CHAPTER ONE

INTRODUCTION

• Introduction

This chapter covers background to the study, statement of the problem, objectives of the study, research hypotheses, scope of the study, justification of the study, definition of key terms and conceptual framework.

1.1       Background to the study

Taxation is perceived as a load which each citizen ought to bear to sustain his or her government because the government has certain functions to perform for the benefits of those it governs. In developing countries, tax non-compliance is a serious challenge facing income tax administration and hindering tax revenue performance. Even though various tax reforms are geared towards increasing tax revenue for several years, total revenue collections have remained consistently low and is relatively shrinking (Alabede, Zainol & Kamil, 2011).

Tax compliance can be described as the process of fulfilling the tax payer’s civil obligation for tax payment and filing of tax returns including the provision of necessary documents and explanations required by the tax authority in a timely manner (Oyedele, 2009).

Achieving high levels of voluntary tax compliance and maintaining it , remains a formidable and continuous challenge to fiscal policy makers in developed and developing countries alike. This is the case because, irrespective of the nature of the economy, the principal objective of taxation is one and the same: to raise revenue towards the financing of public goods and services, and funding of governments (Martina, Silvia, Eric & Alfred, 2008).

Small Scale Enterprises (SMEs) as profit making entities are subjected to taxation.  Since the individual SME remit smaller tax revenues, more focus is centred on the large tax payers. This presents a prime chance for non-compliance among SMES. Tax compliance is currently a topical issue, especially in developing countries as governments at various levels are seeking ways to improve efficiency in tax revenue collection to finance their budgets. Small scale enterprises are the majority business taxpayers in most developing countries and as such their compliance levels directly impact on government tax revenue collections.

The overall objective of the study was, investigating relationship between Uganda’s tax administration system measured in form of tax registration, tax education, tax assessment and tax audit  and tax compliance (returns filing, tax payment and accurate reporting) of SMEs in Lira Municipality. The significance of this study is discussed at length under section 1.7 of this book.

1.1.1 Historical background

Taxation has evolved right from the ancient empires. It was put into practice by diverse empires in different geographical locations and times; perhaps like temple and monument construction, taxation is a common phenomenon of human society. Taxes have been traced by archaeologists as far back as King Scorpion the First’s empire in southern Egypt between 3300 and 3200 BC. There is evidence through archaeology where records of taxation have  been found in clay tablets and on jars and vases discovered in King Scorpion I’s tomb. The thrilling part of the discovery is not only that taxation occurred so early, but that the tablets, jars and vases have the oldest use of writing with symbols representing constants and forming syllables-hieroglyphics (William, 2002).

In Western Europe, quasi-voluntary compliance emerged through a bargaining process. This brought rulers and potential taxpayers together to negotiate about who was to be taxed, the basis for assessing taxes, how taxes should be collected, and the purposes of revenue use.  Where this bargaining process succeeded, it enhanced the effectiveness and legitimacy of the state in three ways. Consultation promoted quasi-voluntary compliance so that taxes could be collected more effectively. Revenues were enhanced as a result. Bargaining also helped to generate consensus about and coherence of national policies and priorities for revenue use. Finally, paying tax became a valid basis for claiming political influence and where this took root the foundation for an eventual move towards electoral democracy was established (Therkildsen, 2006).

Korchmina (2018) compiles an account of the history of tax compliance basing on Russia and Britain. In 1812, the Russian government introduced the progressive income tax, with the highest tax rate of 10 per cent. After Britain, the Russian Empire became the second country to adopt this levy – under the threat of Napoleonic invasion. It is reported that by then, tax compliance was much higher in Russia compared to Britain. The example of Russian income tax in 1812 gives clear evidence of the significance of the voluntarily component in the payment of income taxes. Even in an under-governed and late-industrialized country, the collection of income tax could be organized quite efficiently, even among elites, if elites can be pressured by peer-based institutions. Despite the high level of freedom of taxpayers and the near-absence of coercion, the level of tax compliance in Russia was relatively high. Tax morale was determined by a social sanctioning mechanism among the narrow group of peers, boosted by the fear of Napoleon, which could be considered as the national pride, and tend to progressivity.  It is also likely that the Russian nobles paid the new tax because the tax burden was not very high, and the elite could consider the fiscal demands of Russian state as being fair and equal to their financial capacities. The Moscow nobles paid approximately one million rubles in income tax and, and, in the same year, they collected approximately three million rubles via donations to support the Russian troops.

