Religious factors on tax non-compliance: evidence from Libyan self-employed

Tax non-compliance phenomenon has become a key issue for developing countries such as Libya because it hinders taxpayers from contributing effectively to the economy. Previous literature refers to diverse socio-psychological factors that influence tax noncompliance behavior. Nevertheless, there is a lack of study on the influence of religious factors on tax non-compliance. Therefore, the current study empirically examines the impact of Islamic perspective and Islamic religiosity on tax non-compliance behavior among self-employed taxpayers in Libya. A quantitative method using a questionnaire is utilized to collect the data. Structural equation modeling was employed using PLS. This study provides empirical evidence that Islamic perspective and Islamic religiosity have a significant positive relationship with tax non-compliance among Libyan self-employed. Theoretically, the findings have extended the body of knowledge by providing empirical evidence on the effect of religious factors on tax non-compliance. Practically, the study provides fruitful insights for policymakers and government officials to consider these factors as crucial while formulating taxation policies to minimize the phenomenon of tax non-compliance among Libyan individual taxpayers and, hence, increase government revenue. Fareg Mustafa Abodher (Libya), Zaimah Zainol Ariffin (Malaysia), Natrah Saad (Malaysia)


INTRODUCTION
Tax non-compliance behavior is a phenomenon influencing the worldwide economy and, hence, attracted the attention of scholars in this field (Ross & McGee, 2012). Tax non-compliance affects both developed and developing countries (Hindriks, Peralta, & Weber, 2008). Tax non-compliance problem has the worst impact in developing countries due to the scarcity of domestic resources (Kim, 2008;Mas'ud, Aliyu, & Gambo, 2014). After the 2011 revolution, many factors emerged in Libya that may impact tax compliance, including religious factors and others (Abodher, Ariffin, & Saad, 2016).
According to the report of the Libyan Bureau of Audit, Libya is facing tax evasion problems as a result of tax non-compliance (Abodher, Ariffin, & Saad, 2018). Moreover, Libya, after the 2011 revolution, suffered from the problem of declining oil revenues due to fluctuation in oil prices and declined level of oil production; thus, there arises a need for structural fiscal reforms to increase the tax collection efforts (Mansour, 2015). Furthermore, the Libyan Bureau of Audit indicates that tax non-compliance is a reason for the low tax revenues collection in Libya and, thus, points to the increasing tax non-compliance among Libyan taxpayers (Saidi & Prasad, 2015). The Libyan Audit Bureau (LAB) reported that the collection of revenue tax in 2014 is 731 million Libyan dinars. This number is less than the estimated tax collection of 900 million Libyan dinars at 19%. Thus, it represents a tax gap of 169 million resulting from tax non-compliance. Furthermore, tax income collection in 2015 presented an 8% decrease to 671 million versus 731 million collected in 2014 (LAB, 2016).
Rendering to Central Bank of Libya and Libyan Audit Bureau reports (LAB, 2015(LAB, , 2016, the dropping in tax receipts is one of the main reasons for the increase in the budget deficit, which increased from about 6 billion in 2013 to 25 billion by 2015. The World Bank Group (WBG) and PricewaterhouseCoopers (PwC) reports on tax compliance across countries entitled Paying Taxes to provide vital insights into tax compliance in Libya with respect to 189 other countries. These reports show that Libya stood 116 th in 2013, 157 th in 2014, and 160 th in 2015 out of the 189 countries in the overall world ranking of tax payment. A major determining factor for tax compliance pointed out in the reports was the time needed to fulfill with tax obligation. Libya gets the highest time required to comply after Nigeria, indicating a poor and difficult tax system (WBG & PwC, 2014). The prior literature detects little empirical studies that examine the relationship between religious factors like Islamic perspective and Islamic religiosity and tax non-compliance in Libya. Thus, this study attempts to analyze the impact of Islamic perspective and Islamic religiosity on tax non-compliance behavior among Libyan self-employed workers empirically. The next sections highlight the literature review, methodology, and results. Furthermore, a comprehensive discussion is provided about the results. The last section concludes the study.

