The Importance of Rent Tax Compliance in Ghana (The Case Study of Tarkwa Nsuaem and Sefwi Wiawso Municipalities)
The purpose of the study is to determine the factors affecting rent income tax compliance by property owners (land lords/ladies) in Ghana. Specifically, the study seeks to;
- Determine the effect of rent income tax compliance cost on rent income tax compliance level.
- Examine the effect of rent income tax knowledge and education on rent income tax compliance level.
- Evaluate the effect of perceived opportunity for rent income tax evasion on rent income tax compliance level.
- Assess the effect of threats, fines and penalties on rent income tax compliance level.
This chapter analyses the concept of Rent Income Tax Compliance, Rent Income Tax Compliance Models, factors affecting Rent Income Tax Compliance and the Conceptual Framework. Tax, is a contribution exacted by the state. It is non-penal but compulsory and unrequited transfer of resources from the private sector to the public sector, levied on the basis of predetermined criteria (Vadde & Gundarapu, 2016). Classical economists were of the view that, the only objective of taxation was to raise revenue for the government. But with changes in circumstances and ideologies, the aim of taxation has been modified. Thus, apart from raising revenue for public expenditure, taxes are levied to affect consumption, production and distribution of goods and services with a view to enhancing social and economic development of a country. Taxation provide a stable flow of revenue to finance current and capital expenditures such as the building and maintenance of infrastructure, stimulating economic growth and enhancing good governance (James & Alley, 2014).
During the 1980s, structured research into tax evasion and non-compliance became widespread following the political concerns in the United States of an increasing tax-gap. Initially, literatures which emerged from the United States had a strong focus on economic theory. Utility theory, developed by Allingham and Sandmo, assumed taxpayers to be ‘utility maximisers’ in decisions of tax reporting and compliance, tax evasion was viewed as worthwhile if the financial gains outweighed the financial costs.
Tax compliance studies have been based on social and psychological theories. Research undertaken in this field showed that the human element played a vital role in individual tax compliance decisions. While tax compliance literatures have emerged from a wide variety of disciplines, there is lack of consensus as to why people pay or do not pay tax. Some tax compliance literatures reported by (Chow, 2014) indicated that, there are research gaps that needed to be filled concerning: tax moral, tax fairness and deterrence measures to enhance tax compliance. This section however considers some literatures affecting rent income tax compliance.
Concept of Rent Income Tax Compliance
Tax compliance in general, is a major problem faced by most tax authorities across the world (Osebe, 2014). It is difficult to persuade taxpayers to comply with the tax requirements even though “tax laws are not always precise’’ (James & Alley, 2014). Rent income tax compliance is usually cast in terms of the degree to which residential property owners comply with the rent income tax law (James, 2014). However, the meaning of compliance with respect to rent income tax can be seen as a continuum of definitions. One suggestion is that, the degree of rent income tax non-compliance may be measured in terms of the rent income tax-gap. Rent income tax-gap represents the difference between the actual rent income tax collected and the amount estimated that would have been collected if there was 100% compliance (James, 2014).
Andreoni, Erard and Feinstein (2014), defined tax compliance as the taxpayer’s willingness to obey the tax laws to obtain the economic equilibrium of a country. (Kirchler, Hoelzl & Wahl, 2015) perceived a simpler definition in which tax compliance was defined in the most neutral term, to describe taxpayers’ willingness to pay their tax.
Similarly, Rent Income Tax Compliance is defined by several tax authorities as the ability and willingness of property owners [taxpayers] to comply with the rent income tax laws: declare the correct rent income in each year and pay the right amount of rent income tax on time (Australia Tax Office Report, 2014).