Uganda’s present tax system has colonial roots. The prime objective of colonial taxation was

financial self-sufficiency of the colony.  At the same time taxation of Africans was seen as a way to push them into the monetary economy – at first by compelling them to grow cotton. Coercion and imprisonment were integral parts of taxation of Africans but not of non-Africans (Mamdani,1996; Thompson, 2003). The dual system of taxation described by Adam Smith and Lord Hailey started with the hut tax imposed on Africans in 1900 followed by the poll tax in 1905. At first revenues went to the colonial government. Native local authorities achieved their initial taxing powers in 1925, when they were allowed to commute work obligations (known as “luwalo”) into cash.  But local government taxation proper first came about when Graduated Poll Tax (GPT) was gradually introduced across all districts between 1954 and 1960 (Davey ,1974; 35-38).   Non-Africans were tax-free until 1919 when a poll tax was levied on them. A graduated personal tax for non-Africans was introduced in 1940 but substituted by income tax in 1945. For the 20th century as a whole, the most significant change in Uganda’s system of direct taxation was the abolition, at independence in 1962, of discrimination based on race. To collect taxes in a reliable and efficient manner requires quasi-voluntary compliance; taxpayers must be encouraged to ‘volunteer’ to pay, while the non-compliant must be coerced to pay if they are caught (Levi,1988, 52-70).

The lesson here is that coercison is not the answer to improve tax compliance.

1.1.2 Theoretical background

This study is informed by the Motivational Postures Theory and the Theory of planned Behavior (TBB).The motivational postures adopted by different taxpayers reflect the social distance (Ahmed & Braithwaite, 2005) cited in  Lin Mei (2017). Motivational postures are “sets of beliefs and attitudes that sum up how individuals feel about and wish to position themselves in relation to another social entity, in this case a tax authority” (Lin Mei, 2017). Motivational postures are vital in tax compliance as various studies show that the cooperative postures of commitment and capitulation are negatively associated with tax avoidance and evasion and positively associated with voluntary tax compliance (Kirchler, 2008). On the other hand, resistance, disengagement and game playing are positively associated with tax avoidance and evasion and enforced tax compliance (Ahmed, 2005; Kirchler, 2008).

The Theory of Planned Behaviour (TPB) (Ajzen, 1991) is a favored model for understanding intentions and behaviors of tax payers. This relationship is decisive to any important modifications in tax policy. Intention is a necessary component of tax compliance as it is only through the willing participation of taxpayers that revenue is collected. Thus getting an insight of the taxpayer intention to comply is as important as predicting the actual compliance behavior.

In this research, the TPB has been used to clarify the complexity of tax compliance decision making but, importantly, can also be utilised for the development of broad population compliance strategies.

1.1.3 Conceptual background

The key concepts in this study are tax compliance and tax administration system. Tax compliance is defined largely as the willingness of taxpayer to pay taxes (Walsh, 2012). Tax compliance covers filing compliance (filing returns on time), reporting compliance (reporting incomes correctly) and payment compliance (paying tax due on time). Arturo (2013) shows that tax administration comprises of taxpayer registration, taxpayer services, processing of tax declaration filings and tax payments, taxpayer audits, taxpayer objections (administrative appeals), taxpayer appeals, Collection of tax arrears (as opposed to current tax payments) and tax-fraud investigations. These measures have been adopted in the current study. The traditional role of tax administration focuses on detecting and correcting errors after they have been made.

An important part of improving taxpayers’ relationships with the tax authorities are concepts meant to clarify objectives of the state and procedures of tax authorities in the tax area, creating taxpayers’ positive attitudes towards tax collection, as well as increasing perception of fairness in tax collection and the use of collected tax receipts ( Rabatinová, 2018). Earlier studies have acknowledged that tax administration systems and tax compliance have some links. Tax revenue in many countries remains well below the levels needed to finance the achievement of the sustainable development goals, with 15 percent of GDP often cited as a rough annual estimate (Gaspar, Jaramillo & Wingender,2016). In the meantime, revenue collection is frequently characterized by significant unfairness and inequity, with particularly weak compliance and enforcement among the rich, and often significant–though overlooked– formal and informal burdens on lower income groups (Moore & Prichard, 2017). From this, it is likely that tax administration systems influence tax compliance.

