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FACTORS INFLUENCING KNOWLEDGEABLE CONSUMERS’ LEVEL OF
ACCEPTANCE OF GOODS AND SERVICES TAX
SHALENE KALYANASUNDARAM
Research report in partial fulfilment of the requirements for the
Degree of Master of Business Administration
Universiti Sains Malaysia
2015
This thesis is dedicated to my Papa, S.K. Sundaram who is my sturdiest pillar of
support and who inspired my interest in GST.
I can never thank you enough.
ii
ACKNOWLEDGEMENT
First and foremost, I am grateful to God for being able to conduct a research in an
area of much interest to me and for surrounding me with the best of people who have
supported me endlessly throughout this challenging journey. I am immensely indebted to my
mentor, Professor Dato’ Dr Hasnah Haron for her impeccable guidance, support, motivation,
approachability and constructive feedback without which this research would not have been
possible. Her diligence and dedication was highly inspiring and words cannot express the
honor and gratitude I feel to have worked with her.
I would also like to thank respected professors, namely Associate Professor Dr
Jayaraman and batch-mates who were so generous with their time and knowledge in assisting
me throughout the duration of this research paper. Their kind assistance and valuable
feedback enabled the successful completion of this paper. I would also like to take this
opportunity to thank my good friends; Bong-Arkya, Suria Chetta, Deepa, Thivagar and
Ameet from the bottom of my heart as they were my pillars of support and encouragement as
we travelled through this journey, spending days and nights together to finish this paper.
I would also like to thank my respondents who have participated in the study. I would
not have been able to contribute this study without their assistance. They have played a key
role in this research paper and I would like to pass my sincere gratitude to them.
Last but not at all least, I would like to thank my ever supporting parents, siblings,
employers, colleagues, friends, FREAKSisters and devoted fiancé for their constant show of
support, understanding, love and encouragement. Everyone played an important part in
easing the challenges I had to face throughout this period. Without this amazing support
system, this research paper would not have been a reality.
iii
TABLE OF CONTENTS
Page
ACKNOWLEDGEMENT…………………………………………………………….ii
TABLE OF CONTENTS……………………………………………………………..iii
LIST OF TABLES………………………………………………………………….....ix
LIST OF FIGURES…………………………………………………………….……..xi
ABSTRAK……………………………………………………………………….......xiii
ABSTRACT…………………………………………………………………………..xiv
LIST OF ABBREVIATION………………..…………………………………………xv
CHAPTER 1 INTRODUCTION………………………………………………………1
1.0 Introduction…………………………………………………………………........1
1.1 Background of the Study…………………………………………………………1
1.2 Problem Statement………………………………………………………………..3
1.3 Research Objectives ……………………………………………………………...7
1.4 Research Question……………………………………………………………......7
1.5 Definition of Key Terms …………………………………………………………8
1.6 Significance of the Study………………………………………………..………..9
1.6.1 Practical Implication…..………………………………………………...……..9
1.6.2 Theoretical Implication……………………………………………………….11
1.7 Organization of the Remaining Chapters……………………………………….12
iv
CHAPTER 2 LITERATURE REVIEW………………………………………..…….13
2.0 Introduction……………………………………………………………………13
2.1 Malaysian Taxation……………………………….……………………………13
2.2 Consumers………………………..……………………………………………14
2.3 GST…………………………………………………………………………….16
2.3.1 Reasons for Implementing GST……………………………………………..16
2.3.2 Significance of GST…………………………………………………………18
2.3.3 Mechanism of GST……………………………………………………….....19
2.3.4 GST rate in the ASEAN countries…………………………………………..24
2.3.5 Implementation of GST……………………………………………………..25
2.4 Theory…………………………………………………………………………26
2.4.1 Theory of Planned Behavior (TPB)………………..……………………….26
2.5 Dependent Variable……………………………………………………………28
2.6 Antecedent and Independent variables ………………………………………..29
2.6.1 Attitude………………………………………………………………………29
2.6.2 Rule Observance Behavior……………………………………………..…....31
2.6.3 Perception of fairness of GST…………………………………………..…...32
2.6.4 Subjective Norm……………………………………………………………..34
2.6.5 Perceived behavioral control (PBC)…………………………………………35
2.6.6 Level of GST Knowledge………………………………………………...….36
2.6.7 Self-Efficacy…………………………………………………………………37
2.7 Theoretical Framework………………………………………………………...39
2.8 Factors Affecting Level of Acceptance of GST………………………………..41
2.8.1 Studies on Goods & Services Tax…………………………………………...44
2.8.2 Studies on Tax compliance……………………………………………….….44
v
2.8.3 Studies on Intention to Accept…………………………………………….....44
2.8.4 Other Studies……………………………………………………………..…..45
2.9 Hypotheses Development………………………………………………………46
2.9.1 Rule observance behavior and attitude ………………………………………46
2.9.2 Perception of Fairness of GST and attitude…………………………………..46
2.9.3 Level of GST Knowledge and Perceived Behavioral Control………………..47