According to Mohd and Ahmad (2015), tax compliance is defined as the taxpayer’s willingness to comply with tax laws, declare correct income, claim correct deductions, relief and rebates and pay their taxes on time. Mohd and Ahmad also described tax compliance as an issue of reporting the actual income and claimed that, compliance behaviour was influenced by a situation whereby taxpayers have to make a decision under uncertainty. Another definition of rent tax compliance is a person’s (property owner’s) act of filing his/her rent income tax returns, declaring all taxable rent income accurately and fulfilling all rent income tax payable within the stipulated period without having to wait for followup from the tax authority. Furthermore, rent income tax compliance has been segregated into two perspectives namely: compliance in terms of administration and technical compliance in terms of completing accurately the tax returns (Chow, 2014).
Rent income tax compliance include registering or informing the tax authorities of status as a taxpayer [property owner/land lord], submitting a rent income tax return every year and following the required payment plan or time frame (Osebe, 2014). However, the wider perspective of rent income tax compliance requires some degree of honesty, adequate rent income tax knowledge and the ability to use this knowledge acquired in a timely and accurate manner whilst maintaining adequate records to complete the rent income tax returns and associated tax documentations (Mohd & Ahmad, 2015). This perspective reveal that, tax authorities would seek to influence the areas rental taxpayers have influence, determining to reduce the risks of non-compliance behaviour through rent income tax audits and education.
Young (2014), explained that, tax compliance is the output of interrelation between variables including perception of equity, efficiency and incidence (public finance views). However, penalties and fines as well as probability of audit should be combined to improve rent income tax compliance.
This chapter describes the research method used in the study. The chapter will focus on research study areas, research design, population, sampling size for the study, data collection instruments. Data analysis and presentation methods used. As stated, the purpose of this research is to determine the various factors affecting rent income tax compliance and proffer solutions aimed at addressing the causes of rent income tax non-compliance.
The study was conducted in the Tarkwa Nsuaem and Sefwi Wiawso Municipalities all in the Western Region of Ghana. These municipalities were selected because they are part of the fastest growing municipalities in Ghana in terms of population and economic activities especially real estate development. However, conducting research in the entire municipalities would have been cumbersome therefore some major communities in these two municipalities were selected: in Tarkwa Nsuaem Municipality – Brenuakyinim, Anomakrom,
Brofoyedur, and New Takoradi. Under Sefwi Wiawso Municipality – Wiawso, Dwinease, Ewiase and Ntretereso communities were selected. These communities are heterogeneous, they are fast growing in terms of economic activity and real estate development.
A research design is a plan (series of steps to be carried out), structure and strategy (scheme or an elaborate and systematic plan of action), conceived and implemented or executed in order to obtain answers to research questions and control variables. Research design helps to control the experimental, extraneous (not belonging to that in which it is contained or not essential) and error variables of a particular research problem or area being investigated (Creswell, 2005).
This study used quantitative approach. This enabled the researcher to collect required data on factors that affect rent income tax compliance among real estate owners. Such a design, is a systematic empirical inquiry in which the researcher does not have direct control over independent variables because they cannot be manipulated (Creswell, 2005). Inferences regarding relations among variables will be made without direct intervention from concomitant or cooccurrence variation of independent and dependent variables. This is appropriate due to its high external validity and less cost.
First, Tarkwa Nsuaem, is located between latitude 405’ and longitude 505’. It’s bounded by Prestea Huni-Valley to the north, Nzema East to the west, south by Ahanta West and the east by Mpohor district. The minerals’ contribution to the wealth of the municipality is a factor of the region earning the accolade “the best comes from the west’’. The 2010 population and housing census indicates that the municipality has a population of 90,477. The sex distribution is: male population is 51.6% and female population is 48.4% (Ghana Statistical Service, 2014). Data from the Tarkwa Nsuaem Municipal Assembly shows that there are five hundred and three (503) residential facilities for rental purpose in the study area within Tarkwa Nsuaem Municipality namely; Brenuakyinim, Anomakrom, Brofoyedur, and New Takoradi all suburbs of Tarkwa in the TarkwaNsuaem Municipality (Tarkwa Nsuaem Municipal Evaluation Report, 2015).
