Determinants of Tax Compliance in Nigeria
Chapter One
Research Objective
- To examine the impact of taxpayers’ awareness and knowledge of tax regulations on tax compliance in Nigeria.
- To analyze the effect of enforcement mechanisms and penalties on tax compliance behavior among Nigerian taxpayers.
- To assess the role of trust in government and perceived fairness of the tax system in influencing tax compliance decisions.
CHAPTER TWO
LITERATURE REVIEW
Introduction
The segment highlights the prose researched in order to encapsulate the study’s themes and provide a foundation for the investigation. As a result, the chapter focused on the study’s driving theories, prior empirical investigations, and current advancements in the field. The chapter concluded with a summary of the study’s main points.
Theoretic Review
This study was borrowed from other scholars who developed a number of theories which have been used to expounded in tax compliance scenarios.
Theory of Planned Behavior
The theory was propounded by Ajzen (1991). Three elements encourage a person’s behaviour according to the theory. Firstly, is a behavioural belief, which is a result evaluation. A varied attitude toward a given conduct will be formed through confidence and evaluation of results. The second is what is known as normative belief which can be termed as the faith in others like tax official. The third factor is control belief, whereby people believe in things that encourage their behaviours as well as their views of how strongly these two factors influence their conduct. Control belief gives rise to a sense of behavioural control.
According to the theory of planned behaviour, someone would design their intention to follow the rule by considering attitudes, subjective norms, and control perceived conduct (Ajzen, 1991). In terms of tax compliance, the theory demonstrates that attitudes towards tax compliance, subjective norms, perceptual behaviour, and taxpayer perceptions of the government are all important determinants complying with tax responsibilities (Damayanti et al. 2015).
In line with this study, the theory placed the determinants of tax compliance alongside three main factors, that is tax payers’ attitude towards tax compliance, their behavioural intention as well as perceptions towards the government. The theory was thus relevant in explaining the determinants of tax compliance alongside these factors.
Deterrence Theory
Becker’s renowned article on crime and punishment sparked a modern renaissance of economic research of crime in 1968. While Becker highlighted tax evasion as a possible application for his general model, the study was done by Allingham and Sandmo (1972). Noncompliance is treated as a rational individual decision based on the likelihood of detection, conviction, and punishment levels in this approach. In a criminal justice literature, Scott and Grasmick (1981) proposed the deterrence hypothesis. As a result, “non-compliance” was implicitly defined as illegal tax evasion, and the framework for investigation was provided by deterrence theory.
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The core idea behind the theory is that people choose to engage in activities that maximize their rewards while minimizing their costs (Nagin, Cullen & Jonson, 2018). The act will not be undertaken if the risks are high enough and the expenses are high enough to outweigh the benefits. Many sorts of criminal conduct, including tax evasion, have been studied using deterrence theory as a foundation.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
The methodology that was employed to attain the research objectives was presented in this chapter. The research design, target population, sample size determination procedure, data collecting and analysis procedures were all covered in this part.
Research Design
The study adopted a descriptive design. It used multiple units to describe the current situation and problem (Smith, 2015). It was relevant to this research because it supports collection of primary data to describe and answer the research problem.
Population
According to the Micro Small and Medium Enterprises Authority (MSEA) (2020), the study’s target group consisted of 43,432 SMEs which are in Nairobi. The SMEs were sampled across the 17 LGAs in Lagos state. The proprietors of small and medium businesses were the focus of the research.
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
Introduction
In this chapter, there is a presentation of the results, findings and its discussions based on the data collected from the field. Both descriptive and inferential statistics are presented in this section. The findings will guide development of conclusion and recommendations in the next chapter.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Introduction
The chapter gives a summary of the research findings, conclusions as well as the recommendations. The chapter also gives recommendations for future research as well as limitations of the study.
Summary of Findings
It was established that tax education among Nairobi-based SMEs has been conducted to a small extent. Its influence on tax compliance among SMEs was however positive and significant. It was also demonstrated that legal enforcement measures to ensure tax among SMEs has been implemented by FIRS to a low extent. However, it had a positive and significant influence on tax compliance among SMEs.
The study also established that tax auditing of SMEs is conducted by FIRS to a low extent hence its influence on tax compliance among the SMEs was established to be insignificant. The study also established that the tax compliance costs were considered to be high to a high extent among the SMEs. This translated to a negative and significant influence on tax compliance of SMEs.
Conclusion
The study concludes that improving adoption of tax education practices like tax clinics, seminars, media campaigns and social media campaigns can significantly improve tax compliance among SMEs. It can also be concluded that increasing legal enforcement measures such as departure prohibition orders, agency notices, revocation of licences and prosecutions as well as arrests can significantly increase tax compliance among SMEs.
The study also concludes that higher tax compliance costs such as internet costs, tax consultant costs and book keeping leads to low tax compliance among SMEs. Furthermore, an increase in tax audits practices such as examination of tax reports, confirmation of tax returns filed and audit of related transactions can increase tax compliance among SMEs.
Recommendations
Given its importance on enhancing tax compliance, the study recommends FIRS to increase adoption of tax education practices, that is, tax clinics, seminars, media campaigns and social media campaigns. There is also a need to increase legal enforcement measures such as departure prohibition orders, agency notices, revocation of licences and prosecutions as well as arrests so as to increase tax compliance among SMEs.
The study also recommends a need to increase the rate of tax audits practices such as examination of tax reports, confirmation of tax returns filed and audit of related transactions which are currently being conducted to a low extent by FIRS. This can lead to a significant impact on tax compliance among SMEs. Given that an increase in tax compliance costs is associated with a significant decrease in tax compliance among SMEs, the study recommends FIRS to consider revising the tax filing procedures to be even simpler so as to reduce the costs involved in it.
Limitations of the Study
The study was conducted in the period when COVID-19 was being experienced. As a result, the data collection process faced challenges especially because most respondents didn’t want physical interactions. Given that it was equally hard to use emails to issue the questionnaires to them, the researcher made sure that she observed the COVID-19 protocols such as sanitizing, hand washing, social distancing and wearing masks. Where the respondents were literate, the questionnaires were dropped and then picked up later.
Suggestions for Further Research
The study adopted quantitative primary data to test its objectives. There is a recommendation to consider using a mixed methodology where secondary data from FIRS can also be adopted for comparison purposes. For instance, there is a need to establish how many SMEs have received tax education on a monthly basis, how many times does FIRS conduct audits, how many SMEs have faced legal implications and how does it translate to the number of tax returns filed, how much is paid and how often tax is reported. The study also adopted a direct relationship and didn’t consider other external factors as moderators of the relationship. Other studies may need to find out whether the external environment, such as COVID-19, affected tax compliance among SMEs given the general theme that it has affected SMEs negatively.
REFERENCES
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- Ajzen, I. (1991). The theory of planned behaviour. Organizational behaviour and human decision processes, 50(2), 179-211.
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- Castro, L., & Scartascini, C. (2015). Tax compliance and enforcement in the pampas evidence from a field experiment. Journal of Economic behaviour & Organization, 116, 65-82.
- Damayanti, T. W., Subekti, I., & Baridwan, Z. (2015). Trust and uncertainty orientation: An efforts to create tax compliance in social psychology framework. Procedia- Social and Behavioral Sciences, 211, 938-944.