2.9.4 Self-efficacy and Perceived Behavior Control ……………………………….48
2.9.5 Attitude and Level of Acceptance…………………………………………….50
2.9.6 Subjective Norms and Level of Acceptance………………….……………….51
2.9.7 Perceived Behavioral Control and Level of Acceptance……………………...52
2.10 Summary……………..………………………………………………………..53
CHAPTER 3 RESEARCH METHODOLOGY………………………………………55
3.0 Introduction……………………………………………………………………...55
3.1 Research Design………………………………….……………………………...55
3.1.1 Type of Study……………………………………………………………..…..55
3.1.2 Population and Unit of Analysis……………………………………………...56
3.1.3 Sample Size…………………………………………………………………..58
3.1.4 Sampling Method…………………………………………………………….59
3.1.5 Data Collection Techniques………………………………………………….59
3.1.6 Survey Instrument…………………………………………………………....60
3.1.7 Questionnaire Design………………………………………………………...61
3.2 Measurements of Variables…………………………………………..…….…..63
3.2.1 Measurements of Antecedent Variables and Independent Variables………..63
3.2.2 Level of Tax of Knowledge Scoring………………………………………...64
3.2.3 Measurement of Dependent Variable………………………………………..65
vi
3.3 Pre Test…………………………………………………………………...……67
3.4 Pilot Test….……………………………………………………………………68
3.5 Data Analysis………………………………………………………….……….71
3.5.1 Structured Equation Modeling (SEM)………………………………………71
3.5.2 Covariance-based SEM (CBSEM) against Variance-based SEM
with Partial Least Squares (PLS)……………………………………………72
3.5.3 Statistical Analysis…………………………………………………………..74
3.5.4 Demographic Analysis………………………………………………………74
3.5.5 Common Method Bias………………………………………………………74
3.5.6 Descriptive Analysis………………………………………………………...75
3.5.7 Goodness of Data Test………………………………………………………76
3.5.8 Factor Analysis……………………………………………………………....76
3.5.9 Validity Analysis…………………………………………………………….77
3.5.10 Reliability Analysis………………………………………………………….78
3.5.11 Goodness-of-Fit (GoF)………………………………………………………79
3.6 Summary……………………………………………………………………….79
CHAPTER 4 RESULTS…………………………………………………………….81
4.0 Introduction……………………………………………………………………81
4.1 Response Rate…………………………………………………………………82
4.2 Profile of Respondents…………………………………………………….…..83
4.3 Descriptive Statistics and Multicollinearity ………………………………..…86
4.4 Common Method Bias using Principal Component Analysis ……...…………90
4.5 Data analysis and results ………………………………………………….…..91
4.5.1 Goodness of measures……………………………….………………….......91
4.5.2 Pathway of Each Model Construct………………………………………….92
vii
4.5.3 Construct validity…………………………………………………………...93
4.5.4 Convergent validity…………………………………………………………93
4.5.5 β value and R Square………………………………………………………..94
4.5.6 Discriminant validity………………………………………………………..95
4.5.7 SEM Model…………………………………………………………………95
4.5.8 Results of each model………………………………………………………96
4.5.9 Reliability Analysis………………………………………………………..110
4.5.10 Summary on Validity and Reliability of Models………………………….111
4.5.11 Summary of Hypothesis Testing…………………………………………..113
4.5.12 Goodness-of-Fit……………………………………………………………114
4.6 Summary……………………………………………….…………………….115
CHAPTER 5 DISCUSSIONS AND CONCLUSIONS……………………………116
5.0 Introduction…………………………………………………………………..116
5.1 Recapitulation of the Study Findings………………………………………...116
5.2 Discussion…………………………………………………………………….119
5.2.1 What is the GST acceptance level amongst Malaysians?.............................120
5.2.2 What is the relationship of rule observance behavior and perceptions
of tax fairness with attitude of consumer?...........................................................123
5.2.3 What is the relationship of Self – Efficacy and Level of Tax Knowledge
with Perceived Behavior Control?.........................................................................125
5.2.4 What is the relationship of Attitude, Subjective Norms and
Perceived Behavioral Control with Level of Acceptance? .............................128
5.3 Summary and findings…….……………………………………………………130
5.4 Implications...……………………………………………………………….….131
5.4.1 Theoretical Implication……………………………………………………...131
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5.4.2 Practical Implication………………………………………………………...133
5.5 Limitation………………………………………………………….…………...138
5.6 Suggestion for Future Research ………………………………………………..138
5.7 Conclusion……………………………………………………………………...140
REFERENCES……………………………………………………………………….142
APPENDIX A – ECONOMIC REPORT 2010-2014- FEDERAL GOVERNMENT
REVENUE ……………………………………………..................167
APPENDIX B – ECONOMIC REPORT 2010-2014- FEDERAL GOVERNMENT
FINANCE ……………………………………………..................168
APPENDIX C – RESULTS OF MERDEKA CENTRE SURVEY ON GST....……169
APPENDIX D – QUESTIONNAIRE……………………………………………….176
APPENDIX E – PLS ALGORITHM REPORT (PILOT STUDY)………………….187
APPENDIX F – PLS ALGORITHM REPORT……………………………………..188
APPENDIX G – BOOTSTRAPPING PLS REPORT……………………………….199
APPENDIX H – IBM SPSS STATISTICS REPORT……………………………….203
ix
LIST OF TABLES
Page
Table 2.1 Key Studies on Malaysian Goods and Services Tax 42
Table 3.1 Profile of Contacts 60
Table 3.2 Summary of Questionnaire Sections 63
Table 3.3 Sources of measurement of variables 66