Islamic perspective and tax non-compliance
According to the definition of Islamic perspective, Islamic religious views of taxpayers in Islamic countries are called Halal and Haram (Al-Ttaffi & Abdul-Jabbar, 2015). Prior literature had found that religion is a crucial factor that determines and influences the individuals' behavior (Cornwell et al., 2005). Religious beliefs force taxpayers to fully disclose and comply with tax adherence (Nwidobie, 2018). The Islamic perspective influences the people, although individuals are not completely obliged to their religion (Ali, 2013). Thus, understanding the Islamic perspective of individual taxpayers in Islamic countries is important that could affect the taxpayers' behavior (Al-Ttaffi & Abdul-Jabbar, 2015). The basic emphasis of Islam is the taxation on wealth rather than income. It logically means that tax will be imposed on the wealth that a person retains at the end of the year. This concept can directly affect the economy and the individual's tax compliance behavior.
Islamic ruling explained that Islam does not encourage the accumulation of wealth in a few hands and helps the society and prevents it from being divided into a class system comprising the overly wealthy and the starving. The Quran mentions the cause for taxation on wealth, saying that "So that it (the wealth) may not circulate among those who are rich among you" (Al-Hashr, 59:7). Islam focuses on equality, and creating equality is vital in making a collective effort to ensure a fair distribution of wealth in the economy.
Thus First, if the state needs money and no other source exists to generate finance, levying tax is Halal, but the situation should be real and not a hypothetical one. Second, the state must be too poor to run the government and meet the government expenditures, but such taxes should immediately be eliminated at the end of such situations. Third, taxes can be imposed if the government needs money to accomplish a mega project in the larger interest of the public. However, the money collected for these projects should not be wasted on the personal benefits of the government and the people who have the authority to make decisions regarding a project. Fourth, the tax should be imposed to fulfill the basic needs of the community. To sum it up, the Islamic religious perspective on the legitimacy of tax in Libya could be summarized as follows: • If all the above four conditions are present, then paying tax is considered Halal (permissible).
• If any of these above conditions are missing, then paying tax is considered Haram (forbidden).
However, Al-Ghariani (2013) said nothing is wrong if the government imposes some sort of road taxes and other similar taxes if they fulfill the basic needs of the people for which the tax is being charged.
Moreover, the Fatwa Centre (2012) quoted several researchers who said that if taxation is enacted legitimately, it is not allowed to evade them, while if they did not enact legitimately, non-compliance is both legal and permissible. Peerzade (2005) argued that the system of Zakat is an alternative that can be imposed effectively instead of taxation on people in an Islamic society. In Saudi Arabia in 1994, a fatwa was issued about the tax collection by the standing committee of scientific research and fatwa. This fatwa said that taxation and all its systems were banned and that no authority has a right to impose taxes on people (Al-Ttaffi & Abdul-Jabbar, 2015). Consequently, the Islamic perception of tax can be divided into three aspects. First, if tax is completely Halal, tax non-compliance is not allowed. Second, tax non-compliance is acceptable when tax is considered to be Haram. Third, when tax is totally Haram, non-compliance behavior is acceptable, but the individual should not commit any forbidden acts with respect to non-compliance. Lehrer (2004) proposed religion as one determinant of behavior by emphasizing the impacts related to religious affiliation and how the positive results of being a religious individual are associated with health and well-being. Al-Ttaffi (2009) said that knowing about the Islamic perspective about tax compliance was critical in investigating the tax compliance behavior of the taxpayers in Yemen because that perspective impacted their tax compliance behavior. Several arguments have also been provided to discuss the results and present justifications for those positions on tax non-compliance behavior from different perspectives, including religious perspective. McGee and Smith (2006), following the classification and criterion that Crowe (1944) proposed, divided these arguments into three categories. Those were: 1) those who think that tax non-compliance behavior is not an ethical issue at all; 2) those who think that tax non-compliance behavior can be categorized as an ethical issue in some special circumstances; and 3) those who think that tax non-compliance behavior is an ethical issue.
Religion provides a fundamental for social interaction; religion may have a significant impact on the individual's tax non-compliance attitudes and behavior. Overall, the literature showed that religion might play an important role in helping the authorities achieve their goal of promoting voluntary tax compliance.
In prior studies, there are mixed findings regarding the studies that have ensured the association between religious and taxation. For instance, recently, Nwidobie (2018) found that religious beliefs have positive relationships with tax compliance. Conversely, the study of Dökmen (2018) concluded that the tax revenues of Islamic countries are much lower than those of developed countries. The tax revenues in Islamic countries are decreasing because some of most of these countries are rich in natural resources, especially oil and natural gas; their needs for tax revenues may not be very high. Besides, Eiya, Ilaboya, and Okoye (2016) found no significant effect of religious values on tax compliance. Similarly, Uadiale, Fagbemi, and Ogunleye (2010) also did not find any significant relationship between religious factors and tax compliance behavior. Nonetheless, this study assumed that the Islamic perspective has a significant relationship with individuals to pay taxes: H1: The Islamic perspective has a significant relationship with tax non-compliance behavior.

