Research consultancy
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).
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.
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 and corruption will not positively impact on tax compliance behaviour among SME.
Although there is little research on tax education, recent studies have shown that taxpayers often have little understanding of how tax systems work (Kira, 2017; Feldman, et al. 2016; Tanui , 2016). Using Afrobarometer data on thirty-six African countries, Isbell (2017) reports that the majority of respondents have difficulty figuring out what taxes they owe to the government. While small taxpayers are likely to suffer more from lack of tax knowledge, large taxpayers and business associations are also not immune to this issue (Nalishebo & Halwampa, 2014). Importantly, it is increasingly clear that tax knowledge is a key determinant of tax compliance (Palil, 2010; Richardson, 2006). This is even true in countries where tax systems are complex and hard to navigate. As a result, there is an increasing awareness, especially amongst African tax specialists, that lack of tax education and knowledge is one of the key obstacles to voluntary tax compliance (Kira, 2017; Nalishebo & Halwampa 2014; Tanui, 2016). However, lack of knowledge about tax rules and how they should be applied can affect tax compliance in two opposite ways. On the one hand, it can be associated with lower taxpayer compliance, including both underreporting and failure to register (Kira, 2017; Lubua, 2014; Palil, 2010). There is anecdotal evidence that businesses might think they do not have to register because they only run a small shop, or because they make very little profit. On the other hand, a limited understanding of the tax system could result in higher compliance costs or even overpayment. A recent study shows that taxpayers in the United States of America (US) often pay more than they should due to high compliance costs and relatively complex reporting requirements (Benzarti, 2015).
Adekoya, Lawal and Olaoye (2020) recognize that the skills of the tax enforcement team are important. They look at the human relations skills as important enablers of enforcing tax compliance especially in the informal sector which is largely untapped in Africa. They reiterate the need for good relations between the tax enforcement team and the tax payers as a means of improving tax compliance.
Tax Registration
In addition to the above, the economic structure, the complexity of the tax law for taxpayers and tax professionals, political aspects, culture, norms and identity are some of the factors that explain a relatively low tax-to-GDP ratio (Besley & Persson, 2014). Developing countries often have a large informal sector, it is not an exception when this sector covers over half of the country’s economy. Identification and registration of taxpayers, constitutes an important task for tax administrations and tax authorities should as well put efforts in including in the tax-return system all persons and companies that have succeeded in escaping their notice. They should as well promote online taxation(OECD, 2014).
According to Nyamwanza, Machiki, Mapetere and Nyamwanza (2014), registration is the process, by which the tax administration collects basic taxpayer identifying information, such as names, addresses and legal entity types. Nyamwanza, et al. (2014) further asserts that this information allows the tax administration to know who its taxpayers are, where they are located and whether they are active or inactive.
Generally, the authors reviewed agree that it is important to emphasize tax payer identification and registration as a means of enforcing compliance. However, they all fall short of explaining to what extent each of these dimensions would predict the tax compliance levels statistically. This creates a knowledge gap pending coverage by the current study.
Tax Assessment and collection
In Uganda, The Tax Procedures Code Act (2014) has several stipulations detailing the need for and procedures and methods for creating, maintaining, storing and protecting records relating to taxation. In Part iv of the Act
“Accounts and records” among the provisions is that “every taxpayer shall for the purposes of a tax obligation-(a) maintain, in the English language, records including in electronic format, as may be required to determine the taxpayer’s tax liability under a tax law; (b) maintain the record so as to enable the taxpayer’s tax liability under the tax law to be readily ascertained; and (c)retain the record for five years after the end of the tax period to which it relates or other period as specified in the tax law”.
It is further noted that a mode of record keeping shall contain sufficient transaction information and, in the case of a record in electronic format shall be capable of being retrieved and converted to a standard record format equivalent to that contained in an acceptable paper record.
Uganda, The Tax Procedures Code Act (2014) further provides details of assessment methods asserting that;
“the following are self-assessment returns for the purposes of this Act-(a) a return of income; (b) a return of rental income;(c) a return required to be furnished under the Value Added Tax Act; (d) a return required to be furnished under the Excise Duty Act; and e) a return specified as a self-assessment return under a tax law.”
