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Threat of punishment has been emphasized as one of the effective tools to deter taxpayers’ non-compliance attitudes. Thus this study aims to explore the impact of threat of punishment on both individual taxpayers’ attitudes, compliance and non-compliance. The findings from a mixed-modes survey indicate that threat of punishment is insignificant on taxpayers who are willing to comply with tax laws. They tend to avoid taxes when they are threatened with tax audits and penalties. Overall, threat of punishment appears to have not only an insignificant impact on compliant taxpayers but also trigger their intentions to be less compliant.
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Procedia - Social and Behavioral Sciences 164 ( 2014 ) 291 – 297
Available online at www.sciencedirect.com
ScienceDirect
1877-0428 © 2014 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/3.0/).
Peer-review under responsibility of the School of Accountancy, College of Business, Universiti Utara Malaysia.
doi: 10.1016/j.sbspro.2014.11.079
International Conference on Accounting Studies 2014, ICAS 2014, 18-19 August 2014, Kuala
Lumpur, Malaysia
The impact of threat of punishment on tax compliance and non-
compliance attitudes in Malaysia
Raihana Mohdalia*, Khadijah Isab, Salwa Hana Yusoffb
aUTM Razak School, Universiti Teknologi Malaysia, Jalan Semarak, 54100 Kuala Lumpur, Malaysia
bInternational Islamic University Malaysia, Jalan Gombak, 53100 Kuala Lumpur, Malaysia
Abstract
Threat of punishment has been emphasized as one of the effective tools to deter taxpayers’ non-compliance attitudes. Thus this
study aims to explore the impact of threat of punishment on both individual taxpayers’ attitudes, compliance and non-
compliance. The findings from a mixed-modes survey indicate that threat of punishment is insignificant on taxpayers who are
willing to comply with tax laws. They tend to avoid taxes when they are threatened with tax audits and penalties. Overall, threat
of punishment appears to have not only an insignificant impact on compliant taxpayers but also trigger their intentions to be
less compliant.
© 2014 The Authors. Published by Elsevier Ltd.
Peer-review under responsibility of the School of Accountancy, College of Business, Universiti Utara Malaysia.
Keywords: Voluntary tax compliance; tax avoidance attitude; threat of punishment
1. Introduction
Taxpayers are expected to be deterred by threat of punishment from the tax structure, namely through tax
audits, penalties and tax rates. Prior research mainly focuses on the impact of threat of punishment on tax evasion
because the changes in the tax structure are anticipated to change the way people behave in fulfilling their tax
obligations. However, the direction of tax research has shifted since 1990s in order to try to understand the positive

* Corresponding author. Tel.: +6-03-2615-4584.
E-mail address: raihana@ic.utm.my
© 2014 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/3.0/).
Peer-review under responsibility of the School of Accountancy, College of Business, Universiti Utara Malaysia.
292 Raihana Mohdali et al. / Procedia - Social and Behavioral Sciences 164 ( 2014 ) 291 – 297
attitudes of taxpayers rather than the negative attitudes of taxpayers. This is because despite the slim chances of
being audited or reasonable penalties being imposed on tax evasion, most people are willingly abide by tax laws.
In general, there is a large body of theoretical and empirical evidence to support the view that threat of punishment
such as higher audit probabilities and penalties encouraged compliance and higher tax rates discouraged
compliance. However, there are other studies that pointed to different direction.
Therefore, the aim of this study is to determine the impact of threat of punishment on both compliance attitudes
of individual taxpayers namely voluntary tax compliance and tax avoidance attitude in a study. However, the only
tax structure element employed in the present study was the tax audit and penalty to measure the threat of
punishment variable. The tax rate element was excluded because the Malaysian residents follow a progressive tax
rate schedule and tax audit and penalty elements appear to be more influential in compelling taxpayers to make
positive compliance decisions. The remainder of the paper is organized as follows. The next section briefly
reviews the literature regarding the influence of threat of punishment in tax compliance studies. This discussion is
then followed by the presentation of the methods used in this study. Next, the findings of the study are presented.
