Factors Influencing Voluntary Tax Compliance in SMEs
Chapter One
Purpose of the study
The purpose of this study was to evaluate the factors that influence voluntary tax compliance among Small and Medium Enterprises in Ado Ekiti, Nigeria.
Objectives of the Study
This study was guided by the following objectives:
- To assess the extent to which tax rates explains tax compliance among Small and Medium Enterprises.
- To assess the availability of tax information as a factor influencing voluntary tax compliance among Small and Medium Enterprises.
- To determine the extent to which costs incurred by Small and Medium enterprises in being tax compliant influence their level of tax compliance.
- To determine how Small and Medium Enterprises attitude about tax influence voluntary tax compliance.
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter outlined the various schools of thought revolving around tax compliance and evasion. This Chapter identified the various theories put across by various scholars in relation to tax compliance. For the research questions identified in Chapter One, the researcher highlighted the findings of different authors, on the factors influencing factors influencing voluntary tax compliance among SMEs.
Theoretical Framework
This study borrowed heavily from existing research that is increasing. It was influenced by the following theories which have been put across by various scholars with regard to adoption of technology in society:
The Tax Morale Theory
The tax morale theory was first advanced by German scholars centered around Gunter Schmolders known as Cologne school of tax psychology. Tax morale can be termed as the individual factor that motivates a person to comply with his or her tax obligations. As a determinant of tax behavior, tax morals aim to explain how and why a tax payer morality influences his or her tax behavior. Many studies have found out that tax evasion can be attributed to the tax morale (Mocetti, Vol 18 No. 6).
Tax payers would be inclined to evade tax when the communities in which they live or operate disapprove of tax evasion.Tax payers are more likely to comply with tax obligation if their friends, relatives and acquintances comply with these obligations. Also tax payers will evade taxes if they feel that other people are getting away with tax evasion. In other words, if a society tolerates tax evasion, such a society would encourage tax evasion(Waweru, 2004). Religious beliefs are a variable in tax evasion as studies have shown that tax ayers who have strong religious commitments or beliefs would likely be tax compliant even if they feel that the tax rate is high (Gee, 2006).
In some instances tax payers can feel morally feel justified in evading taxes if they feel that the quality and quantity of public services and goods are unsatisfactory. The opposite is also true. In economies where the provision of pulic goods and services is satisfactory the evasion rates are low. Tax payers will tend to comply with their tax obligation if they feel that their government is honest, democartic and participatory and also if the tax payers feel they play a meaningful role in governance (Cummings, 2007). Thus tax payers attitude are important predictors of tax evasion thus the study aims to interpreate the tax attitudes of SMEs and how it contibute to tax evasion.
The Allingham and Sandmo Theory (AS Theory)
This theory was advanced by Allingham and Sandmo. According to (Sandmo, 1972) The AS theory holds that the government deters tax evasion through a sanction arrangement and audits. A tax payer will decide to violate the fiscal laws and evade his or her tax obligations when he or she percieves that the cost of evading tax is too low, believing he or she does that he or she is unlikely to be detected or audited.
Tax payers would also evade tax when he or she perceives the cost of compliance is high. Tax systems and procedures that are involving and cumbersome tend to encourage tax evasion. Tax payers who feel that tax rate is high and punitive will evade tax. There is a negative correlation between tax evasion, the probabilty of detection, the degree of punishment and high transactional costs associated with tax laws. Income tax evasion was pioneered by Allingham and Sandmo (1972), where a rational and a moral taxpayer maximizes expected utility, which solely depends on income. When caught, the agent must pay penalties, imposed on the amount of evaded income. A key comparative static result is that when the tax rate goes up,competing income and substitution effects might lead to more or less tax compliance. The substitution effect encourages evasion since the marginal benefit of cheating goes up with the tax rate. On the contrary, the income effect tends to suppress evasion since a higher tax rate makes the taxpayer with decreasing absolute risk aversion feel worse-off, and thus decrease risk-taking.Therefore, the net effect is ambiguous.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter outlined the research methodology as the method of achieving the purpose of the study. This includes the research design, target population, sampling for the study, data collection instruments and data analysis. Section 3.2 outlines the research design.