From the above, it follows that the revenue authorities in Uganda appreciate that records keeping is an important element in the tax assessment.
The digital age is rapidly transforming the relationship between tax authorities and taxpayers (Kassim, 2013). Driven by a desire for more revenue, greater efficiency and improved compliance in an atmosphere of shrinking resources, tax authorities are increasingly relying on digital tax data gathering and analysis using digital platforms to facilitate real-time or near real- time collection and assessment of taxpayer data (Liu & Ye, 2013). When taxpayers file their taxes online, they will be creating a permanent electronic record for use in the future. Instead, they can pull up their information on computer and get to work right away. The Digital Tax System brings more accuracy and online filing takes much of the guesswork out of the tax return process and many programs even do the calculations. It also makes the filing process faster and the last thing most taxpayers want to do is spend days and weeks sifting through papers to file their return. When tax payers file their taxes online, that will speed up the process, which will save them a lot of time and frustration and improve compliance as well.
Indirect tax assessment methods are policy tools commonly adopted by fiscal authorities worldwide. It is possible to distinguish different typologies of indirect tax assessment methods, on the basis of the information used to reconstruct the tax base. As an alternative to taxable income declared by the taxpayers, the fiscal authority can estimate tax liabilities taking into account information reported by a third party or information regarding some taxpayers’ observable characteristics. By removing the element of self-assessment, indirect tax assessment methods reduce, but do not completely eliminate, the opportunity to evade. Therefore, taxpayers may alter their behavior in potentially inefficient ways in order to reduce their presumed tax liability. Indirect tax assessment methods have often been criticized as being unfair, because they do not necessarily reflect a taxpayer’s ability to pay.
Tax Collection
Tax collection mechanism, is the method used by a government to collect taxes imposed on citizens and business entities (Bucci, 2019). In Uganda, this is a common practice at local government levels through the tender boards. Income tax imposed on individuals and corporations. Individual income taxes, is computed based on the money earned while income tax imposed on net profits and computed as the excess of cash received over allowable deductions.
Complex legal provision and administrative practice, combined with the lack of a culture of voluntary compliance, often provide strong incentives for small businesses and self-employed taxpayers to operate outside the formal tax system. Moreover, high administrative and compliance costs make it arduous for fiscal authorities to include in the tax system, to verify and to monitor a large number of small entities. The conventional consideration that the highest degree of noncompliance is among small business and self-employed taxpayers (Logue & Vettori, 2011), combined with the poor record of traditional audit strategies, has fostered the interest toward the adoption of alternative methods for tax enforcement, such as presumptive taxation methods.
Presumptive taxation methods are a typology of simplified tax regimes levying on small businesses and self-employed taxpayers. Such policy tools represent a methodology of assessment of tax liability alternative to the regular method used to compute actual taxable income, based on taxpayers’ accounts (as defined by law). Usually taxpayer’s income is presumed using information on variables not considered in the standard computation of taxable income, linked to income generation and easily achievable by tax authorities. Presumptive taxation methods may be very useful when the books and the records are difficult for the tax authorities to measure, verify, and monitor, or when such values do not reflect the tax payer’s taxable capacity correctly (Martins & S´a, 2018).
Taxpayer education channel effectiveness evaluation is carried out using marketing metrics. Solcansky and Simberova (2010) noted that metrics is the ability to evaluate economic performance using a set of indicators. These indicators they added are both financial and non-financial. Metrics for determining channels effectiveness have been identified in marketing literature (Gao, 2010). According to Price Waterhouse Coopers (2008), SMEs consistently report taxation as a constraint to business growth.
Compliance costs
Taxpayers incur two main types of compliance costs: gross monetary compliance costs and psychological costs. Gross monetary compliance costs include both actual money paid and opportunity costs relating to the time and other resources expended when complying with tax
laws (Evans & Tran-Nam, 2014). Psychological costs, on the other hand, involve the estimation of stress and anxieties resulting from complying with tax laws, normally measured
using a Likert scale (Evans, Hansford, Hasseldine, Lignier, Smulders & Vaillancourt, 2014).