1.1.4 Contextual background

Revenue collection remains a key challenge in African and Uganda in particular (Mukunda, 2017). This is mainly on account of limited tax compliance. In the last three decades, Uganda has embarked on improvements to broaden the tax base and increasing domestic revenue mobilization. Modernizing the tax administration systems is among the initiatives (World Bank, 2018b). In comparison with regional neighbours, Uganda’s tax revenue to GDP is still below the 16 per cent Sub-Saharan average and lags behind her East African Community (EAC) neighbors too (World Bank, 2018b). Tax administration in Lira has gradually improved from manual forms to electronic system where tax payers need to access tax information at their convenience and consult on tax matters 24 hours using the toll free line. There is also tax education and sensitization in different parts of the country, Lira inclusive (Uganda Revenue Authority (URA) Annual Report, 2015/2016, 2016).

Despite such efforts, tax compliance in Lira is still a challenge. Some SME entrepreneurs are illiterate and hire tax consultants to help them file returns and interpret trade laws and regulations especially for tax purposes. There are also complaints by traders about delayed administrative feedback especially in clearing imports at various customs points (Kato, 2017). Most SMEs survive at the mercy of clearing agents who sometimes may not offer satisfactory advice, hence tax disputes between URA and the tax payer (Kato, 2017).

The town Clerk of Lira on realizing poor compliance initiated sensitization of the community on its roles in promoting service delivery through voluntary tax compliance even in the absence of the law enforcement officers (Ogweng, 2018). The low tax compliance among SMEs in Lira Municipality could be a sign of general loopholes in the tax administration systems (Cong, 2018) and thus sets the basis of this study.

1.2       Statement of the problem

Uganda’s tax administration system is a key enabler of tax compliance (Godin & Hindriks, 2015; Mukunda, 2017). Enhancing the way taxes are administered is likely to result into better willingness of SMEs to pay the taxes as and when they fall due and help Uganda to generate tax revenues to ensure a stable fiscal regime. The constitution of the Republic of Uganda under Article 17 (1)(g) provides the legal basis for tax payment and tax collection (Balaba, 2020).  At the national level, URA has tried to make tax administration reforms in education, identification and registration, assessment, audits and appeals. Currently, there are a number of fora for tax education and sensitization as well as tribunals to handle tax related complaints, audits and verifications among others countrywide, including Lira Municipality (Busingye, 2017; Uganda Revenue Authority Annual Report, 2015/2016, 2016; Mukunda, 2017).

However, Lira municipality, notwithstanding the above improvements, still continues to register poor tax filing, incomplete or no tax reporting as well as untimely or even failed tax payment (Cong, 2018; Ogweng, 2018; Kato, 2017). This poor tax compliance is common among SMEs (Ministry of Trade Industry and Cooperatives, 2018; Busingye, 2017) and more so, those in Lira Municipality (Ogweng, 2018; Cong, 2018). This poor compliance normally forces Uganda Revenue Authority to impose tax penalties, forcefully collect any unpaid tax and sometime close businesses (Ogweng, 2018). If such poor tax compliance continues, Lira Municipality is likely to lose hope of self-sustenance and face very poor service delivery to the people due to limited tax collections to finance the municipality activities.

It is thus important to explore whether tax administration systems and compliance costs influence tax compliance among small and medium scale enterprises particularly in Lira municipality. This will then act as a basis to inform authorities to improve on tax administration for better tax compliance in Lira Municipality which is currently taking a negative and worrying trend.

1.3   General objective of the study

The general objective of the study is to examine the relationship between Uganda’s tax administration system and tax compliance among SMEs in Lira Municipality.