Secondly, Sefwi Wiawso Municipal has a population of 139,200. Male population constitute 50.1% and female 49.9%. The Sefwi Wiawso Municipality lies in the North Eastern part of the Western Region between latitudes 60N and 60 300 N and Longitudes 20 450 W and 20 150 W. The Brong Ahafo Region shares boundary with it to the North, Juaboso and Bodi to the West, Aowin-Suaman to the South, Bibiani-Anhwiaso-Bekwai district to the East and Wassa Amenfi West to the South-East. Agriculture is the major economic activity in the Municipality in terms of employment and income generation, about 66 percent of the working population are engaged in this sector which constitutes the main source of household income in the Municipality (Ghana Statistical Service, 2014). Data from the SefwiWiawso Municipal Assembly shows that there four hundred and ninety- five (495) residential facilities for rental purpose in Wiawso, Dwinase, Ewiase and Ntretereso areas (Sefwi Wiawso Municipal Assembly Baseline Survey, 2014)
Thus, there are nine hundred and ninety-eight (998) residential facilities for rental purpose approximated to one thousand facilities (1000).
RESULTS AND DISCUSSIONS
This chapter deals with the analysis and discussion of the data collected. The chapter assesses the impact of the factors that affect rent income tax compliance by property owners. The response rate is 97.22%, thus, 270 out of 278 questionnaires administered were received.
The chapter discusses the variables (Dependent and Independent) involved in the study and estimate the conceptual model described in chapter two. In the first two sections, data description and analysis are presented. The model estimation and analysis of the results are then discussed. Finally, concluding remarks are made. Data description involves a discussion on the sources of data and definition of the dependent and the independent variables. Data collected was quantitatively analysed and presented in tables inter alia. Research questions were addressed or tested using the p values and t test values.
The purpose of the study is to determine the factors affecting rent income tax compliance by property owners in Ghana.
SUMMARY, CONCLUSION AND RECCOMENDATIONS
This is the final chapter of the study. It contains summary of the study, major findings of the research, recommendations based on the findings to enable the relevant authorities take appropriate measures aimed at improving rent income tax collection.
Summary of the Study
The general objective of this study is to analyse the factors affecting rent income tax compliance in the real estate sector in Ghana. The target population consisted of all the residential property investors or owners within Tarkwa
Nsuaem and Sefwi Wiawso Municipalities, all in the Western Region of Ghana. Two hundred and seventy (270) questionnaires were received. Initial sample size was two hundred and seventy-eight (278) respondents selected from a target population of one thousand property owners. The study assessed, whether the following independent factors: rent income tax compliance cost, rent income tax knowledge and education, fines and penalties on rent income tax defaulters and perceived opportunity for rent income tax evasion have any significant effect on rent income tax compliance level (Dependent variable).
Findings on gender revealed that, there are more land lords than land ladies. It was also revealed that majority of the respondents were more than fifty years old (51+). From the findings, majority of respondents had basic education.
Findings on information about house or real estate ownership revealed that majority of the estates have been in existence between 7-9 years. With respect to annual turnover, majority of property owners made a turnover of more than GHc 1000.00 annually.
Findings on preliminary information on rent income tax revealed that majority (84.1%) of the respondents have not heard of the rent income tax law and 85.2% of respondents do not know how to declare their rent income for tax purpose.
The study found that, rent income tax compliance level among property owners (Landlords) was low. There is therefore an urgent need for the Ghana Revenue Authority (GRA) to collaborate with other governmental agencies or institutions such as National Commission for Civic Education (NCCE), Information Service Department inter alia, to sensitize property owners on their civic responsibility. On matters pertaining to punishment by GRA as a result of not filing rent income tax returns, late filing of rent tax returns and under reporting rent income, majority of the respondents indicated that, they have never been penalized for such offence(s).
