THE INFLUENCE OF PERCEPTION OF TAX FAIRNESS ON SERVICE TAX COMPLIANCE BEHAVIOUR IN MALAYSIA

International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 1 Paper ID: IPCAF202527 DOI: THE INFLUENCE OF PERCEPTION OF TAX FAIRNESS ON Noorlaila Ghazali1*, Yusri Hazrol Yusoff 1, Shaliza Alwi 2 1 Faculty of Accountancy, Universiti Teknologi MARA, Malaysia 2 Arshad Ayub Graduate Business School (AAGBS), Universiti Teknologi MARA, Malaysia *Corresponding author: [email protected] ABSTRACT 1. This conceptual paper examines the influence of perception of tax fairness on service tax compliance behaviour in Malaysia, focusing on the food and beverage (F&B) sector. Despite the reintroduction of the Sales and Service Tax (SST) in 2018, non-compliance among service providers remains a pressing issue, undermining fiscal sustainability. Drawing on the Theory of Planned Behaviour (TPB), this paper proposes that the perception of tax fairness, encompassing distributive, procedural, and retributive dimensions, plays a critical role in shaping taxpayers’ attitudes and intentions to comply. Fair treatment, transparency, and equitable burden-sharing enhance trust in tax authorities, thereby promoting voluntary compliance. The paper synthesises relevant literature (2020–2024) to build a conceptual framework explaining how fairness perceptions influence compliance intentions and behaviour. The discussion highlights implications for tax policy, especially for the Royal Malaysian Customs Department (RMCD) in developing fairness-oriented compliance strategies. The study concludes that reinforcing perceptions of fairness is vital to strengthening Malaysia’s indirect tax system and encouraging sustainable compliance behaviour. 2. Keywords: Tax fairness, service tax, compliance behaviour, Theory of Planned Behaviour, Malaysia, F&B sector. INTRODUCTION Taxation plays a pivotal role in ensuring Malaysia’s fiscal sustainability, as it is the primary source of government revenue, financing public services and development projects. However, despite its importance, the country faces significant challenges with tax compliance, particularly in the service tax sector. Non-compliance persists, undermining the effectiveness of revenue collection and potentially impeding the government’s ability to meet its financial targets. This issue is especially pronounced within specific industries, such as the food and beverage (F&B) sector, where businesses continue to evade or underreport taxes, causing a notable gap between expected and actual tax revenues. The reintroduction of the Sales and Service Tax (SST) in 2018 aimed to streamline Malaysia's indirect tax system and foster a more transparent, more efficient framework for businesses. While this policy change was International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 2 intended to improve compliance, it has not fully resolved the underlying challenges. The persistence of compliance issues indicates that traditional approaches, such as stricter enforcement and higher penalties, are insufficient on their own to address the problem. Research has shown that tax compliance is not only shaped by economic factors like penalties and enforcement but also by psychological and behavioral elements. One such factor is the taxpayer’s perception of fairness in the taxation system. According to scholars like Wenzel (2004) and Alabede et al. (2023), when taxpayers perceive the tax system as unfair or unequal, they are less likely to comply voluntarily and may actively avoid tax obligations. On the other hand, when taxpayers believe the tax system is fair and, they are more likely to view compliance as a moral duty and are less inclined to engage in evasion tactics. This paper aims to explore the influence of fairness perceptions on tax compliance behavior within Malaysia’s service tax regime, particularly focusing on businesses in the F&B sector. The study will conceptually analyze how the perception of fairness can act as a psychological determinant that shapes attitudes towards compliance. By examining this behavioural factor, the paper seeks to provide insights into how policymakers and tax authorities can enhance voluntary compliance, thereby improving overall revenue collection and addressing the longstanding challenges in the Malaysian tax system. LITERATURE REVIEW 2.1 Tax Compliance Behaviour in Malaysia Tax compliance refers to the extent to which taxpayers adhere to tax laws, including accurate reporting, filing, and payment of taxes (Alm & McClellan, 2023). In Malaysia, service tax compliance rates remain relatively low compared to direct taxes, posing risks to fiscal stability (RMCD, 2023). The F&B sector, dominated by small and medium-sized enterprises (SMEs), faces unique challenges, including complex registration procedures and high compliance costs (Ahmad et al., 2023). 2.2 Concept of Tax Fairness Tax fairness is a multidimensional construct comprising distributive, procedural, and retributive fairness (Molero & Pujol, 2022). Distributive fairness concerns the equitable distribution of tax burdens; procedural fairness relates to the transparent and consistent application of tax laws; and retributive fairness involves the proportionality of penalties (Wenzel, 2004). When taxpayers perceive the system as fair, they are more likely to comply voluntarily (Wahab & Brown, 2022). Conversely, perceived unfairness fosters resentment and rationalisation of evasion (Saad, 2014). 2.3 Theoretical Framework: Theory of Planned Behaviour The Theory of Planned Behaviour (Ajzen, 1991; 2020) posits that behavioural intention, shaped by attitude, subjective norms, and perceived behavioural control, predicts actual behaviour. Within this framework, tax fairness contributes to the attitudinal component, influencing positive intention to comply (Kirchler, 2007). When taxpayers perceive fairness, their attitudes toward the tax system become more favourable, strengthening compliance intention (Musimenta, 2020). International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 3 2.4 Fairness and Compliance: Empirical Insights Empirical studies across contexts confirm the pivotal role of fairness in tax compliance. Oladipupo et al. (2022) and Alabede et al. (2023) reported that fairness perceptions significantly predict voluntary compliance among SMEs. Recent Malaysian studies (Lee & Nair, 2024; Ghani et al., 2020) emphasise that equitable treatment and transparent enforcement enhance tax morale. However, much of this evidence focuses on direct taxes, leaving the fairness of service taxes underexplored. CONCEPTUAL FRAMEWORK AND PROPOSITION The Theory of Planned Behavior (TPB) serves as the