1.4   Research Objectives

This study was guided by the following research objectives;

• To determine the relationship between tax education and tax compliance among SMEs in Lira Municipality.
• To determine the relationship between tax registration and tax compliance among SMEs in Lira Municipality.
• To determine the relationship between tax assessment and tax compliance among SMEs in Lira Municipality
• To examine the effect of compliance costs on tax compliance among SMEs in Lira municipality.

1.4.1    Null rresearch hypotheses

This study aimed at answering the following research hypotheses

H1: There is no significant relationship between tax education and tax compliance among SMEs in Lira Municipality.

H2: There is no significant relationship between tax registration and tax compliance among SMEs in Lira Municipality.

H3: There is no significant relationship between tax assessment and tax compliance among SMEs in Lira Municipality.

H4: Compliance costs have no significant effect on tax compliance

1.5   Scope of the study

The scope of this study was confined to the geographical, subject and time scope.

1.5.1    Geographical Scope

The study was confined to Lira Municipality, with specific reference to SMEs in Lira. The target populations for this study was small and medium enterprises (SMEs) operating in Lira municipality, covering the divisions of Adyel, Ojwina, Central and Railways (2.2581° N, 32.8874° E).

Lira central division

Lira Central Division is located in Lira Municipal Council in Lira District. It is one of the four Divisions in the Municipality. The Division covers a land area of 203,625 hectares. The population of Lira Central Division is about 17,593, 82, males and 9295 females from 3089 households (National Population and Housing Census, 2002).

Lira Central Division was chosen since the majority of SMEs including Metal fabricators, Leisure and hospitality, timber dealers, groceries and general merchandise dealers among others are found there and are either ideal candidates for taxation or are actually paying the taxes. Lira Municipality (Central Division) was selected basing on the increasing levels of poor tax compliance amidst tax administrative reforms which creates a puzzle to the tax authorities and the Municipality administration.

 1.6.2   Subject Scope

The study was confined to establishing the relationship between tax administration systems and tax compliance of SMEs. The scope selected is small enough to be covered in depth but large enough to give a contribution to the current knowledge on tax administration and tax compliance.

1.6.3    Time Scope

This study was carried out between April 2020 and  Feb 2021. The focus was on the period 2009 to 2020 to capture recent developments in relation to the study context and perspective.

1.7 Significance of the study

The findings of the study is expected to be significant in the following ways;

This study is intended to provide policy makers, that is the Ministry of Finance Planning and Economic Development and tax law makers in parliament insights to base any possible amendments to suit the local needs. This will drive voluntary compliance among tax payers.

The Uganda Revenue Authority has so far tried several means to enforce tax compliance. This study will provide additional information to URA to understand how best to enhance tax compliance among SMEs.

Lira Municipality is mandated to collect taxes locally and also to help government bodies like URA to meet revenue targets. This study will highlight how the two bodies can cooperate for mutual benefit.

To other researchers, it is important to tell the nature of the relationship between tax administration systems and tax compliance, thus this study will provide a current reference material.

To the researcher, this study will boost the knowledge on taxation and hence be a milestone in the career growth as well as academic achievements.

Lira municipality will also benefit from the study as a basis for making reforms in administration that will appropriately address tax compliance loopholes.

1.8       Conceptual framework

                 Independent Variable                                                      Dependent   Variable

Source: Adapted from literature by (Lemgruber, Masters & Cleary, 2015; Alm, 2011; Ocheni, 2015; Maseko, 2014).

In the conceptual framework above, tax administration is thought to influence tax compliance. Tax administration is the independent variable, studied in terms of education, registration and assessment, (Lemgruber, Masters & Cleary, 2015). All these elements are thought to influence tax compliance among SMEs.

The relationship between tax administration system and tax compliance is moderated by SME operators’ perceptions and cost (Maseko, 2014). In addition, tax compliance is the dependent variable, studied in terms of tax filing, tax reporting and tax payment (Alm, 2011; Ocheni, 2015). The study assumes that tax compliance among SMEs in Lira municipality is influenced by the tax administration systems used by URA. These relationships are studied guided by Motivational Postures Theory (Braithwaite, 2003) and the Theory of Planned Behavior (Ajzen & Fishbein, 1980).