The subsequent section provides a discussion of the overall findings together with the theoretical and policy
implications. Several limitations of the current study are acknowledged and the final section concludes the paper.
2. Threat of punishment and tax compliance
Fear has been used by tax authorities as a means to force taxpayers to conform to tax laws given that a taxpayer
is viewed as a “perfectly amoral, risk-neutral or risk-averse, utility maximizing individual who chooses to evade
tax whenever the expected gain exceeded the cost” (Milliron & Toy, 1988, p. 85). The economic deterrence
approach was developed based on the economics-of-crime model, introduced by Becker (1968) to optimize the
public and private policies in fighting illegal behavior since threats of punishment are expected to encourage
lawful behavior. Basically, it is assumed that the tax compliance decision is made by a taxpayer under uncertain
circumstances, strictly due to the fear of the possibility of being caught and penalized (Alm & McKee, 1998).
The threat of punishment, consisting of tax audits, tax penalties and tax rates, is used in most countries to deter
taxpayers’ non-compliance behavior. In general, most of prior studies showed a positive correlation between audit
probability and compliance (Fischer, Wartick, & Mark, 1992). However, the impacts of audit probabilities on tax
compliance are varied depending on the group of taxpayers. For example, audit probabilities were found to have
strong influences on tax compliance for sole proprietors but only little effect on salaried taxpayers (Witte &
Woodbury, 1985). Hence, tax audits that specifically target a certain group of taxpayers seem to be more effective
in increasing tax compliance rather than random audits (Hasseldine, 1993). Further, audit probabilities may only
affect taxpayers who have the intention to evade (Hanno & Violette, 1996; Trivedi, Shehata, & Lynn, 2003).
Spicer and Thomas (1982) suggested that taxpayers may only abide by tax laws when they have definite
information about the possibilities of being audited.
There are mixed findings on the influence of penalties. A number of studies (for example: Beck, Jon, & Jung,
1991; Park & Hyun, 2003) indicated a positive influence of higher penalty on tax compliance but other studies (for
example: Alm, Bahl, & Murray, 1990; Alm, Jackson, & McKee, 1992) lead to the opposite findings. The severity
of the penalty may only discourage taxpayers from reporting their true incomes because the possibility of gaining
is greater than the possibility of losing (Slemrod, 2004). In addition, the impact of penalty also varies according to
group of taxpayers. For example, the severity of criminal fraud penalties was found to be positively related to the
behavior of high income self-employed individuals (Alm, Bahl, & Murray, 1990). On the other hand, civil
penalties appeared to have negative relationships with the behaviors of small proprietors and middle income
individuals (Witte & Woodbury, 1985).
Studies that examined tax rates as a compliance variable have produced mixed results. For instance, it is
apparent that taxpayers are prone to understate their incomes when the marginal tax rate is increased (Clotfelter,
1983; Skinner & Slemrod, 1985). In other words, higher tax rates will pressure taxpayers to be less compliant.
Feinstein (1991), however, discovered conflicting findings which were in line with the findings by Etzioni (1986),
that is, despite the fact that the tax rate was stable, the tax compliance rate was still low. Sandmo (2005) in his
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review of the theory of tax evasion believed that the tax rate was not among the main factors that influenced
taxpayers’ decision-making as compared to the penalty and audit rate.
In Malaysia, the tax structure, consisting of tax rate, audit rate and penalty rate, is apparently influential on
taxpayers’ compliance behaviors as evident in an experimental study involving two groups of undergraduate
students (Loo, 2006b). A mixed-methods study (a survey and an experiment) also demonstrated the same findings
except for tax audit which was found to be less effective for salaried taxpayers (Loo, McKerchar, & Hansford,
2009). This may be because the scheduler tax deduction is imposed on the majority of salaried taxpayers in
Malaysia. However, the penalty rate appeared to be the most influential tax compliance determinant of tax
compliance attitudes in a comparison study of taxpayers’ compliance attitudes before and after the implementation
of the SAS (Loo, 2006a). Despite the tax structure being evident to deter the non-compliance behavior of
taxpayers, the enforcement of the rules was viewed to be rather loose which may reduce the integrity of the IRBM
in the eyes of taxpayers. Overall, the threat of punishment remains significant in deterring the negative intentions
or attitudes of taxpayers.