Table 3.4 Details of Models for analysis 69
Table 3.5 Cronbach’s Alpha for pilot study 70
Table 4.1 Summary on the Response Rate 82
Table 4.2 Socio-Demographic table – Respondent’s profile 83
Table 4.3 Descriptive Statistics and Correlation Matrix (n=228) 86
Table 4.4 Total Variance Explained 91
Table 4.5 Measurement model of VB-SEM- Model 1 97
Table 4.6 Discriminant Validity- Model 1 98
Table 4.7 Summary of PLS Results – Direct Effects- Model 1 99
Table 4.8 Measurement model of VB-SEM-Model 2 101
x
Table 4.9 Discriminant Validity- Model 2 101
Table 4.10 Summary of PLS Results – Direct Effects-Model 2 103
Table 4.11 Measurement model of VB-SEM-Model 3 105
Table 4.12 Discriminant Validity-Model 3 107
Table 4.13 Summary of PLS Results – Direct Effects- Model 3 109
Table 4.14 Cronbach’s Alpha and Composite Reliability for Model 1 110
Table 4.15 Cronbach’s Alpha and Composite Reliability for Model 2 110
Table 4.16 Cronbach’s Alpha and Composite Reliability for Model 3 111
Table 4.17
Summary of Hypotheses Testing
113
Table 5.1
Summary on t-test for Gender and Mode of Study
121
Table 5.2
Descriptive Table on Institutes and Level of Acceptance of GST
121
Table 5.3
ANOVA table of results for institution groups
122
Table 5.4
Descriptive Table on Income Level and Level of Acceptance of GST
122
Table5.5
ANOVA table of results for income level groups
122
xi
LIST OF FIGURES
Page
Figure 2.1 Cascading effect -Sales & Service tax 17
Figure 2.2 Cascading effect - Service tax 17
Figure 2.3 Input and output tax 20
Figure 2.4 Standard rated supply 21
Figure 2.5 Zero-rated supply 21
Figure 2.6 Exempt supply 22
Figure 2.7 GST Mechanism- standard rated 22
Figure 2.8 GST rates in the ASEAN countries 25
Figure 2.9 Theoretical Framework 40
Figure 4.1 PLS Pathway for Model 1 92
Figure 4.2 PLS Pathway for Model 2 92
Figure 4.3 PLS Pathway for Model 3 93
Figure 4.4 PLS output for Beta-value and R square value(Model 1) 98
xii
Figure 4.5 PLS output for testing population regression coefficients 100
Figure 4.6 PLS output for Beta-value and R square value – Model 2 102
Figure 4.7 PLS Output for testing population regression coefficients 103
Figure 4.8 PLS output for Beta-value and R square value-Model 3 108
Figure 4.9 PLS Output for testing population regression coefficients 109
xiii
ABSTRAK
Pelaksanaan Cukai Barangan dan Perkhidmatan (GST) pada 1 April 2015 adalah satu
kejayaan bagi Malaysia. Pelaksanaan GST adalah amat penting untuk menyokong
pembangunan negara. Kajian ini telah dibangunkan untuk mengenal pasti faktor-faktor yang
mempengaruhi tahap penerimaan GST oleh pengguna menggunakan’Theory of Planned
Behavior’. Faktor-faktor yang dikaji termasuk Peraturan kelakuan pematuhan, Persepsi
keadilan GST, Aras pengetahuan GST, ‘Self-efficacy’, Sikap, ‘Subjective Norm’ dan
‘Perceived Behavorial Control’. Borang soal selidik telah diedarkan kepada pelajar-pelajar
dalam talian MBA daripada Universiti Sains Malaysia, Universiti KebangsaanMalaysia,
Universiti Malaya dan Universiti Putra Malaysia pada Februari 2015. 228 MBA pelajar
mengambil bahagian dalam kajian ini dan Smart PLS telah digunakan untuk menguji kesahan
dan kebolehpercayaan data dan hipotesis.. Hasil kajian membuat kesimpulan bahawa 6
hipotesis daripada 7 disokong. Tahap penerimaan GST rendah dengan Sikap dan Persepsi
Kawalan Tingkahlaku menjadi pengaruh yang penting. Pematuhan Peraturan Kelakuan dan
Persepsi GST keadilan adalah ‘ántecedent’ yang penting kepada Sikap. Self-efficacy dan
Tahap pengetahuan GST adalah ántecedent’ yang penting kepada ‘Perceived Behavorial
Control’. Kajian menunjukkan bahawa walaupun tahap pengetahuan GST dipertingkatkan di
kalangan pengguna, tahap penerimaan tidak akan bertambah baik tanpa langkah-langkah
berkesan yang diambil untuk meningkatkan persepsi mereka terhadap keadilan GST. Di
samping itu, pemahaman GST tidak akan mencukupi untuk mempengaruhi penerimaan GST.
Pengguna perlu dididik bagaimana untuk menguruskan penggunaan dan kewangan mereka
serta diberikan sokongan yang mencukupi dalam tempoh peralihan ini.
xiv
ABSTRACT
The implementation of Goods and Services tax (GST) on the 1st of April 2015 is a milestone
for Malaysia. The implementation of GST is of vital importance in order to support the
development of the nation. This study was developed in order to identify the factors that
influence knowledgeable consumers’ level of acceptance of GST using the Theory of Planned
Behaviour. Factors examined include Rule observance behavior, Perception of fairness of
GST, Level of GST knowledge, Self-efficacy, Attitude, Subjective Norm and Perceived
Behavioral Control. Questionnaires were distributed online to MBA students of Universiti
Sains Malaysia, Universiti Kebangsaan Malaysia, Universiti Malaya and Universiti Putra
Malaysia in February 2015. 228 MBA students participated in the study and Smart PLS was
used to test the validity and reliability of the data as well as the hypotheses developed.