Working definitions

Tax education: Imparting knowledge and skills related to taxes among tax payers.

Tax registration: Taking note electronically of manually the details of potential tax payers for inclusion in the taxpayer database.

Tax assessment: The determination of the amount of tax due for every tax payer at a certain point in time.

Tax collection: The actually gathering or receiving of taxes by cash, cheque or electronically

Returns filling: The record and sharing of the expected tax payment to fall due in a given financial year for a tax paying entity (individual or organization).

Tax reporting: The declaration of the details pertaining to tax payments made or about to be made.

Tax payment: The actual release of the assessed tax to the tax authorities like URA or its representatives including banks, tax clearance agents or URA representatives.

Compliance costs: This relate to actual money paid and opportunity cost relating to the time and other resources expended when complying with tax laws.

CHAPTER TWO

LITERATURE REVIEW

2.1  Introduction

In this chapter, the researcher reviewed the relevant literature. The review begins with the theory and then the relationship between education and tax compliance, the relationship between identification, registration and tax compliance and the relationship between tax assessment, audits and appeals and tax compliance.

One of the largely untapped taxpayer groups in Uganda are the SMEs. In Uganda, Small Enterprises employ between 5 and 49 and have total assets between UGX 10 million but not exceeding 100 million. The Medium Enterprise therefore, employs between 50 and 100 with total assets more than 100 million but not exceeding 360 million (UIA, 21018). Uganda has an extensive SME sector which accounts for approximately 90% of the entire private sector, over 80% of manufactured output and contributes about 75% to the Gross Domestic Product (GDP). It takes up more than 2.5 million people in employment. It encompasses about 1,100,000 enterprises which makes the sector one of the largest employers in the country. SMEs stretch across all sectors ; the service sector (49%), commerce and trade (33%), manufacturing (10%) and other fields (8%) (Ministry of Trade Industry and Cooperatives, 2018).

2.2 Conceptual Review

Tax Education

Tax education embraces all the efforts geared towards improving tax awareness, appreciation and use of various channels to pass tax related information to tax payers and ensuring that the taxation activities are carried out by properly skilled people (Tanui, 2016; Kira, 2017). However, gaps in tax education have been partly blamed for the low tax compliance in (Tanui, 2016)

In Africa,  several initiatives have been taken on to improve tax compliance, including;  1) training on the practicalities of taxpaying, 2) initiatives to inform taxpayers of the importance of paying tax, 3) the promotion of information and discussion around fairness and accountability (Tanui,  2016). In assessing tax education, it is important to know about the existing educational initiatives, with a focus on: Programme structure (duration, content, geographical scope, target); available resources for this type of programme (budget, personnel); and the existence of any evaluation of their success (Tanui , 2016). Tax education is clearly attracting increasing attention amongst revenue authorities, in line with more modern approaches to tax administration that focus on customer orientation and voluntary compliance (Tanui, 2016; Kira, 2017). However, the common trait of the initiatives in Africa is the general lack of any evaluation to see what works and what does not (Tanui,  2016).

Tax Assessment

The tax assessment process describes the tasks including record keeping, engaging skilled personnel on tax matters, gathering all the information requirements  for taxation purposes and using the appropriate methods provided within the law to determine the tax due at a point in time for any tax paying entity (Law Insider, 2020).

Tax Assessment means any notice under which such Tax Authority imposes, purports to impose or indicates that it may impose tax on the company (Law Insider, 2020). Tax assessment means (in any jurisdiction): (a) any assessment, notice, letter, determination, demand or other document issued by or on behalf of any tax authority (whether issued or made before or after the date of this Agreement and whether satisfied or not at the date of this Agreement); and (b) any return, amended return, computation, accounts or any other documents required for the purposes of taxation; in any case, from which it appears that: (i) a tax liability has been, or may be, imposed on any group company; or (ii) an increased or a further payment to a tax authority is required to be made by any group company; or (iii) that a Group Company is denied or is sought to be denied a relief (Law Insider, 2020).

Tax Collection

Tax collection includes collection methods, collection procedures, manpower collection and collection costs or efficiency (Cawley & Zake, 2010).