Research design
A descriptive survey design was adopted for this study. A descriptive survey design was best for this study as it describes characteristics associated with the subject population, and in particular factors that make them behave the way they do. According to Cooper and Schindler (Cooper, 2003) descriptive design discovers and measures the cause and effect of relationships between variables. Mugenda and Mugenda (Mugenda, 2003) state that a descriptive research determines and reports the way things are and attempt to describe possible behavior, attitude, values and characteristics of such things. The study used a descriptive design because it enables the researcher to collect a large quantity of in-depth information about the population being studied. A survey design was appropriate as the data required for analysis needed to be collected from a large population that is SMEs operating in Ado Ekiti.
Target population
The research targeted SMEs operating their business in Ado Ekiti. The unit of analysis for the study is any SMEs registered by the Nigeria Revenue Authority. The researcher was interested in examining the tax behavior of these SMEs as shown in table 3.1.
CHAPTER FOUR
DATA ANALYSIS, PRESENTATION AND INTERPRETATION
Introduction
This chapter presented the data analysis, presentation and interpretation of findings on the data collected from registered SMEs in Ado Ekiti, based on the factors influencing voluntary tax compliance. The main objective of the study was to evaluate the factors that influence the tax compliance among SMEs in Ekiti state Ado Ekiti, Nigeria. The study sought to answer the research questions: To what extent do tax rate in Nigeria explain tax compliance among SMEs?
How does the availability of tax information influence voluntary tax compliance among SMEs? To what extent do tax compliance costs explain tax compliance among SMEs? How does the attitude of SMEs about tax influence voluntary tax compliance? The study sampled 150 registered taxpayers operating within Ado Ekiti. The data was interpreted as per the research questions.
CHAPTER FIVE
SUMMARY OF THE FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
Introduction
In this chapter the research findings were summarized, then conclusion and recommendations to the study are drawn and research gaps are identified for future studies as the study aimed at determining factors influencing voluntary tax compliance among SMEs in Ado Ekiti, Nigeria.
Summary of findings
The researcher sampled 150 Medium and Small taxpayers operating within Ado Ekiti. 120 of the targeted respondents filled in and returned the questionnaires, giving an 80% response rate. Relying on the responses given by the respondents, the researcher came up with findings which were used to make conclusions and give recommendations.
From the study findings, most of the SMEs are more than 10 years old. 48 of respondents representing 40% are engaged in commercial related activities as their business type and 48% of the respondents have a monthly turnover of over three million. 100% of the respondents do have a PIN for their respective business and for 32% of the respondents have staff below 20.
Tax rates
72% of the respondents think that the tax rates in Nigeria are high. 97% agree that there are several types of tax heads which reduce tax compliance as most SMEs are not aware of ways to comply with the many different forms of taxes. 61% of the respondents agree that the tax amount due for payment does influence the tax to be paid. This is a clear indication that NRA and the Nigerian Government have not put in places ways of harmonizing the tax rates.
Availability of tax information
With regard to availability of tax information as a factor, the findings revealed that 87 (73%) of the respondents agree that information about taxes is not readily available, and 85% attest that the lack of information affects SMEs when it comes to tax compliance and 57% have are not even sure whether they are able to calculate the correct taxes. Tax Compliance Cost
81% of the respondents which is 97 out of the 120 organisations spend more than 50,000 in a month in expenses which are directly related to tax compliance costs. Majority of the respondents agree that the cost of complying also affects tax compliance among SMEs, 50% ranks book keeping as the major cost when it comes to expenses directly related to tax compliance.
Taxpayers Attitude towards tax
59% of the respondents have access to public utilities this leaves a big group who fell they have no access to public utilities. This undermines tax compliance. However, the study did reveal that most SMEs do value payment of taxes to the government and they also feel that their counterparts, other SMEs, do also value the payment of taxes.
Discussion of findings
This section gives a detailed discussion of the findings from this study as per the objectives that the study sought to achieve.
Conclusions
Findings from the study reveal that all the identified factors have a direct influence on the tax compliance among SMEs. The tax compliance factors examined included tax rates, availability of tax information, tax compliance cost, and attitude of taxpayers toward payment of income tax.