Furthermore, a determination of the effect of rent income tax compliance cost on rent income tax compliance level revealed a strong negative correlation, meaning, rent income tax compliance cost has a significant effect on the level of rent income tax compliance level. Thus, high compliance costs will reduce rent income tax compliance level. This finding supports the findings by Franzoni (2014) who posited that, high tax rates and complex tax legislation could induce fraud. Thus, property owners could develop some resentment against tax authorities who imposed relatively high taxes and complex tax systems. This could lead to rent income tax evasion because of the perceive financial advantage that may accrue to evaders.
As well, effect of rent income tax knowledge and education on rent income tax compliance level showed a strong positive relationship between the two implying that, enhanced knowledge on rent income tax, will enhance rent income tax compliance level. This finding supports the work by Mohd (2014) who posited that: Taxation knowledge is necessary to increase public awareness on tax laws (such as the rent income tax law), the role of tax in national development, and especially to explain how and where the money collected is spent by the government. Findings by Eriksen and Fallan (2013) also posit that, when a property owner has a positive attitude towards the payment of his rent income tax it reduces his or her inclination to evade rent income tax. Therefore, attitude toward rent income tax compliance level can be improved by educating property owners on the need to fulfil their rent income tax obligation.
An assessment of the effect of fines and penalties on rent income tax compliance level revealed that, there is significantly a positive relationship between them. This implies that an effective use (enforcement) of fines and penalties on rent income tax defaulters or offenders could improve rent income tax compliance. The study provides some preliminary evidence to the effect that fines and penalties play vital roles in improving rent income tax compliance level.
Specifically, a rent income tax system with fair rates of fines and penalties, rent income tax compliance is likely to be enhanced. (Kirchler et al., 2015) stated that tax compliance could be enhanced if fines are supported with frequent audit probabilities.
The results of the study also indicated that perceived opportunity for rent income tax evasion has a significant effect on rent income tax compliance level. This is because opportunity and induced opportunity to cheat increased rent income tax non-compliance regardless of whether the participants actually intended to be compliant or not. This finding is corroborated by the work of (Ahmed & Braithwaite, 2015) who noted that, tax payers (property owners) facing high opportunities to evade might feel less certain about how to pay their taxes correctly.
Finally, knowledge and education on rent income tax have a significant effect on rent income tax compliance level. It is therefore necessary for the tax authority [Ghana Revenue Authority – GRA], to improve education on how to file rent income tax returns and the importance of paying rent income tax as a civic responsibility by property owners. This finding supports the research by (Kirchler et al. 2015) who were of the view that rent income tax compliance is influenced by the extent to which landlords trust their governments, therefore to build trust, tax authorities must periodically engage tax payers in a dialogue to address any perception/concern that might negatively affect compliance. This finding also supports the work by (Moore 2014) who propounded the fiscal exchange theory which suggested that the presence of government expenditure(s) may enhance compliance and that governments can increase compliance by providing goods and services that citizens need in a more efficient, effective and accessible manner. This view was corroborated by Alm et al. (2016) who noted that, tax compliance increased with the availability of public goods and services. Thus, the main concerns of taxpayers are the benefits in return (directly) for the tax paid in the form of public services (quid pro quo). Therefore, taxation and the provision of public goods and services are interpreted as a contractual relationship between taxpayers (land lord/ladies) and the government (Moore 2014). However, rent income tax compliance could be influenced positively by educating property owners of their social and civic responsibilities to pay and thus their intention would be to comply.
Findings from the study provide evidence that, rent income tax compliance cost is a contributory factor in the level of rent income tax compliance by property owners. As noted by Franzoni (2014), high tax rates and complex tax legislations could induce fraud. Thus, the findings provide enough proof to conclude that rent income tax compliance cost is associated with the level of rent income tax compliance. Robben et al. (2015) stated that an experimentally induced opportunity to cheat (opportunity to deduct, non-deductible expenses) increased non-compliance regardless of whether the participants intended to be compliant or not.