 Tax compliance

According to Alm (2011), the scope of tax compliance includes, reporting income and paying all taxes in accordance with the applicable laws, regulations, and court decision. Tax compliance typically means, true reporting of the tax base, correct computation of the liability (accuracy), timely filing of the return, and timely payment of the amounts due (timeliness) (Franzoni, 2011).

For many taxpayers the uncertainty inherent in the tax system makes paying taxes akin to a game of chance. Some people gamble on the ambiguity of the law and intentionally under-report their earnings, whilst at the other end of the spectrum, others overcompensate for any possible profit and pay more than they owe. There is great variety of taxpayer behaviour patterns in between these extremes (Hendy, 2013; Dubin & Wilde, 2014). Existing theories have failed to clarify the complexities of taxpayer decision making and thus failed to establish a useful platform for agencies to influence and encourage voluntary compliance.

Ocheni (2015) defines tax compliance as an ability of a tax liable body to submit accurate, complete and satisfactory returns in conformity with tax laws and regulations of the state to the authority for the purpose of tax assessment (Badara, 2012).

Penalizing tax evaders or going after delinquent taxpayers are not in themselves the object of tax administration, although it would serve to encourage voluntary compliance if the taxpayers believe that the tax administration can effectively detect and punish non-compliance. Tax compliance according to Organisation for Economic Co-operation and Development (OECD) (2010) is a problem associated with how to enter and report all information timely, filling in the correct amount of taxes owed and taxes paid on time without any coercive action.

There is evidence that tax compliance leads to increases in income and audit rates and decreases in tax rates.  It is also better when the taxpayers perceive some direct benefits from taxation (Almetal, 2013). Non-compliance results in missed government income.  With limited taxes government is unable to finance public goods like education and health yet on the other hand compliant tax payers shoulder a big tax burden  (Nicoleta, 2011).

Uganda has a very low VAT Gross Compliance Ratio (VATGCR) of 26.50 in comparison to the World and Sub-Sahara Africa (SSA) averages of 65.48 and 38.45 respectively. This low rate may be due to the significant number of exemptions. From an economic efficiency perspective, a moderate VAT rate with a broad consumption base and few exemptions is always preferred to a high rate with many exemptions. Cawley and Zake (2010) also indicate that VATGCR has remained low because administration capacity and compliance did not improve as much as expected. Further, Uganda‘s Corporate Income Tax Revenue Productivity (CITPROD) and Personal Income Tax (PIT) productivity (PITPTOD) measures of 0.03 and 0.11, respectively, indicate that Uganda uses these taxes less efficiently in generating revenue than the world averages of 0.13 and 0.14 for CITPROD and PITPROD, respectively.

Tax Filing

A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes. These are filed annually with various incomes and or fees (KPMG, 2019). Globally, becoming formal is not a priority of  SMEs; after all, this does not guarantee increased revenue thus making them easy dodgers of taxation(Alcazar, Andrade & Jaramillo, 2010). Therefore, SMEs find no urgency in formalization. The complexity of filing, and hence the compliance burden, that individual taxpayers face varies widely.

Tax payers with more diverse income sources tend to find it more complex to calculate their tax liabilities. This is worsened by the low levels of literacy among some tax (Fichtner, Gale & Trinca, 2019).

Tax Reporting

Tax reporting is a core competency within the Tax function. Earlier efforts to enhance tax reporting processes through outreaches beyond offices have resulted in evident improvements. However, there is still need for more efforts to improve efficiency and functionality (Price Waterhouse and Coopers & Lybrand (PwC) , 2016). Production of accurate reports in more compressed timeframes, while adding value to the overall organization strategic decision making process remains a challenge. Increased global tax compliance requirements combined with outdated, inefficient, manual processes consume valuable resources and increase risk.

Tax payment

Asingwire (2019) based her study on selected SMEs in Kikuubo Trading Zone with a sample size of 332 respondents comprising 324 SMEs and 8 URA staff. The study findings revealed that most SMEs were not complaint regarding paying of taxes. More than 60% of the selected SMEs were not fully committed to paying taxes. The challenges faced included high cost of involving consultants, poor record keeping, bad attitude towards the way how tax payers’ money is used by government and an unfair taxation system among others. However, the respondents had a belief that tax compliance can be achieved if tax payer sensitization and education is looked into and the taxation system revised to make it fair to SMEs among others.

