New Page 1

MOHAMAD SHAROFI ISMAIL
MD SUHAIMI MD SALEH
SYED SOFFIAN SYED ISMAIL
Universiti Utara Malaysia

In Malaysia, the major source of revenue is the assessment tax (47 per cent for Peninsular Malaysia). Section 130 of the Local Government Act 1976 stipulates that rates are to be imposed upon the improved value of the holding. Improved value was defined as the price that an owner willing and not obliged, to sell might reasonably expect to obtain from a willing purchaser with whom he has been bargaining for the sale and purchase of the holding (Mohamad Affandi, 1995). The total assessment tax collection may have a major impact on the quality of services provided by local authorities. The studies of the Malaysian local authorities have shown that the low collection of assessment tax is associated with poor collection systems (Nahappan Report, 1970; Ismail, 1989 and 1991). Therefore, this study attempts to investigate the current practices of assessment tax in local authorities especially in term collection and enforcement.

The findings can assist the state government and Ministry of Housing and Local Government to restructure the current local tax especially in term of collection system. It is expected that the new approaches of collecting assessment tax and enforcement approaches have the potential to make major improvement in reducing arrears in local authorities.

The primary objective of this research is to investigate the management of property taxes implemented in six local authorities in Malaysia. Specifically, the study investigates:

The Malaysian government can divide into three levels: federal, states and local authorities or local government. Local government or local authority is the third tier of the government and is governed by the Local Government Act 1976. Local authority as the closest government agency to the public is very important to the life of the people. Its responsibility is not only accommodating the public with variety of services and basic facilities but also as an important channel for the public in their interaction with the government.

According to section 2, Local Government Act 1976 defines local authority as ‘Any City Council, Municipal Council or District Council, as the case may be. In relation to the Federal Territory means the Commissioner of the City of Kuala Lumpur appointed under Section 3 of the Federal Capital Act 1960’.

It is surprising, given the money that has been spent on systems to collect national non-domestic rates, community charge and the council tax, that the application of modern technology to the legal process has been delayed so long. It is in no-one's interest for arrears to be allowed to build up. The sooner people in arrears are contacted the more easily the problem can be resolved, since at each stage in the debt recovery process the majority of people contacted either repay, or arrange to repay, the money owed.

There are many different methods of payment, all with varying levels of default associated with them. In general the commercial sector has been quicker to recognise this than the public sector. Credit companies lending money to low-income people tend to retain control of the payment system. The same applies to money lenders who use door-to-door collection methods, or mail-order companies which recruit local people to act as their agents. In contrast, local authorities have tended to change to rent payment systems that give them less control, with door-to-door rent collection now a rarity.

At the end of the day, there is no single solution to the problem of debt. People fall into arrears with their household and credit commitments for many different reasons; some are circumstances that are outside their control while others have created them for themselves. Tackling the problem involves preventing debts occurring in the first place, swift and responsible debt collection and providing practical help and support for people who have got into debt (Bassano, 1995)

The GFOA/MBIA survey also found that about 20 percent of governments have attempted to introduce competition into the collection process by permitting public agencies and private firms to bid to provide revenue collection services. Of these 20 percent of governments, most have entered into successful contracts with private firms to collect portions of their revenues. "The survey results indicate that governments are interested in improving collections by every means possible, including utilizing the services of private firms when it makes sense," said Jeffrey L. Esser, executive director of the Government Finance Officers Association.

Nearly half of the governments surveyed have made changes to their revenue collection processes during the past 24 months, with many focusing on improved performance monitoring and enhancements to their computer systems: Fifty-three percent have established means for monitoring collection performance more carefully. Forty-five percent have made improvements to their computer systems. Thirty-nine percent have made greater use of credit reporting services and collection agencies.

The survey found that 38 percent of survey respondents accept electronic funds transfers, and 24 percent accept credit card payments. In addition,

twothirds of the respondents use computer programs to assist with their collection efforts; of these:

Sixty-four percent interface with the accounting system. Fifty-nine percent automatically generate collection notices and letters. Seven percent automatically generate legal action filings. Six percent have on-line capabilities.