Islamic religiosity and tax non-compliance
Religiosity is the level of individuals' religiousness based on their religious beliefs and activities (Ali, 2013 H2: Islamic religiosity has a significant relationship with tax non-compliance behavior.

Data collection and sample
Three hundred and twelve (312) questionnaires were collected from self-employed taxpayers in Tripoli, the capital city of Libya, through self-administered questionnaire using simple random sampling technique. In Tripoli, approximately 16,543 Libyans are self-employed taxpayers, according to the Tax Authority of Libya. The data were analyzed by partial least squares structural equation modeling (PLS-SEM).

Measurement of variables
Tax non-compliance is the taxpayer's failure to meet tax adherence, whether intentionally or unintentionally (Hasseldine & Hite, 2003

Descriptive statistics of latent variables
Descriptive statistics of the latent variables were calculated for means, standard deviations, and minimum to maximum scores. Table 1 shows the descriptive statistics of the latent variables. According to Larson-Hall (2010), a smaller standard deviation is closer to the mean, and larger ones are more spread out. The numerical summary shows that standard deviations are quite small (between 1.17 to 1.23), indicating low variations in the data. In particular, the mean value of Islamic perspective is 3.28, and the standard deviation is 1.23, indicating the similarity of respondents' opinion towards Islamic perspective.
Besides, religiosity showed a mean value of 2.99 and a standard deviation of 1.18, which also revealed a moderate agreement on religiosity. Lastly, tax non-compliance showed a mean value of 3.28 and a standard deviation of 1.17, showing moderate agreement among respondents.

Convergent validity
Convergent validity is a crucial metric that refers to the measure of items; it tests the validity of constructs. Hair, Hult, Ringle, and Sarstedt (2017) defined the convergent validity as "the extent to which a measure correlates positively with alternative measures of the same construct" (p. 137). According to Hair (2017), most popular measures of the convergent validity are outer loadings of a reflective measurement model and average variance extracted (AVE), also, to establish internal consistency, composite reliability (CR) should be measured.  Figure 1 shows the convergent validity of the outer model.

Discriminant validity
Assessment of discriminant validity is necessary to confirm that a construct is significantly different from other constructs empirically. In simple words, a construct should measure a unique issue or phenomenon ( Fornell and Larcker (1981) criterion to measure the discriminant valid-ity. The results of the Fornell and Larcker from PLS algorithm through the average variance extracted (AVE) and the correlation coefficients between the constructs were reported in Table 3. Hence, it ensures the discriminant validity.    Islamic  religiosity IR   IP1   IR1   IR2   IR3   IR4   IP2   IP3   IP4   IP5   TN6   TN2   TN3   TN4   TN5   TN1

Significance of path coefficient and hypotheses testing
The estimations are gained by using the PLS-SEM bootstrapping of the relationships of the structural model. This study applied three levels of significance for accepting or rejecting the hypotheses based on t-statistic and p-value, as Hair, Hult, Ringle, and Sarstedt (2017 p. 206) stated. Commonly used critical values for two-tailed tests are 1.65 (significance level = 10%), 1.96 (significance level = 5%), and 2.57 (significance level = 1%). Table 4 showed the path coefficients and their significance. It shows that Islamic perspective and Islamic religiosity have a significant effect on tax non-compliance (p < 0.001); thus, supported.
The path coefficients are further elaborated in Figure 2.