Tax administration systems

Zhamalov (2010) considers tax administration as the tax relations evolving system, which coordinates activities of tax authorities in a modern economy. Tax relations in this case assume fiscal and organizational forms. Organizational relations of the tax authorities formation and functioning system establish the applicable taxation procedures, according to the Tax Code. Fiscal tax relations occur when the taxpayer fulfills tax liability. The main elements of tax administration are structure and hierarchy, rights and obligations of tax authorities; procedure for collecting, processing and verifying tax reporting; applying tax exemptions and sanctions; support and generalization of tax statistics; international tax relations regulation. According to the research of Richard (2015), the main tasks of tax administration consist of three different, although related, actions – identification, evaluation and collection. Arturo (2013) shows that tax administration comprises of taxpayer registration, taxpayer services, processing of tax declaration filings and tax payments, tax payer audits, tax payer objections (administrative appeals), tax payer appeals, collection of tax arrears (as opposed to current tax payments) and tax-fraud investigations.  Lemgruber, Masters and Cleary 2015) show that tax administration operations comprise of taxpayer registration, return filing, taxpayer audit and verification, arrears and dispute resolution. For simplicity and comprehensiveness, the current study adopts the measures used by Lemgruber, Masters and Cleary (2015).

Tax Identification and Registration

Tax registration includes identification of legal taxpayers/business, issuing ID numbers, location and addresses of business or taxpayers and registration procedures (KPMG, 2019; Verberne, 2017). Gaps in tax registration are usually connected to poor tax compliance (Atawodi & Ojeka 2012). Tax payer identification paves the way for tax registration and both processes move together. In Uganda, a TIN (Tax Identification Number) is a legal requirement and it applies to all taxpayers regardless of their tax transactions and it provides evidence of tax registration (Verberne, 2017).

SMEs usually have to operate in an overbearing regulatory environment with the plethora of regulatory agencies, multiple taxes, cumbersome importation procedure and high port charges that constantly exert serious burden on their operations. Such a system imposes several burdens on the SMEs thus promoting their evasion (Atawodi & Ojeka 2012), and this results in a tax system that imposes high expenses on the society.

Small and Medium Enterprises (SMEs)

Although there is no universally agreed definition of SMEs, some commonly used criteria are the number of employees, value of assets, value of sales and size of capital (Bataa, 2008).  In Uganda, SMEs are officially defined based  on  both  the  number of people employed  and  annual  turnover  of  the  enterprise (Turyahebwa, Sunday & Ssekajugo, 2013).  They  are small enterprises  employing  a  minimum  of  5  people  and  a  maximum  of  50  people,  with  an  annual  sales/revenue turnover  of  more  than  UGX  360  million  and  total  assets  of  not more  than UGX  360  million.

2.3 Theoretical Review

Motivational Postures Theory (Braithwaite, 2003)

This study is guided by the Motivational Postures Theory (Braithwaite, 2003). The aim is to capture the attitude which is reflected from the taxpayer on the registration and assessment, tax audits and verifications and tax regulation and controls as established by tax authorities. Braithwaite (2003) stated that the authorities may have legal legitimacy, but this does not guarantee them psychological legitimacy. Individuals and groups evaluate authorities in terms of what they stand for and how they perform.  As evaluations are made, revised, shared and accumulated over time, individuals and groups develop positions in relation to the authority and develop a social distance (Braithwaite, 2003). Social distance will determine the level of acceptance and rejection of the taxpayer through the tax system which in turn will affect their compliance behavior. Posture motivation is formed from the position (distance) between taxpayers with regulators and regulations that lead to beliefs, feelings and attitude interconnected.