3. Research method
The main principle of a survey is to gather original data directly from a population through a survey of a
fraction of the population to reflect the larger population (Salant & Dillman, 1994). It is regarded as an excellent
method in rationalizing an individual’s attitude towards certain issues (Babbie, 2008), hence a self-administered
survey was utilized in this study for that purpose. One of the most successful techniques to avoid low response
rates in a survey is to employ a drop-off method (Dillman, 2007). However, a drop-off survey is also considered to
be costly since it requires travelling from one location to another for hand deliveries and retrievals of
questionnaires (Zikmund, 2003). Thus an online survey was then selected as a second method since it is known for
its economic advantage as an inexpensive method (Van Selm & Jankowski, 2006). There is a possibility of
responses received from one mode may differ from responses received in the other mode but only little impact is
expected (de Leeuw, 2008). Thus both a drop-off and online survey were used in this study.
The current study only involved individual taxpayers in Malaysia comprising salaried and self-employed
taxpayers. The potential respondents for drop-off survey were selected based on proportionate stratified sampling
according to the proportion of ethnic groups in Malaysia namely Malays and other indigenous groups (66 percent),
Chinese (25 percent) and Indians (8 percent) (Department of Statistics Malaysia, 2001). A total of 450
questionnaires were sent to seven companies and distributed by the intermediaries to salaried taxpayers and the
balance, 50 questionnaires were sent personally to self-employed taxpayers.A survey link was also forwarded to
both salaried and self-employed taxpayers.
Three constructs were developed to measure individuals’ attitudes towards tax compliance and their
perceptions towards threat of punishment. The items for these constructs were adapted from the literature review
and self-developed. Tax compliance attitudes were represented by two dependent variables namely voluntary tax
compliance (VTC) adapted from Kirchler and Wahl (2010) and Braithwaite, Murphy, and Reinhart (2007); and tax
avoidance attitude (TAA) adapted from Gilligan and Richardson (2005) and Niemirowski and Wearing (2006).
The independent variable namely threat of punishment (ToP) was adapted from Verboon and van Dijke (2007) and
one item was self-developed. All three constructs were measured on a 5-point Likert scale (1 = strongly disagree, 5
= strongly agree).
4. Findings
The total usable responses from both methods was 302 with 197 responses were received from the drop-off survey
and 105 responses from the online survey. The responses from these two methods were combined because the
same questionnaire was used in both methods and the t-test results show there were no significant differences
between data from both methods such as (t(300)VTC= 0.91, p = n.s.). The percentage of Malay (78 percent)
294 Raihana Mohdali et al. / Procedia - Social and Behavioral Sciences 164 ( 2014 ) 291 – 297
involved in this study appeared to be over representative compared to Chinese (17 percent) and Indians (5 percent),
but the overall sample was considered acceptable because it reflected the actual ranking of Malaysian proportion in
the population. Almost 90 percent of the respondents were salaried taxpayers and 10 percent were self-employed
taxpayers. The overall mean score for voluntary tax compliance and tax avoidance attitude is 3.67 and 2.53,
respectively. This result demonstrates high voluntary tax compliance among the respondents and negative
inclination towards the component of tax avoidance attitude.
There were mixed attitudes that shaped the respondents’ compliance attitudes in terms of the impact of the
threat of punishment as shown in Table 1. A large number of respondents appeared to disagree with the third
(ToP3) and second (ToP2) items with a percentage of 62 and 40, respectively. They believed in a high possibility
of being audited and a high chance of being discovered and punished by the IRBM. On the contrary, more than 45
percent of the respondents appeared to agree that the potential of being tracked by the IRBM was unlikely if it
involved the understatement of income or overstatement of expenses (ToP4). The respondents’ awareness of the
type and extent of penalties and risks indicated similar percentages, around 30 to 35 percent in all three categories
of attitudes for the first item (ToP1). The overall mean score of 2.85 illustrated the respondents’ disagreement but
the inclination was towards a neutral attitude.