Findings of the study concluded that 6 hypotheses out of 7 were supported. The acceptance
level of GST was slightly low with Attitude and Perceived Behavioural Control being
significant influencers of the acceptance level. Rule Observance Behaviour and Perception of
GST fairness were significant antecedents to Attitude with perception of fairness being the
variable with higher weightage. Self-efficacy and Level of GST knowledge were acceptable
antecedents to Perceived Behavioral Control with Self-Efficacy carrying the higher
weightage of significance. This implies that although the level of GST knowledge is
enhanced amongst consumers, level of acceptance will not improve without effective
measures taken to enhance their perception of GST fairness. Besides that, the mere
understanding of GST will not be sufficient to influence acceptance of GST. Consumers need
to be educated on how to manage their consumption and finances as well as be given ample
support during this transition period.
xv
LIST OF ABBREVIATIONS
ATT Attitude
AVE Average Variance Extracted
BR1M Bantuan Rakyat 1 Malaysia
CBSEM Covariance-based Structural Equation Modelling
CFA Confirmatory Factor Analysis
CMB Common Method Bias
FAQ Frequently Asked Questions
GST Goods & Services Tax
ITA Income Tax Act
LA Level of Acceptance
LTK Level of Tax Knowledge
PBC Perceived Behavorial Control
PLS Partial Least Squares
PTF Perception of Tax Fairness
RMCD Royal Malaysian Customs Department
ROB Rule Observance Behavior
SE Self Efficacy
SEM Structural Equation Modelling
SN Subjective Norms
SST Sales & Services Tax
TPB Theory of Planned Behavior
xvi
UM Universiti Malaya
UKM Universiti Kebangsaan Malaysia
UPM Universiti Putra Malaysia
USM Universiti Sains Malaysia
VAT Value-Added Tax
VBSEM Variance-based Structural Equation Modelling
1
CHAPTER 1
INTRODUCTION
1.0 Introduction
This chapter presents the research framework of the study. It begins with discussing
the background of the study and the problem statement followed by research
objectives and research question. Definition of key terms of major variables will also
be included to enhance understanding of the concepts. The significance of the study
is the contribution of the scope of study to both practical and theoretical
implications. The scope of study focuses on consumers as the Goods and Services
tax being studied is a consumption tax. Manufacturers, retailers and distributors are
able to set off the tax they pay against the tax charged to their customers but
consumers are unable to claim the GST they pay on their consumption. Towards the
end, the chapter will give a brief overview of the remaining chapters in the thesis.
1.1 Background
Malaysian taxation system is divided into two; direct and indirect taxes. Indirect
taxes are controlled by the Royal Malaysian Customs Department (RMCD) and
consist of four parts; customs duties, excise duty, sales tax and service tax. Direct
taxes are administered by the Inland Revenue Board of Malaysia (IRBM). This
comprises individual income taxes, corporate taxes, petroleum income taxes, real
property gains taxes and stamp duty.
2
According to Jeyapalan Kasipillai(2005), taxation is a vital economic tool for
governments to regulate the economy, to revitalize economic growth through the
granting of fiscal incentives and to provide funds for development projects.
Attached in Appendix A is a table which provides information on the federal
government revenue obtained from the Economic Report 2013/2014 of Ministry of
Finance. According to the report, in 2013, 57.6% of the revenue was in the form of
direct taxes while 16.6% was in the form of indirect taxes.
With reference to the second table in the Appendix B, the Economic Report
2013/2014 reports an overall deficit yet again. From the table, it can be seen that
Malaysia faces deficits even from 2010. This has accentuated the desperate need for
Malaysia to develop a more efficient, effective taxation system which will be able to
provide Malaysia with a stable source of revenue.
Since the Sales and Service tax had inherent weaknesses in its system in terms of
generating stable revenue, Malaysia was forced to look into the implementation of
GST. GST is a broader consumption-based tax which is proven to be able to generate
stable revenue for the nation's financial needs. GST is levied on all goods and
services except for essential ones which are exempted from tax, or those which are at
zero-rated tax for now (Palil & Ibrahim, 2011).
Sales tax is an indirect tax levied on certain imported and locally manufactured
goods introduced in 1972. It is also known as manufacturer's tax. It is a single stage
3
tax and 10% sales tax is charged to manufacturers of locally manufactured goods
when goods are sold or for imported goods, at the time when goods are cleared at
Customs. Service tax of 6% was introduced in 1975 and is levied on taxable services
which include prescribed goods, i.e tobacco as well as professional and consultancy
services (Palil & Ibrahim, 2011). The Goods and Services Tax will replace both
these taxes at a rate of 6%. It is also categorized into standard-rated, zero-rated and
tax-exempt items. It is mandatory and involves all Malaysians nationwide as it is a
consumption based tax.
1.2 Problem Statement
Budget 2014 was a milestone budget as the Honourable Prime Minister Dato’ Seri
Najib Tun Razak announced the implementation of Goods and services tax (GST) on
the 1st of April 2015. According to The Star newspaper the Prime Minister in his
budget speech stated that the Government had to take bold measures to overcome the
weaknesses of the current sales and service tax in order to strengthen the fiscal
position of the nation. Thus, after years of detailed and comprehensive studies as
well as views of all segments of society including chambers of commerce, investors,
economists, academicians, consumer associations and NGOs, the government has
decided to implement a fair tax system that benefits all Malaysians, Goods and
Services Tax (GST). The GST was publicized at a rate of 6%, higher than what was
promised in earlier proposals (Singh 2013). However, this rate is the lowest amongst
the ASEAN countries compared with 10% in Indonesia, Vietnam, Cambodia, the
Philippines, and Laos and 7% in Singapore and Thailand.