foundation for understanding how taxpayers’ perceptions of fairness can drive compliance behavior. According to TPB, an individual’s behavior is primarily influenced by their attitudes, subjective norms, and perceived behavioral control, which together form the intention to perform a specific action. In this context, the perception of tax fairness is conceptualized as a crucial antecedent that shapes taxpayers' attitudes toward tax compliance. When taxpayers perceive the tax system as fair, they are more likely to develop positive attitudes toward paying taxes, which subsequently enhances their intention to comply with tax obligations. The paper proposes that perception of tax fairness directly impacts compliance behavior through its influence on intention. By strengthening taxpayers' attitudes, fairness acts as a catalyst for forming a positive compliance intention. In other words, individuals who believe that the tax system is equitable are more likely to have the intention to comply with tax regulations. This intention, in turn, drives actual compliance behavior. The mediating role of intention in this framework suggests that while fairness influences attitudes, it is the intention to comply that ultimately translates these attitudes into observable actions. Building on these theoretical insights, the framework posits that tax fairness is not merely a passive perception, but an active driver of compliance behavior. Specifically, the hypothesis P1 asserts that a positive perception of tax fairness is expected to have a direct and positive effect on service tax compliance among Malaysian taxpayers. This framework underscores the importance of psychological factors in influencing tax compliance, providing a pathway through which fairness perceptions lead to more favourable compliance attitudes and, eventually, stronger tax adherence. IMPLICATIONS FOR POLICY AND PRACTICE The perception of tax fairness holds significant implications for shaping tax compliance behavior, particularly in the context of Malaysia's service tax system. If taxpayers perceive the tax system as just and equitable, they are more likely to comply with tax obligations voluntarily. This relationship suggests that policymakers and tax authorities should focus not only on enforcement mechanisms but also on ensuring transparency and fairness in tax administration. By fostering trust in the system through clear, fair, and consistent application of tax laws, the government can improve taxpayer compliance without resorting solely to punitive measures. As a result, the government could see higher voluntary tax compliance, which is often more efficient and less costly to administrators. International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 4 The implications extend beyond merely increasing compliance rates; they also highlight the role of public perception in building long-term trust in the tax system. Taxpayers' attitudes toward tax fairness can influence their broader social contract with the government. When individuals perceive the tax system as fair, they are more likely to feel a sense of civic duty and responsibility toward contributing to public goods and services. This perception strengthens the social legitimacy of taxation, which can lead to greater taxpayer morale and a more positive public attitude toward tax policy reforms. If the government focuses on improving the perception of fairness, it can create a sustainable cycle of compliance and trust, reducing the need for aggressive enforcement strategies. However, the challenge lies in how to manage and shape perceptions of fairness effectively. If taxpayers feel that the tax system is biased, unequal, or arbitrary, it can result in resistance or even tax evasion. In the Malaysian context, ensuring that service tax policies are perceived as fair across all sectors and income groups is crucial. This requires not only equitable tax rates and enforcement but also clear communication of the benefits that tax revenues provide to society. By addressing concerns over fairness and ensuring equitable distribution of tax burdens, Malaysia can create a more favorable environment for tax compliance, leading to a more sustainable and efficient tax system. CONCLUSION This conceptual paper advances the argument that perception of tax fairness is central to understanding service tax compliance behaviour in Malaysia. Grounded in the Theory of Planned Behaviour, the study highlights that perceptions of fairness influence attitudes and intentions, leading to greater voluntary compliance. The framework provides a foundation for future empirical research to test these relationships using structural equation modelling. Strengthening perceptions of fairness will be essential to achieving a more cooperative and sustainable tax culture in Malaysia’s indirect tax regime. REFERENCES Ajzen, I. (1991). The theory of planned behavior. Organizational Behavior and Human Decision Processes, 50(2), 179–211. Ajzen, I. (2020). The theory of planned behavior: Frequently asked questions. Human Behavior and Emerging Technologies, 2(4), 314–324. Alabede, J. O., Ariffin, Z. Z., & Idris, K. (2023). Fairness perception and tax compliance among SMEs. Journal of Accounting and Taxation, 15(3), 102–115. Alm, J., & McClellan, C. (2023). Tax compliance and enforcement: New evidence from behavioural insights. Journal of Economic Behaviour & Organization, 208, 315–328. Ghani, E. K., Said, J., & Nasir, N. M. (2020). Trust, fairness and compliance behaviour among Malaysian taxpayers. Asian Journal of Accounting Perspectives, 13(2), 57–74. Lee, C. S., & Nair, M. (2024). Behavioural determinants of tax compliance in Malaysia. International Journal of Public Administration, 47(2), 256–272. International Postgraduate Conference on Accounting and Finance (IPCAF 2025) 2 May 2025 Kuala Lumpur e-ISBN: 978-967-0760-39-1 Publish Date: 14 October 2025 5 Molero, J. C., & Pujol, F. (2022). Fairness and compliance: The moral foundations of taxation. Journal of Economic Psychology, 91, 102–113. Musimenta, D. (2020). Behavioural insights and tax compliance intention in SMEs. Small Business Economics, 55(3), 775–790. Oladipupo, A. O., Afolabi, A. F., & Olayemi, O. (2022). The role of fairness perception in shaping tax compliance behaviour. International Journal of Economics and Management, 16(4), 403–419. Wahab, N., & Brown, K. (2022). Perceived fairness and voluntary compliance in developing countries: Evidence from Malaysia. International Journal of Accounting and Information Management, 30(1), 112–130. Wenzel, M. (2004). An analysis of norm processes in tax compliance. Journal of Economic Psychology, 25(2), 213–228.*