Table 1. Attitudes towards the threat of punishment
Item Statement Mean Med. SD
Strongly
Disagree/
Disagree
Neutral
Strongly
Agree/
Agree
ToP1 I am NOT aware of the type and extent
of penalties and risks that exist for
income tax evasion in Mala
y
sia.
2.98 3.00 1.00 108
(35.7)
95
(31.5)
99
(32.8)
ToP2 It is unlikely for taxpayers to be
discovered and punished by the IRBM
if the
y
were to evade income taxes.
2.83 3.00 0.99 122
(40.4)
99
(32.8)
81
(26.8)
ToP3 I do NOT pay taxes as required by the
regulations because I know the
probability of being audited is very
slim.
2.44 2.00 1.01 188
(62.3)
63
(20.9)
51
(16.8)
ToP4 The IRBM rarely finds out if someone
has overly understated their income or
overstated their deductions.
3.13 3.00 1.01 104
(34.4)
62
(20.5)
136
(45.1)
ToP - 2.85 2.75 0.70 - - -
* The percentage of responses is given in parentheses and some of them do not total up to one hundred percent due to rounding.
** n = 302.
The threat of punishment was found to have a negative relationship with voluntary tax compliance and not
statistically significant (r = -0.003). In contrast, it was found to a have positive significant correlation with tax
avoidance attitude (r = +0.38). A simple regression analysis indicated that threat of punishment was insignificant
(β = 0.08, p = n.s.in explaining voluntary tax compliance but a significant (β = 0.06, p = 0.00predictor of tax
avoidance attitude.
5. Discussion of findings
The highest mean score perceived by individual taxpayers in Malaysia between two tax compliance components
was voluntary tax compliance. This may indicate a high tendency of individual taxpayers in Malaysia to comply
voluntarily with tax laws which lends support to the prior research (Loo, McKerchar, & Hansford, 2010). One of
the potential explanations for this strong positive attitude may be because the majority of the respondents were
salaried taxpayers. Being salaried taxpayers, a portion of taxpayers’ salaries was deducted automatically by their
employers for payment of income taxes based on the scheduler tax deduction set up by the IRBM. Further, the
employment of the e-filing system in Malaysia probably offers an easy and economical transaction for taxpayers
who have straight-forward tax affairs such as salaried taxpayers who were the majority of the respondents in this
study. The provision of convenient and inexpensive ways to deal with the tax authority is stressed by McKerchar
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and Evans (2009) as an important strategy in fostering voluntary tax compliance. Thus high levels of voluntary tax
compliance were evident among the individuals in this study.
The influence of threat of punishment on tax compliance components in this study was found to be positively
statistically significant only on tax avoidance attitude. The threat of punishment has encouraged taxpayers to be
more inclined towards the tax avoidance attitude. Since they were already willing to comply, the use of threat of
punishment may only encourage them to be less compliant which might indicate their rebellious attitude against
the government. This is probably because compliers are less likely to be affected by the threat of punishment as
compared to non-compliers (Hanno & Violette, 1996) but the threat of punishment might trigger rather than
discourage negative intentions or attitudes. This lends strong support to prior Malaysian studies, even though the
term used is different (Loo, 2006a; Loo et. al., 2009). Tax structure (tax audits and penalties) appeared to have an
indirect influence on tax compliance which led some taxpayers to over-comply. However, their main reason for
complying was to get a tax refund.
The insignificant impact of the threat of punishment on taxpayers’ positive attitudes probably reflects the
salaried taxpayers being the majority in the current study. This was probably because they had less opportunity to
avoid or even to evade paying taxes because their tax affairs were direct and simple. Self-employed taxpayers were
considered to have more complicated tax affairs that enable them to make use of the various loopholes in the
income tax rules. This strongly supports the prior international (Witte & Woodbury, 1985) and Malaysian (Loo et.
al., 2009) studies that showed the prospect of a tax audit was ineffective for salaried taxpayers. However, the threat
of punishment still appeared to be effective if they had the intention to avoid taxes, regardless of their employment
status.