4
Amongst the main highlights associated with the implementation of GST was that
GST will not be implemented on approximately 40 essential goods and services, the
Government will be assisting the Rakyat with the GST transition period by providing
them with one off cash allowance and a reduction of 1% in individual income tax
rates. The Prime Minister also iterated that the GST is vital in assisting the
Government to generate revenues in an effective way in order to invest in the
development of the country (Lai 2014; New Strait Times, 2014).
Despite the implementation of GST being a topic already put forth many years ago,
the acceptance level amongst Malaysians is poor as represented by the massive rally
organized by a coalition of 89 various parties on May 1 2014. The rally with the
theme “GST: Protest Till It’s Dropped’ was aimed at displaying the protest of
citizens against the implementation of GST and enforced the need of the
Government to first resolve the issue on the high personal debt level of the nation
and minimum wage as well as that the people are currently still adjusting to the hike
in petrol prices and other essential goods. (Star Online, 2014)
Moreover, a survey conducted by the Merdeka Centre in May 2014 of 1009
registered voters comprising 60% Malay, 31% Chinese and 9% Indian concluded
that 62% of Malaysians are not in favour of GST. The respondents were selected on
the basis of random stratified sampling along ethnicity, gender and state of residence
in order to obtain results which are generalizable. At the same time, 64% of the
respondents indicated that they are not aware of the working of the national
economy. To add on, 72% of those with household income less than RM1, 500 and
56% of those with household income between RM1, 501 and RM3,000 do not
5
understand GST. More than half of those who earn between RM3, 000 and RM5,
000 and 67% of those who have a household income of over RM5, 000 understand
the issue.(MerdekaCenter,2015).
Also, 45% of the respondents have indicated that GST is not a fair tax system when
in fact more than 160 countries have successfully implemented GST. According to
the poll, 62% Malays do not understand GST, while less than half of the Chinese
(41%) and Indian (35%) respondents do not understand the issue
(MerdekaCenter,2015).The results of the survey are attached in Appendix C. To
further corroborate this phenomenon, some of the riot participants who were
interviewed by the Star newspaper displayed the same lack of knowledge in the
system and high level of uncertainty in its impact to their daily lives.
Previous studies (Nordiana, 2012; Bidin & Shamsudin, 2013; Ramalingam et al.,
2014) were focused on the compliance of organizations with GST and their adoption
of the GST application systems. Previous studies have also explored the awareness
and acceptance levels of consumers (Saira et al., 2010; Palil & Ibrahim, 2011;
Shamsuddin et al., 2014; Moomal & Zakarian, 2014). However, in the nation’s
current scenario, it is vital for the government to understand the causes of the low
levels of acceptance. In line with that, this study will delve deeper into factors that
are influencing consumers’ acceptance of GST using the well-established Theory of
Planned Behavior. In order to further understand the factors influencing the
consumers’ acceptance of GST, antecedent variables to the attitude and perceived
behavorial control are examined. The antecedent variables determined were Rule
Observance Behaviour, Perception of GST Fairness, Level of GST knowledge and
6
Self-Efficacy. If these antecedent variables together with the other variables
examined in the study (attitude, subjective norm and perceived behavioral control)
proved significant, recommendations can be suggested to ensure a more efficient and
smooth implementation of GST. This is because the relevant authorities can now
identify specific areas for improvement in order to address any acceptance issues
amongst the consumers.
The focus of this study is knowledgeable consumers who are currently pursuing their
Masters in Business Administration. This is because the Merdeka Center survey had
portrayed that there was a higher level of unacceptance amongst private sector
employees, self-employed individuals and those involved in business. Moreover, the
age groups comprising of those in their twenties and thirties showed a higher level of
unacceptance (Merdeka Center, 2015). MBA students will be able to represent the
demographics of the Merdeka Center survey who are not accepting GST. MBA
students are normally within the above-mentioned age group and majority are
employed (Tay, 2001) Moreover, lack of GST acceptance has been associated with
lack of knowledge (Borneo Post Online, 2015; Jalil, 2015; GST Malaysia Info,2014)
and by choosing MBA students we will be able to put that assumption to test as
MBA students are expected to have the required basic knowledge on GST. Thus, for
this study, MBA students will represent the consumers in Malaysia.
7
1.3 Research Objectives
1) To examine the level of acceptance of Goods and Service Tax (GST)
amongst consumers.
2) To examine the relationship between the existence of rule observance
behavior and attitude of consumer.
3) To examine the relationship between perception of GST fairness and attitude
of consumer.
4) To examine the relationship between level of GST knowledge and perceived
behavioral control of consumer.
5) To examine the relationship between self-efficacy and the perceived
behavioral control of consumer.
6) To examine the relationship between attitude of consumers and their level of
acceptance of GST
7) To examine the relationship between subjective norms of consumers and
their level of acceptance of GST
8) To examine the relationship between perceived behavioral controls of
consumers and their level of acceptance of GST
1.4 Research Questions
1) What is the level of acceptance of GST amongst consumers?
2) What is the relationship between rule observance behavior and attitude of
consumer?
8
3) What is the relationship between perception of GST fairness and attitude of
consumer?
4) What is the relationship between the level of GST knowledge of consumers
and perceived behavioral control?
5) What is the relationship between self-efficacy of a consumer and perceived
behavioral control?
6) What is the relationship between attitude of consumers and their level of
acceptance of GST?
7) What is the relationship between subjective norms of consumers and their
level of acceptance of GST?
8) What is the relationship between perceived behavioral control of consumers
and their level of acceptance of GST?
