that the ‘black’ economy has reached 10% of GDP in an advanced country and can top to 70% in developing countries. Among various tax administration strategies and other global measures to combat tax noncompliance or tax fraud are the roles played by the penalties and sanctions. Prior studies found that tax penalty system in one’s country influence tax compliance behaviour. In accordance with that, the objective of this study was to investigate the relationship between the tax penalties and tax compliance behaviour of the taxpayer in particular among the SMEs, since they are more prone to tax non-compliance as shown by previous studies. The elements of tax penalties for this study were rate and punishment, knowledge and education as well as psychological behaviour of taxpayers. This study attempts to see the effect of tax penalties according to each element with the tax compliance behaviour. This study applied quantitative research method where a survey has been conducted on selected sample of Small Medium Enterprise (SMEs) in Malaysia. The result shows that tax penalties do have a significant effect on tax compliance behaviour. Study results found all elements of tax penalties possess a significant relationship with tax compliance behaviour namely rate and punishment, education and knowledge of tax penalties as well as the psychological behaviour of taxpayers with tax compliance behaviour. This study thus described the roles of tax penalties in increasing the tax compliance behaviour in Malaysia to the tax administrator. The findings from this study also provide a platform for IRBM to evaluate their existing tax penalty system in the country.