One important policy implication for the IRBM from this study is probably to communicate the positive and
negative information to taxpayers as practiced by the Australian Tax Office (2012). For example, the Australian
Tax Office plan for compliance activities for 2012 to 2013 were released to the public in July 2012 as a means of
communicating relevant information to taxpayers and the compliance information is also conveyed through the
media and tax practitioner community. It is probable that such a targeted policy could be practiced in Malaysia.
For example, positive information is probably effective for salaried taxpayers in Malaysia because they have
strong intentions to voluntarily comply so that they can easily respond to positive appeals from the tax authority
and negative information most probably is more appropriate to threaten taxpayers who have the intention to evade
taxes. Interestingly, both types of information are found to be effective on “high opportunity” taxpayers such as the
self-employed (Hasseldine, Hite, & Toumi, 2007, p. 189).
The most apparent limitation of this research is that it relied on a self-reported method to collect data and that
may have led to inaccuracies in the data. This is because respondents may interpret the questions differently
according to their understanding and may misunderstand the questions because of certain terminologies even
though reasonable efforts were made to ensure the wording was simple and precise. The second obvious limitation
was the selection of taxpayers involved in this study. Even though several attempts were made to include more
self-employed taxpayers in the surveys, the salaried taxpayers remain as the majority of the total respondents.
Furthermore, the opportunities to avoid or evade paying taxes between these two types of taxpayers are different
because salaried taxpayers have fewer opportunities to evade compared to self-employed taxpayers (Braithwaite,
2003). Thus they might have different perspectives and attitudes towards tax compliance issues.
6. Conclusions
The empirical evidence in this study has shown that the threat of punishment is less likely to be effective in
deterring people who already have strong intentions to comply with tax laws but more likely to increase their
negative intentions to comply when threat of punishment is employed as one of the tools to reduce tax non-
compliance attitudes. Their willingness to comply probably deteriorates because they are being threatened for
things that they do not have any intentions to do. Therefore, the IRBM is suggested to carefully plan their strategy
by using target policy in disseminating information to the right group of taxpayers such as salaried and self-
296 Raihana Mohdali et al. / Procedia - Social and Behavioral Sciences 164 ( 2014 ) 291 – 297
employed taxpayers in encouraging voluntary tax compliance in Malaysia. Since this study was dominated by
salaried taxpayers, the key direction for future research is to explore self-employed taxpayers’ perspectives on
threat of punishment. It may provide interesting information to fully understand the possibility of taxpayers’
changing attitudes depending on the avoidance opportunities available to them. Even with its limitations, this study
has provided evidence that threat of punishment might activate the non-compliance attitudes in people who have
strong intentions to comply.
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... According to Raihana et al. (2014), the issue of tax compliance becomes one of the main interests and requires special attention by policymakers, tax administrations and societies since non-compliance behaviour may lead to a reduction in tax revenue which indirectly might affect citizens, including those who complies voluntarily. TABLE 1. Number of cases (tax audit settlement) and amount of tax penalties collected Source: IRBM Annual Report, 2011-2015 The amount of tax penalties collected per year indirectly indicates the trend of tax non-compliance in Malaysia (Kasipillai 1999;Natrah 2009;Nor Azrina et al. 2014;Muhammad Aqbal et al. 2016;Nuridayu et al. 2017). ...
... In addition, this study will also examine another two factors, namely treatment provided by tax authority and SVDP, which is also considered an accommodative approach to better understand tax compliance strategies by the IRBM. Many previous studies in Malaysia focus on the tax audit and penalty (deterrence approach) (Razilina et al. 2012;Mohamad et al. 2013;Mohd Rizal et al. 2013;Raihana et al. 2014;Noor Sharoja et al. 2014). Therefore, this study intends to provide a more comprehensive perspective of compliance strategies by extending the study to include the 'other side' or 'positive side' of compliance strategy that is accommodative approach to improve tax compliance. ...
... The threat of punishment has been emphasized as one of the effective tools to curb evasion and has become one of the main strategies used by most tax authorities to overcome non-compliance issue (Verboon & van Dijke 2007;Murphy 2008;Devos 2013;Raihana et al. 2014). It consists of tax audit, tax penalty and tax rate. ...