1.5 Definition of Key Terms
1. Level of Acceptance refers to the level of intention to accept (Shamsuddin et al.,
2014).
2. Attitude is an individual’s positive and negative feelings about performing a
target behavior. The feelings are brought about after evaluations conducted based on
beliefs (Fishbein & Ajzen, 1975).
3. Subjective Norm is the individual’s opinion that those who are important to
him/her think that he/she should not perform the behavior in question
(Fishbein&Ajzen, 1975).
9
4. Perceived behavioral control is the perceived internal and external constraints on
behavior or intention to behave (Taylor & Todd, 1995).
5. Rule observance behavior relates to obedience to authority (Trevino, 1986).
6. Perception of fairness is the judgement of individuals that something or someone
is free of biasness and injustice (Saad, 2010).
7. Self-efficacy is an individual’s perception of his/her capability to organize and
execute courses of action required to accomplish selected types of performances
(Bandura, 1986).
8. Level of GST knowledge is an individual’s technical and general knowledge on
the subject matter of GST. (Saad, 2010)
1.6 Significance of Study
Both theoretical and practical implications of the study will be discussed.
1.6.1 Practical Implication
With the Goods and Services Tax finally being implemented, a study of this nature
would be imperative for the government in identifying areas at which they should
improve in and allocate resources to. This is very crucial especially since according
to Deputy Finance Minister Datuk Ahmad Maslan, there is RM250 million budget
10
allocation to educate the public about GST and to facilitate its implementation (Ian,
2014 ; Malaysian Insider, 2014).
This will therefore enable the Royal Malaysian Customs Department to undertake
measures for a smooth and effective transition to the GST system for consumers and
the Government as a whole. This includes enhancing their current support system
and enforcement measures (Kasipillai, 2013; Tan, 2009; Tan, 2014; Choo, 2014).
Previous studies (Saira et al., 2010; Palil & Ibrahim, 2011) have been conducted on
an exploratory mode as the GST implementation was not finalized. Other studies
Shamsuddin et al. (2014) and Moomal & Zakarian (2014) studied on the correlation
between awareness and acceptance. However, all these studies were not backed up
by a theory. Nordiana (2012), Bidin & Shamsudin (2013) and Ramalingam et al.
(2014), conducted a study on the compliance with GST and adoption of GST
application system of corporate tax collectors. Thus, this study would be the first
study to examine the factors that influence the acceptance level of consumers at large
amidst the announcement of the confirmed implementation of GST on 1 April 2015.
The key idea to understand here is that with corporate tax payers, their compliance is
harped on because under the GST implementation they are required to file in taxes to
the Royal Customs on a monthly or quarterly basis. Although they bear expenses on
preparing infrastructure and staff to ensure compliance to GST, which is usually a
one-off expenditure, it is the consumers who bear the tax burden of GST and
corresponding price hikes. The findings of this study will ultimately provide insight
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to the Consumers’ association on the information they can disseminate to the
consumers in order to assist them to accept and adapt to the implementation of GST.
1.6.2 Theoretical Implication
Although the implementation of GST has been decided upon-1 April 2015, however,
the acceptance level of consumers is still low. As such, the only issue at hand now is
to handle the transition process as smoothly as possible.
For this to be a success, the theory of planned behavior comes in handy to explain
the various possible factors to be addressed in order to enhance the acceptance of
GST amongst consumers. Previously this theory has been used to study corporate tax
payers’ compliance to GST (Nordiana, 2012; Bidin & Shamsudin, 2013) but through
this research, the theory will be extended to understand the factors that contribute
towards the acceptance of GST by consumers. Consumers do not need to comply
with the GST but rather just accept it as the tax will already be embedded in prices of
goods and service. In this case, the study will examine the consumers’ level of
acceptance of GST by determining their intention to accept GST because at the time
of data collection GST has not been implemented yet.
Hence, this study will test the theory’s rigidity in instances where the intention to not
behave in a certain way does not enable the respondent to escape from the behavior
itself.
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Antecedent variables are also used in this study to enhance the explanatory power of
the Theory of Planned Behavior. With these antecedent variables, the research will
be able to demonstrate very specific key areas for improvement that the government
should allocate resources to. The antecedents were Rule Observance Behavior,
Perception of GST Fairness, Self-Efficacy and Level of GST Knowledge.
1.7 Organization of the remaining chapters
This research is made up of a total of five chapters in order to present the study in a
systematic manner. The next chapter, Chapter two presents an overview of previous
literature on the variables put forth. This then leads to the development of the
theoretical framework and hypotheses for this study.
Chapter three consists of the research methodology, research design, data collection
methods and data measurement methods that will be employed for this study.
Chapter four presents the findings of this study where the goodness of the data used
is confirmed and the hypotheses developed are tested.
The final chapter, Chapter 5 will discuss the implications of the findings, practical
and theoretical applications of this study, limitations of the study, future research
suggestions and the conclusion.
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CHAPTER 2
LITERATURE REVIEW
2.0 Introduction
This chapter aims to examine all existing literature on the content, theory and latent
variables of this study as well as the relationships being examined in relation to
Goods and Services Tax which will be implemented come 1st April 2015.This will
then lead to the formation of the theoretical framework and the development of the
hypotheses.