The study also provided evidence that fines and penalties play a vital role in improving rent income tax compliance level. Specifically, for a tax system with relatively high rates of fines and penalties, the level of rent income tax compliance is likely to improve.
In addition, the results indicated that, perceived opportunity for rent income tax evasion had a significant effect on rent income tax compliance level. Thus, induced opportunity to cheat increased non-compliance, regardless of whether property owners intended to be compliant or not. Therefore, as Allingham and Sandmo indicated, penalties as well as audit probabilities have positive impact on (rent) tax compliance. Relatively, the higher the penalty and the potential audit probability, the greater discouragement for potential tax evaders.
Finally, knowledge and education on rent income tax have significant effect on rent income tax compliance level. One of the measures to increase voluntary compliance of the rent income tax is by ensuring that property owners have adequate knowledge about the rent income tax law, this will enhance their ability and confidence to exercise/fulfil their rent income tax responsibility (Mohani, 2014). It is prudent for tax authorities to enhance education on how to file rent income tax returns and the importance of paying rent income tax which is a civic duty imposed on every citizen and for this matter, property owners. Thus, with respect to providing rent income tax awareness training, it is the responsibility of the tax authority (Ghana Revenue Authority) to conduct series of training programmes to enhance rent income tax payers’ knowledge. However, the research indicated that majority of the respondents have not attended any rent income tax training. This may be the result of poor control and lack of proper monitoring mechanism by the tax authority or lack of awareness/knowledge by rental tax payers of any training programme being organised by the GRA or other institutions. Therefore, it can be concluded that many respondents [property owners] are oblivious of the rent income tax law and therefore need training on the law.
The Government must enforce a tenancy agreement (written contract) between land lords and tenants. This will facilitate fair determination of the rent income tax.
Rent Control Department should be established in every district in the country and resourced adequately to play an intermediary role between landlords and the Ghana Revenue Authority.
From the findings, rent income tax compliance cost has a significant effect on rent tax compliance level. Therefore, a rent income tax system with relatively moderate rent income tax compliance costs will enhance compliance. Thus, the government and the Ghana Revenue Authority must ensure that, rent tax compliance cost are kept at the barest minimum relatively so that it does not encourage property owners to evade the payment of rent income tax. A possible cost embedded in compliance cost is the cost of transportation, this could be addressed by providing a system that enable property owners to pay their rent income tax online or via the mobile money system to avoid transport cost and risks, as well as reduce human contact inter alia.
The findings show that, fines and penalties have a direct impact on rent income tax compliance level. It is suggested that, the Ghana Revenue Authority must ensure, there are relatively high levels of fines and penalties coupled with periodic audit to encourage property owners to comply for fear of paying unnecessary fines or penalties.
Furthermore, rent income tax knowledge and education have significant effect on rent income tax compliance level. Thus, the rent income tax system should not only provide a clear and simple guideline on how to fill the rent tax returns but also the Ghana Revenue Authority, should improve rent income tax payer education by engaging property owners in seminars, road shows inter alia.
Finally, perceived opportunity for rent income tax evasion has significant effect on rent income tax compliance level, therefore the Government (Ministry of Finance) and the Ghana Revenue Authority, should target property owners at all levels and seal loopholes that may facilitate rent income tax evasion. There should be mapping of all rental properties by the GRA and the rent control department and a formal contract or agreement between land lords and tenants that would indicate rent rates charged based on which the rent income tax could be calculated or determined showed be enforced.
Suggestions for Further Studies
In future, researchers can replicate this study in other parts of the country if not the entire country.
An examination of the concept of fairness in fiscal exchange could be carried out. Critical factors in this respect are citizens’ perceptions about the role of the state, how the tax law is administrated, perceptions about enforcement and government trustworthiness.
Research focusing on fairness in tax collection and comparative treatments of taxpayers could also be undertaken.
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