DISCUSSION
This study primarily examines the effect of religious factors on tax non-compliance among Libyan self-employed. The empirical result of this study reveals the significant effect of the Islamic perspective on tax non-compliance behavior among individual taxpayers in Libya; therefore, H1 is supported, hence, accepted. However, the results of this study found that the Islamic perspective and tax non-compliance have a positive and significant relationship. Religion offers direction to each person through their beliefs. The impact of religion happens in the community, although individuals are not fully obliged to their religion (Ali, 2013). Religion offers a vital basis for social integration. Consequently, understanding the Islamic religious standpoint of the taxpayers in Islamic countries is of great significance and is a significant  are many views about taxation, with some researchers said pay tax itself is forbidden (Haram) and others who believe in its legality and the right of the government to impose a tax on its people. It can be mentioned that the Islamic perspective towards paying tax might influence the taxpayers' behavior, where people believe that paying tax is Haram will have a negative behavior toward tax payment. In line with the findings of this study, it can be stated that the Libyan self-employed, being Muslims, perceive the strong and significant association between Islamic perspective and tax non-compliance behavior. However, the differences between the state taxation system and the four conditions of the fatwa (Al-Ghariani, 2013) created confusion among the Islamic population in Libya. So, the citizens of Libya may decide to do not to pay taxes because they think it is Haram. Thus, this provides a greater opportunity for those people not to meet the state tax compliance requirements using the logic that the fatwa forbids it. Therefore, the findings of this study prove that the Islamic perspective is a significant determinant of tax non-compliance behavior.
Similarly, empirical results of H2 also reveal strong support where Islamic religiosity shows a positive and significant effect on tax non-compliance behavior of individual taxpayers in Libya. The result is in line with the various previous studies, for instance, Nurunnabi (2017) argued that religiosity is likely to affect certain behavior, for instance, tax cheating (tax non-compliance) behavior, criminal behavior (Baier & Wright, 2001;Ellis & Peterson, 1996), and ethical behavior (Keller, K. T. Smith, & M. Smith, 2007). Besides, Margolis (1997) asserted that religion always guided a person to choose between good and bad, which ultimately leads an individual towards the fulfillment of his moral responsibilities, and paying tax is one of them. Tittle and Welch (1983) explained the perception of an individual concerning the relationship between non-compliance behavior and religiosity. The researchers said that the features of religious communities impact an individual's religiosity and their non-compliance behavior. The findings of the result implicate that Islamic religiosity has a strong effect on tax non-compliance of self-employed people in Libya as Libya is a Muslim majority country. Therefore, it may justify that in the light of four conditions that are mentioned in fatwa given by Al-Ghariani (2013), people may think that Libya neither is a developing country nor needs money to finance big projects; therefore, from religiousness standpoint, people think that they should not pay tax.
The findings of the current study practically contribute to developing economies, in particular, Libya, regarding the policies that can minimize tax non-compliance, hence, increase government revenue and, in turn, benefit the citizens. For instance, the present findings show a significant and positive relationship between religious factors (Islamic perspective and Islamic religiosity) and tax non-compliance. It means that government officials should consider these factors as crucial while formulating taxation policies to minimize tax non-compliance. In this regard, the government should engage Libyan clerics to give fatwa in favor of paying tax as a religious obligation as Libya is a Muslim majority country.

CONCLUSION
This study provides empirical evidence on the interaction among religious factors to exert influence on Libyan self-employed taxpayers towards non-compliance with tax rules and regulations. Both factors, Islamic perspective and Islamic religiosity, were found to have a significant and positive effect on tax non-compliance behavior among the Libyans self-employed. This study has some limitations, which may be associated with the generalization of results. The study was concentrated on only the self-em-ployed taxpayers residing in Tripoli. Perhaps the behavior of taxpayers in other parts of Libya may be influenced differently. Besides, this study may not be completely free from some survey limitations such as non-response bias and bias in completing the questionnaires. It is desirable for future research efforts to focus on identifying other economic, social, psychological, and cultural factors that may influence taxpayers' non-compliance behavior, particularly in developing countries. Also, future research that focuses on tax non-compliance behavior in the informal sector is desirable. Moreover, researchers in the future should exploit the possibilities of conducting more research on tax non-compliance using mixed methods consisting of both qualitative and quantitative research. The study provides fruitful insights for policymakers to consider religious factors as a significant precedent for boosting tax incomes.