2.1 Malaysian Taxation
The British colonialism introduced taxes into the Federation of Malaya in 1947
which has resulted in the taxation system in Malaysia today (Singh, 1999). At first,
the Income Tax Ordinance 1947 was gazetted as the fundamental act yet this was
accordingly changed and replaced by Income Tax Act 1967 (ITA) with effect from
January 1, 1968. At that time, ITA combined the three acts of income taxation in
particular Sabah Income Ordinance 195633, Sarawak Inland Revenue Ordinance
196034 and Income Tax Ordinance 194735. As of now, ITA 1967 is the fundamental
act to administer direct taxes in Malaysia including individual and corporate income
tax (Palil, 2010).
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The Lembaga Hasil Dalam Negeri or the Inland Revenue Board (IRB) is the tax
authority which oversees the operationalization of direct taxes in Malaysia. Other
than ITA, the IRB are also accountable for supervision, assessment, collection and
enforcement of petroleum taxes, real property gain taxes and stamp duties. The
indirect taxation system is controlled by the Royal Malaysian Customs (RMC). This
includes customs duties, excise duty, sales tax and service tax (Palil, 2010).
2.2 Consumers
In previous research, (Nordiana, 2012; Bidin & Shamsudin, 2013; Ramalingam et
al., 2014) their scope of study was on industrial taxpayers such as manufacturers,
retailers and distributors. The focus was on businesses that were registered under
GST compliance. In this study, the scope of study is on consumers, individuals who
consume goods with taxes already embedded in the pricing. Thus, the matter of non-
compliance or evasion does not exist in this context. In this study, MBA students
will be representing the consumers as majority of them are within the age group and
employment status highlighted in the Merdeka Center Survey of those who had a
higher percentage of not accepting GST.
An in-depth discussion of GST in the following component will highlight the very
fact that although GST will be charged at different stages, in the end the burden will
be on the consumer (Voon, 2013). The implementation of GST will have quite a
significant impact on consumers especially since according to the Report on
Household Expenditure by the Department of Statistics Malaysia, average monthly
expenditure per household has increased from RM 1,161 in 2004 up to RM 2,190 in
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2010. Even without GST implemented, consumers are facing an increase in
expenditure by 89% over 6 years. Thus, it is vital to study the perceptions and
acceptance of GST by these Malaysian consumers and the factors that are
influencing their perceptions.
Moreover, according to Bank Negara, Personal/Household Debt is standing at an
alarming rate of 83% of Gross Domestic Product of the nation compared to a 70% in
2009 and the debt to household income ratio is standing at an alarming 140%
(Joseph, 2013). Additional statistics creates more concern over this implementation
of GST. The increase in GDP of 5.1% in 2012 is less than half of the growth of
household debt of 12% in 2012, indicating severe unsustainability (Joseph, 2013).
Consumers are already high in debt pre-GST and it is worrying to imagine the
impact on consumers’ post-GST, where prices of goods and services are expected to
increase.
Hence, with the undertaking of this study, the reasons for knowledgeable consumers
accepting or not accepting GST can be determined and consequently influence the
channeling of resources towards customizing assistance and support for the
consumers in the most effective way.
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2.3 GST
Goods and Services Tax or GST is a tax on consumption based on a value-added
concept. In a nutshell, the more you consume the more tax you pay. Unlike the
present sales tax or service tax which is a single stage tax, GST is a multi-stage tax.
The tax is not a cost to the intermediaries since they are able to claim back GST
incurred in their business operations. GST is imposed on goods and services at every
stage in the supply chain including situations in which the good or service is
imported. It is not a new tax but instead is a tax to replace the current Sales Tax and
Service Tax (SST). GST is also known as VAT, Value-Added Tax in certain
countries (RMCD, 2013)
2.3.1 Reasons for implementing GST
The key reason for many countries adopting GST/VAT is the inefficiency of the
current tax system in financially supporting the development of the nation’s
economy. The same scenario occurred here in Malaysia and the Ministry of Finance
has studied and confirmed that the implementation of GST can overcome the various
weaknesses under the current Sales & Service Tax system. These weaknesses
include tax compounding and cascading, transfer pricing and reliefs on certain goods
(RMCD, 2013).
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Figure 2.1: Cascading effect -Sales & Service tax (RMCD, 2013)
Figure 2.2: Cascading effect - Service tax (RMCD, 2013)
In 1990, direct taxes contributed to 35.2% of the nation’s revenue whilst indirect
taxes contribute to 36.7%. The contributions of both categories of taxes were equal
but trade liberalization policies were amended causing major inequality in the
contribution of direct and indirect taxes. This was clearly depicted in 2012 when the
contribution from direct tax was 56.4% and indirect tax 17.2%. At this point of time,
Malaysia relies profoundly on direct taxes and petroleum revenues, a situation which
economic experts do not recommend. According to these experts, over-dependence
on only certain taxes will have an adverse effect on the nation’s financial position.
Hence, to eliminate these adverse effects this is an appropriate time for the
Government to engage in an overall tax reform and implement GST. (RMCD, 2013)
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2.3.2 Significance of GST
GST was introduced by the government in the 2005 budget but postponed to a later
date. Following that, the GST Bill was tabled for the First Reading in the Dewan
Rakyat in December 2009 but in 2010 the implementation was postponed again.
However, the implementation of GST is inevitable to support the nation’s long term
economic growth and the pressure was on the government to ensure a smooth
transition to GST. In order to do this, the Government has to take into account the
welfare and concerns of the society as a whole so that it is well-received (RMCD,
2013).
With this in mind, the Government had undertaken social impact studies of the
implementation of GST. To ease the tax burden on the consumers, certain goods and
services which are indispensable to the low and middle income group have been
proposed not to be subjected to GST. To add on, basic items such as poultry, rice,
flour, meat, vegetable, sugar, flour, cooking oil, residential and agricultural
properties, health services and education will not be subjected to GST (RMCD,
2013).