Five motivational postures that have been identified by Braithwaite (2003) are divided into two parts. Two of the first postures reflect a positive orientation toward authority, namely motivations posture commitment and capitulation. While the three postures of the second part describe the resistance (defiance) of the tax system that motivation posture of resistance, disengagement and game playing. Commitment reflects beliefs about the desirability of tax systems and feelings of moral obligation to act in the interest of the system (URA in this case) and pay one’s tax with good will. Capitulation reflects acceptance of the tax office as the legitimate authority and the feeling that the tax office is a kind power as long as one acts properly and refers to its authority. Resistance reflects doubts about the intentions of the tax office to behave cooperatively and benignly towards those it dominates and provides the rhetoric for calling on taxpayers to be watchful, to fight for their rights and to curb tax office power. Disengagement is also a motivational posture that communicates resistance, but here the disenchantment is more widespread, and individuals and groups have moved beyond seeing any point in challenging the authorities. The tax office and the tax system are beyond redemption for the disengaged citizen, the main objective being to keep both socially distant and blocked from view. The fifth posture is game playing. Game playing is a tax behavior which relates to the taxpayer’s view on tax regulations to seek opportunities (loopholes) that can be used in order to find the weakness of the rule.

The Theory of Planned Behavior  (TPB)

The TPB has its origins in the earlier theory of Expected Utility but introduces a number of additional explanatory variables which are, according to Ajzen and Fishbein (1980, p. 4) “designed to explain virtually any human behavior”. If they are correct in their claims that “behaviors are not really difficult to predict”, then the TPB has the potential to aid the tax office, in predicting, supporting and thus re-shaping taxpayer behavior (Härtel, Langham & Paulsen, 2012).

TPB proposes a direct relationship between intention and behaviour. This relationship is critical to any significant change in policy. Intention is an essential component of tax compliance as it is only through the willing participation of taxpayers that revenue is collected. Thus predicting taxpayer intention to comply is as important as predicting the actual compliance behaviour. Determining if behaviour is motivated by unwillingness to comply (as opposed to external factors preventing compliance) will shape the treatment to improve performance of the behavior (Härtel,  et al., 2012). The tax authority would design interventions that preemptively address the cause of the non-compliance rather than administer solutions post hoc which may encourage further non-compliance.

In addition to intention, the TPB addresses the issue of behavioral control with the inclusion of two variables, perceived behavioural control and actual control. Perceived behavioural control is composed of two elements: the individual’s controllability of the behaviour and their self-efficacy in performing the requisite behaviour. This variable encapsulates the factors which determine an individual’s persistence and effort in performing the actions necessary for the behaviour. Actual control is only a recent addition to the model (2010) but is an essential component when investigating behaviours that are complex or require the individual to overcome performance obstacles. Actual control has been defined as “the relevant skills and abilities as well as barriers to, or facilitators of, performance” (Fishbein & Ajzen, 2010).

The TPB is a strong model for predicting all types of behavior. Nevertheless, weaknesses in the model relate to effective operationalization of variables and its applicability in certain contexts. Few studies have empirically tested the full TPB model due to the misapplication of key methodological factors, such as the correct specificity of behavioural measures or the temporal instability of intentions. Additional difficulty is met when the behavior is complex or when it involves a third party.

In view of the above, SMEs continue to use the loopholes and avoid being entered into the tax bracket. This on the other hand angers those in the tax bracket who feel the injustice of ‘paying for others’ and wish also to jump out. All this challenges , the authority (URA) to reinforce its administrative authority and the cycle continues. On the above note, these theories provided guidance to the study.

2.4 Review of Study Constructs  in relation to Tax Compliance

Tax Education

Furthermore, Oladipupo and Uyioghosa (2016) cite (Braithwaite, 2007) who indicates that high awareness by the society would encourage people to fulfill their obligations to register as taxpayers, reporting and paying taxes properly. Richardson (2016) explained that it is very important for people to understand tax law, because it shapes their disposition to comply. He also explained that generally, the law is viewed as complex, this results in taxpayers becoming unwilling to try and comprehend the tax legislation. Many people find it difficult to comprehend the messages contained in the tax laws, their best level of comprehension depends on the knowledge that a person has pertaining to the area of tax knowledge (Saad, 2012).

Charity, Mwandambira, Newman and  Ongayi (2018) established that SMEs particularly in most developing countries do not comply with tax law. They possess only basic tax knowledge and lack a deeper understanding of tax issues. It also emerged that enhancing tax knowledge on its own without addressing the high tax rates an