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Due to the significance of tax revenue as the primary source of a country's income, any leakage due to non-compliance behaviour may impact the country, which will eventually affect citizens. One way to reduce tax non-compliance is through compliance strategies which can be categorised into two; deterrence and accommodative approach. It is advisable that tax authority should not only focus on the deterrent approach (tax audit and penalty), mainly on tax offenders. Instead, tax authority also needs to find ways to preserve good taxpayers' continuous fulfilment of their tax responsibilities, encourage future taxpayers to commit to tax laws, and transform tax offenders to become good taxpayers using the accommodative approach. This study uses the survey method to determine individual taxpayers' perception of tax authority's compliance strategies (threat of punishment, tax education programme, treatment provided by tax authority, special voluntary disclosure programme (SVDP)). This study then investigates the influence of those compliance strategies towards tax compliance behaviour. Our findings indicate that individual taxpayers have a positive perception towards compliance strategies provided by the tax authority in Malaysia (refer to Inland Revenue Board of Malaysia (IRBM)). In addition, the threat of punishment, treatment provided by IRBM and SVDP are significantly proven to have a positive relationship with tax compliance. However, it is suggested that IRBM should improve their tax education programmes as it is found to be insignificant. This study contributes to current tax compliance literature in a relatively important field of compliance strategies by providing comprehensive insights into the influence of both deterrence and accommodative apporaches in influencing tax compliance behaviour, as well as focusing more on an accommodative approach that is receiving attention lately. With both approaches in one study, the results of this study provide a clear, complete and comprehensive understanding since most of previous studies conducted separately. Finally, the findings of this study also provide valuable and significant input to the tax authorities and policymakers, especially IRBM in assessing and making a necessary improvement on their compliance strategies with the mission to enhance tax compliance behaviour, especially among individual taxpayers.
... The reviewed articles in this sub section are related to economic or structural variables within the developing countries. For instance, Mohdali, Isa, Yusoff and Salwa (2014) discover that punishment is a good determining factor of tax compliance in their empirical study. A conceptual study by Sinnasamy, Bidin and Ismail (2015) conclude that tax rate and tax penalty are determining factors of tax compliance in Malaysia. ...
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It is pertinent that sustainable tax compliance is achieved only if the tax policy takes the main determinants of tax compliance into consideration. Meanwhile, tax compliance has been seen as one of the critical tax administration issue particularly amongst the developing countries of the world. In that regards, scholars have contributed immensely in studying the causes or determinants of the phenomenon based on some prevailing factors associated to economic, social and psychological conditions of our society. And the factors are basically linked to some suggested theories. Nevertheless, the study premised on reviewing some related studies conducted amongst the developing countries of the world based on thematic and chronological approach, in order to know the most commonly identified determining factors of tax compliance between the periods of 1998 to 2022. it is imperative to note that the major determining factors extracted from the reviewed literatures are basically ranked from the most commonly identified to the least identified as: taxpayers attitudes and tax fairness perceptions were frequently identified six times each, secondly, tax payers knowledge, perceived behavior and subjective norms were identified four times each, thirdly, sources of income, complexity of tax laws, ethical sensitivity and religiosity knowledge were frequently identified three times, and lastly, perceive tax system and perceived usefulness were frequently identified from the literatures two times each respectively. Therefore, the study concludes that the commonly identified determining factors of tax compliance in the developing countries based on reviewed literature are taxpayer’s attitude and fairness perception. Hence, other empirical studies may need to be conducted to justify the position of this study.
... In fact, it is argued that the excessive use of coercive and punitive measures can rather undermine the legitimacy of public authorities and generate a counterproductive impact on people's commitment to compliance (e.g. Murphy, 2008;Mohdali, 2014). ...
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... In contrast with Mohdali et al. (2014), this assertion claimed that sanctions and penalties encourage tax avoidance among taxpayers because of what they believe is a "threat of punishment" from the government. In contrast, the result disagrees with Gemmell et al. (2018), who claimed that tax penalties would not affect taxpayers. ...
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