Another innovation has been the sale or securitization of property tax liens or other receivables. While 13 percent of all responding governments have considered or actually sold or securitized property tax liens within the past 24 months, 25 percent of respondents from county governments and 27 percent of respondents from the northeastern region of the United States indicated that they have considered this approach (Anonymous, 1997.

According to Ahmed (1992), Local councils in Bangladesh have been provided with several sources of revenue that can be utilized for the maintenance of the councils, as well as the initiation of developmental projects. The union and upazila level councils have fared miserably in collection of such revenue. An examination of twelve upazilas during 1986--90 demonstrates that their performance has been affected by a lack of administrative support for the task, a dearth of adequate knowledge and skills on the part of local leaders and a failure to plan carefully on the part of the government. The Ordinances through which they have been established did not identify realistic sources of revenue nor did they provide guidelines on their utilization.

Post and Hochberg (1989) provide three strategies that can improve the collection of assessment tax which are:

Six local authorities located in Peninsular Malaysia were studied. These local authorities were selected based on their willingness to participate in this case study.

A set of questions used in this study contains 34 questions and were pre-tested by several accountants before conducting the self-administered questionnaire survey coupled with short interviews for each of them.

ANALYSIS, RESULT AND DISCUSSION

Billing and Collection of the Assessment Tax

Table 6.1 presents the current practices of assessment tax billing for the six local authorities. The results shows that the frequency of billing for assessment taxes between these local authorities are standardized where the tax are charge twice a year (January and July). This is in line with the requirement under Section 133 Local Government Act 1976 which prescribe that the assessment tax shall be payable half-yearly in the month of January and July. The tax payers are normally be given two months period to settle the respective bill.


Billing			Local Authorities
	LA 1	LA 2	LA 3	LA 4	LA 5	LA 6
Frequency of Biling	2	2	2	2	2	2
Month of biling	Jan & Jul	Jan & Jul	Jan & Jul	Jan & Jul	Jan & Jul	Jan & Jul
Duration for settlement	2 months	2 months	2 months	2 months	2 months	2 months
	1st half Jan - Feb	1st half Jan - Feb	1st half Jan - Feb	1st half Jan - Feb	1st half Jan - Feb	1st half Jan - Feb
	2nd half Jul -Aug	2nd half Jul -Aug	2nd half Jul -Aug	2nd half Jul -Aug	2nd half Jul -Aug	2nd half Jul -Aug

The results from Table 6.2 represent the modes of payment collection (other that counter services) being practiced by six local authorities. This study reveals that there are major differences between modes of payment provided by LA 2 compared to other local authorities. The LA2 provides more alternatives to tax payers in settling their tax payment, such as credit cards, direct debit, salary deduction and electronic banking. With regards to payment facilities, there is only one local authority (LA1) that offers payment facilities through Cash Deposit Machine (CDM). Unfortunately, there are two local authorities that still conveniently using conventional way of collecting payment through counter services.

			Local Authorities (LA)
	LA 1	LA 2	LA 3	LA 4	LA 5	LA 6
Credit Card (Charge by Bank)	NA	1.4%-1.65%	NA	1.80%	1.5%-2.0%	NA
Payment Machine	Cash Deposit Machine	Electronic Bank	NA	NA	NA	NA
Salary Deduction	NA	Yes	NA	Yes	NA	NA
Bank as an Agent	NA	9 Banks	9 Banks	3 Banks	8 Banks	NA

The types of enforcement being practiced vary between the local authorities. The enforcement by local authorities can be divided into two which are targeted to property or human. This is consistent with the study by Post and Hochberg (1989). The results in Table 6.3 shows that half of the local authorities have establish Revenue Management Department. This department is responsible to manage the assessment tax as well as enforcement. According to the Local Government Act, 1976, the following actions could be taken against a tax payer for non-settlement of taxes:-

A Form E Notice will be issued to tax payer. The person is expected to settle payment within 15 days from the date of the notice. A late-payment fine will be imposed on the balance of arrears – Section 147 (1), Local Government Act, 1976.

The Late Fee being charged to the tax payers are varies among the local authorities. LA1 normally charge 10 per cent on the total tax. Where as others local authorities charge between 1-2 per cent for half year base on total accumulated arrears.