The study confirmed that NRA why uses both voluntary tax compliance strategy alongside the deterrent measures strategy. Most of the respondents felt the tax rates should be reviewed, thus the government should relook at the tax rates currently charged to SMEs. On availability of tax information, information received by taxpayers is an important factor that contributes to their understanding of tax responsibilities, especially regarding registration and filing requirements. NRA should address the complexities of annual tax returns, periodic variations in the tax laws, and levels of penalties and fines. They should pass this information regularly to SMEs via various channels like tax Seminars, Booklets and Media Channels. This will greatly improve the SMEs level of compliance as the great complexity associated with tax matters will be demystified.
On tax compliance cost, the companies confirmed to engaging the services of tax agents and professional staff to handle accounting issues. This cost is normally a burden to the SMEs.
SMES should be encouraged to improve their bookkeeping by offering incentives, such as application of a lower presumptive tax rate for small businesses meeting certain recordkeeping standards. The government should also engage the small holders in sensitization forums on how to reduce the cost associated with tax compliance.
With regard to the attitude of taxpayers toward payment of taxes to the government, the study revealed that most of the companies felt they had at least some access to the public utilities financed by taxes while at the same time valued the payment of taxes to the government of Nigeria .Taxpayers’ attitudes encourages tax compliance in Nigeria and what influence the taxpayers’ attitudes, equally affect the taxpayers’ compliance with the tax requirement i.e.
taxpayers’ attitudes encourages tax compliance in Nigeria.
Recommendations of the study
Based on the findings of this study, the researcher came up with several recommendations to encourage tax compliance among SMEs. These include;
Tax rates and penalty rates
Consider lowering the tax rates to enhance collections. Lower tax rates make it less attractive to evade taxes as opposed to high rates. High penalty rates will increase compliance but only marginally. This penalty rates should be kept at an optimum level not to discourage taxpayers. Also consider uniform penalty rates for all tax heads.
Tax Return forms
The returns ought to be simplified and accompanying notes reconstructed into plain language that can be understood by all taxpayers. They should also be clear and brief but complete in detail to enable the taxpayers fill the return. In addition, where possible, simple computed examples should be incorporated in the notes. Returns should also be made readily accessible to both manual and computerized taxpayers. This will mean making available return forms in the NRA web site for downloading by the taxpayers with computerized systems.
Taxpayer education
To enhance compliance there is need to intensify taxpayer education in terms of increasing the number of sessions and broadening coverage to include tax consultants. This will enlighten the taxpayers on existing law and any other tax liability. This will also provide a forum for taxpayers to air their complaints and or compliments
Audits
Increased rates of audits that seek to reduce the time between audits will improve compliance, as taxpayers will fear the risk of being audited and penalized. The audits should also be broadened to cover a wider area with a possibility of conducting joint income tax and VAT audits based on modern audit tools. These measures are expected to result in enhanced tax collection improved sharing of information and time saving both to the authority and to the taxpayers. The criteria for selection of files for audits should be based on information given in returns and not random or subjective selection. This will make audits more productive and informative.
Improved Services
The authority should strive to give taxpayers high quality services as stipulated in the corporate plan. Most of the services provided by the authority like refunds, remissions and dispute resolutions were rated poor and thus there is every reason to improve them. Where possible, officers should endeavor to adhere to the taxpayers’ charter in terms of service provision to taxpayers. ‘Help’ counters manned by technical and knowledgeable staff should be introduced and enhanced throughout the authority’s offices to bring services closer to the taxpayers. This will also improve communication between the taxpayers and the authority. Other services worth introducing include payment of VAT directly into the banks- as is the case with PAYE, and modern technology such as telephone exchanges.
Training
There is need to continuously train technical staff to keep abreast with the tax law and any other changes therein. This way, the officers will impart proper and correct advice to taxpayers during the time of audits. Customer care lessons should form an integral part of this training. Recruitment of new taxpayers by the authority should be intensified and enhanced. This will broaden the tax base and reduce pressure on the complying taxpayers
Suggestions for further research
This study proposes the following areas for further study:
- Factors affecting income tax compliance among SMEs in other regions of Nigeria.
- A study on the relationship between voluntary tax compliance strategy and the deterrence measures kind of strategy.
- Factors that motivate SMEs to be tax compliant.
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