GST is a more transparent, competent, effective and less bureaucratic taxation
system. The double taxation phenomenon under the Sales & Services Tax regime is
eliminated with GST in place. From a business point of view, they are able to reduce
costs as they now can claim back the GST incurred which was not possible under the
SST regime. A company which back then had to absorb the sales and service taxes
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2.3.3 Mechanism of GST
The mechanism of GST can be examined from the consumers’ and businesses’ point
of view.
(a) Business
GST is charged on the supply of goods and services made in Malaysia and on the
imports of goods and services into Malaysia. GST is charged on the selling price of
the goods or services and only the GST amount will be forwarded to the
Government. The GST value is representative of the value added to the goods or
services at each level of the supply chain. The value added is the value added to a
raw material or purchases before selling the new or improved product or service. To
operationalize this, GST adopts a credit offset mechanism whereby GST charged
on the output of the business is offset against the GST paid on the goods or services
acquired as inputs by the business. Along these lines, a company will be charged
GST by its suppliers and simultaneously, the company will charge GST to its
paid can now claim the GST paid from the Customs. The net effect is definitely a
reduction in costs for these companies (RMCD, 2013).
Exportation of goods and services are not subjected to GST which will in return
ensure Malaysian exports are competitive in the global market. Consequently, this
will improve the Gross Domestic Product of the nation (News Strait Times, 2015)
With GST in place, shadow economy activities such as illegal trading, black money
and tax evasion can be curbed. (Schneider & Frey, 2000 ; MalayMail Online, 2015)
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customers. GST charged on output is called output tax and GST incurred on
purchase is called input tax. This offsetting mechanism is to guarantee GST paid by
businesses are recoverable leading to a reduction is cost. Most importantly, this
ensures there’s no double taxation and the net tax effect on the end consumer is only
6%. (RMCD, 2013)
Diagram 2.3: Input and output tax (RMCD, 2013)
(b) Consumers
GST-registered businesses will collect GST from consumers on the goods and
services purchased. There are three types of supplies listed under GST which
are(Examples are derived from Royal Malaysian Customs Guide on Supply
under GST):
(i) Standard rated supplies are taxable supplies of goods and services which are
subject to a positive rate of 6%. Examples of these supplies are sales of
commercial properties, vehicles, accessories and packaged food items.
(ii) Zero rated supplies are taxable supplies which are subject to a zero rate.
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Examples of zero-rated supply are fresh vegetables, live animals, books and
exports of goods and services. Businesses dealing with zero-rated supplies are
still able to claim the input taxes incurred.
(iii) Exempt supplies are non-taxable supplies which are not subject to GST.
However, the GST paid on input by the businesses cannot be claimed as tax
credit. Examples of exempt supply of services are domestic transportation of
passengers for mass public transports, private education and private health
services. Examples of exempt supplies of goods are residential properties, land
for agricultural and land for general use.
Below is an illustration showing how GST works:
Diagram 2.4: Standard rated supply (RMCD, 2013)
Diagram 2.5: Zero-rated supply (RMCD, 2013)
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Diagram 2.6 : Exempt supply (RMCD, 2013)
Although GST is imposed at every stage of the supply chain, businesses can claim
the GST incurred on inputs. Such mechanism implies that the end consumer only
pays GST at the rate of 6% and not 24%.
Diagram 2.7: GST Mechanism- standard rated (RMCD, 2013)
Hence, for consumers patronizing zero-rated and exempt-rated products, there would
not be any tax burden unlike purchasing a standard rated product. However, delving
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deeper, the consumer should understand that producers of exempt rated goods and
services cannot claim back their incurred input GST and will have no choice but to
channel the cost to the consumers by increasing prices. For example, a private
education institute will have to pay their suppliers GST for purchases of
infrastructure and maintenance services but will not be able to claim this GST
expense from the customs as their service is considered an exempt rated service.
However, the institute is now incurring higher costs than pre-GST implementation
and will have to increase their selling prices as well to cover the costs incurred.
An equally important point to understand is that GST, if well-implemented
should not result in increase of prices of all standard-rated products and
services. With the discussions below, an understanding can be obtained on the
three main implications of standard-rated GST on consumers.
Scenario 1:
10% SALES TAX abolished, 6% GST implemented
The sales tax of 10% is a business to business transaction and this tax burden is
usually embedded in the final pricing to end consumers. With the
implementation of GST, consumers should end up paying less because a
product manufactured or imported now is subject to 6% GST rather than 10%
Sales Tax.
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Scenario 2:
6% SERVICE TAX abolished, 6% GST implemented
While most consumers don’t experience the direct effect of the 10% Sales Tax,
most of them would have paid for the 6% Service Tax. In the scenario of
consumers engaging in service for which they were previously charged 6%, the
implementation of GST will not impose any price increase on items.
Consumers will be paying the same.
Scenario 3:
No Service or Sales Tax previously, GST 6% implemented
As GST is a broad-based taxation system, more sectors of the economy are
covered as compared to under the SST regime such as the paper and printing
industry, food preparation industry, medical and educational equipment
industry as well as repackaging industry. (Customs Guide Book,2003) Unless
the goods or services are zero-rated, prices of goods not previously covered
under SST will now be affected. Consumers will have to pay a higher price.
2.3.4 GST rates in the ASEAN countries
The GST rate of 6% suggested is the lowest in comparison to our neighboring
countries. Although Singapore initially introduced GST at 3% but the current GST
rate is 7%.
