Where do taxes go?

As of 1st March 2025, all individuals employed in Malaysia are required to file their income tax returns. This process can be completed through online services or the e-filing system. For individuals without business income, the deadline for submission is 30th April 2025. The e-filing system has been designed to be user-friendly, making tax filing a straightforward and efficient process. However, despite the simplicity and accessibility of the system, tax collection from individuals remains insufficient.

According to the Inland Revenue Board (IRB), there were RM6.34 billion lost to tax evasion in 2024, with over 170,000 international travel restrictions on Malaysian individuals due to outstanding income tax arrears. This shortfall necessitates proactive measures from the IRB to enhance tax collection efforts. Nevertheless, it is crucial to address the underlying causes that discourage individuals from fulfilling their tax obligations. While complexity and inconvenience may often be cited as barriers to tax compliance, these do not appear to be significant issues in Malaysia, given the ease of the e-filing system. Instead, other fundamental concerns must be examined to understand the reluctance of certain individuals to pay taxes.

Scholars from Universiti Kebangsaan Malaysia (UKM) cited that one primary issue is trust in the tax system and government institutions. Taxpayers do not perceive that the authority vested in the tax authorities will significantly influence their behaviour in complying with the tax system. Instead, trust is sufficient to encourage taxpayers to voluntarily adhere to the tax system, without the need for the tax authorities to exercise their powers.

Many taxpayers are curious about how taxes are allocated and utilised. They appreciate clarity on public fund expenditures and how these contribute to societal development. Concerns regarding mismanagement or inefficiencies in government spending may discourage individuals from participating in the tax system.

Establishing a transparent and accountable framework for public fund allocation is essential to fostering trust and encouraging tax compliance. Effective communication of financial reports and government spending initiatives can mitigate negative perceptions and reinforce confidence in the system.

Another crucial factor is the perceived fairness of the tax system. Individuals may feel that the benefits derived from government initiatives are not equitably distributed across different income groups. Malaysia’s classification of income groups—B40 (Bottom 40%), M40 (Middle 40%), and T20 (Top 20%)—raises concerns among higher-income taxpayers regarding whether they receive a fair share of public services and benefits.

While social welfare programs primarily target lower-income groups, taxpayers in higher income brackets may perceive inequality in the advantages available to them. Addressing this concern requires a balanced approach in policy formulation to ensure that all taxpayers perceive the system as fair and just.

The fairness issue also concerns the M40 group according to the research by the UiTM team, stating that if the government provides equitable value or benefits to the M40 group, their tax compliance behaviour is likely to improve, as they will feel they are being treated fairly. In this regard, the introduction of targeted benefits for the M40 group should be considered, for instance, a one-time cash assistance program similar to the Bantuan Sara Hidup (BSH) received by the B40 group, healthcare support and opportunities to enhance skills. Such initiatives could enhance the perception of fairness within the tax system and encourage greater compliance.

Transparency is a key element in addressing these issues. The IRB and the government must ensure that taxpayers are well-informed about the allocation of tax revenues. Clear disclosure of how funds are utilised—such as investments in public infrastructure, education, and healthcare—can reinforce public confidence in the tax system. If individuals can directly observe the positive impact of their contributions, they may be more inclined to comply with tax regulations voluntarily.

In conclusion, improving tax compliance requires a multifaceted approach that goes beyond simplifying the filing process. Addressing trust and fairness concerns through greater transparency can significantly enhance voluntary compliance. By fostering an environment of accountability and equitable distribution of public resources, the government can encourage more individuals to fulfil their tax obligations, thereby increasing overall tax revenue for national development.

Suria Zainuddin

Dr Suria is a senior lecturer at the Department of Accounting, Faculty of Business and Economics, Universiti Malaya