In case of failure to comply, a Warrant of Attachment will be issued to such person. This warrant gives an authorized local authorities’ officer the power to:

A warrant of attachment will also be imposed. The finding shows that almost all local authorities charge the tax payer a warrant of attachment fee of 10 per cent on total arrears. Only two local authorities charge much higher between 15 to 20 per cent.

In order to ensure the tax payer pay the arrears, the following approval process and services by local authorities shall be withheld:-

The result shows that only LA6 thoroughly check and hold the process until the tax payers pay the arrears. Meanwhile LA1 and LA3 allow the above process even the tax payers owed the local authorities.

For the final stage, the legal action will be taken to collect sum owed in arrears of assessment taxes. Legal costs for this will be borne by the property-owner. Table 6.3 indicates that only two local authorities proceed with this action.

It appears that this method of enforcement is more efficient than those methods that are targeted against the property, since the latter is a longer process and more costly for the enforcement authority

			Local Authorities (LA)
	LA 1	LA 2	LA 3	LA 4	LA 5	LA 6
Establishment of
Revenue Mgt Dept	Yes	No	No	Yes	Yes	No
Late fee	10% on total taxes	2% on accumulated arrears of assessment	2% on accumulated arrears of assessment	1% on accumulated arrears of assessment	5% on accumulated arrears of assessment	2% on accumulated arrears of assessment
Cost of warrant of attachment	10% on total arrears	20%	10%	10%	15%	10%

Issuance of Warrant	by post	bailiff	No	Bailiff	Task force	Task force and Post
Court Case	No	Yes	No	No	Yes	No
Establishment of
Special Task Force	Yes	Yes	No	Yes	Yes	Yes
Incentive to Task Force	8% on collection	5%	NA	10%	NA	NA
Debt Written-off	No	Yes	No	No	No	Yes
Sealed-off property	Yes	Yes	Yes	Yes	Yes	Yes
Contra with other property	No	No	Yes	No	No	No
Check before OC	No	Yes	No	No	No	Yes
Check before licenses	No	Yes	No	Yes	No	Yes
Check before property	No	Yes	No	No	Yes	Yes
Transfer
Check before apply plan	No	No	No	Yes	No	Yes
Check before approve plan	No	No	No	Yes	No	Yes
Check before complaint	No	No	No	No	No	No
Check in Newspaper	No	Yes	No	No	No	Yes
(bankrupt, tender, auction)
Outsource to debt collecter	No	No	No	Yes	Yes	No
Advertise property	No	No	No	No	Yes	No

Table 6.4 indicates that most of the local authorities do provide incentives for early payment of the assessment tax by offering lucky draw, souvenir and rebate. Only two local authorities do not even offer any incentive to the tax payers.

The management of assessment tax in Malaysian local authorities with respect to the collection of revenue has been positively developed in some of the local authorities. It seems that all the local authorities have complied with the section 133 of Local Government Act 1976 for the matter of assessment. Very few of the local authorities that have been actively innovate their modes of collecting payment from tax payers since most of them still believe on traditional collection system. To reduce the percentage of arrears among tax payers, enforcement and incentive will be the most important aspect in local authorities. Consequently, it is essential that the stipulations are revised and arrangements are made to provide appropriate administrative support for local councils, in order to improve their collection system.

Hence, this study offers several recommendations to the relevant local authorities to stimulate the use of more sophisticated system.

a) Electronic allocation of work allows effective management of resources, and it also increases processing speed as well as overall performance. A classic example is in the case of a person who requests to pay his assessment tax by installments. Traditionally, any application to pay assessment in installment has to be made at the counter. But now, the publics need not be present at the counter. They can just call or send e-mail. A new Assessment Tax System, which then can captures the application, calculate the amount of installments, displays and print reports should be introduced. A report such as the schedule of payments will then be sent to the applicants by using e-mail, and for those who applied by using mobile phone, a Short Message Service or SMS will be sent to alert them and to indicate when their installment payments are due.

b) The concept of customer relationship management (CRM) should be introduced in designing the Assessment Tax system. It is very difficult to trace any record of communication between front lines and the taxpayers. A ‘diary’ of customer interactions should be incorporated into the system. Information such as call made and received, SMS sent, adjustments to the annual value and rates are recorded in the diary of each taxpayer. With these information available on-line, the front liners can serve the public better.