In describing tax compliance cost there is also the need to distinguish between computation costs and planning costs (Hijattulah & Pope, 2008).
2.5 Empirical Studies
2.5.1 Tax education and tax compliance among SMEs
Palil (2010) posits a relationship between that tax knowledge and taxpayers’ ability to understand the laws and regulation for better compliance. This author is supported by Amayi and Machogu (2013) who sought to establish the effect of taxpayer education on voluntary tax compliance, among Small and Micro-Enterprises (SMEs) in Mwanza City-Tanzania. A cross-sectional descriptive research design was used. Both primary and secondary data were collected using a questionnaire. 85% of the respondents, admitted to have gained understanding on the basic tax laws and procedures, while 15% showed that there was no improvement in understanding the basic tax laws. 78.7% of the respondents agreed that through the taxpayer education, they had been able to understand and become aware of their taxpayer rights and obligations. 21.3% of the respondents stated that taxpayer education had not been able to help them in understanding and becoming aware of their tax rights and obligations. 83% of the respondents agreed that taxpayer education helped them in understanding clearly the procedure of paying taxes, while 17% claimed that despite the tax education they received, they did not understand clearly the procedure of paying taxes.
Tembo (2014) shows that there was a positive relationship between taxpayer’s education knowledge and tax compliance, a significant positive relationship between tax awareness campaigns and tax compliance and a significant positive relationship between religiosity (tax morals/ethics) and tax compliance among Small and Medium Enterprises in Nakawa Division.
Oosa (2016) show that tax knowledge has a higher tendency to promote tax compliance than tax penalty. Government should therefore do everything possible to increase public knowledge on tax matters and tax education should be included in school curricula at all times. Small and medium scale business owners should also seek to advance their tax knowledge and awareness for the mutual benefits to the governments and taxpayers.
Wadesango and Mwandambira (2018) provide further evidence noting that tax non-compliance is an area of concern for all government and tax authorities and it will continue to be an important issue that must be addressed. The study was to evaluate if lack of tax knowledge contributed to high levels of tax non-compliance amongst SMEs in Zimbabwe. To achieve this, a quantitative research approach was used involving a sample of 35 SMEs and 40 tax officials. The findings were that SMEs in Zimbabwe possess basic tax knowledge about taxation but lack a deeper understanding like the difference between presumptive taxation and income based taxation. Wadesango and Mwandambira (2018) further note that this insignificantly influences their non-compliance behaviour. It emerged that in order for tax knowledge to influence tax compliance positively, the tax rates and corruption need to be addressed too. In spite of these results, Wadesango and Mwandambira (2018) recommend that Zimbabwe Revenue Authority (ZIMRA) should still continue to raise awareness to uninformed and inexperienced SMEs on the benefits of paying tax, encourage proper record keeping through tax payer education and social media campaigns.
In Nigeria, Nwidobie and Oyedokun (2018) show that direct education by the tax authority is the most effective channel of educating tax payers in Nigeria as the types of taxes, mode and amount of payment, effective due date for payment and benefits of tax paid are clearly disseminated to taxpayers and taxpayers questions accurately answered by tax administrators, increasing taxpayer education and compliance to tax obligations, necessitating increased taxpayer education directly by tax administrator effective channels for educating tax payers to improve tax compliance in Nigeria.
From these, there seems to be a link between tax knowledge and tax compliance. The only gap is to what extent and what is the best way to pass on this knowledge that can bring the highest compliance levels.
Bird (2014) also argues that “the existence of tax knowledge, which consists of general knowledge, legal knowledge and technical knowledge did not significantly affect tax compliance behaviour of SMEs”. His findings indicated that knowledgeable taxpayers were not necessarily compliant taxpayers. It was also found that tax knowledge has no impact on tax compliance in Indonesia according to Fauziati (2016).
In Zimbabwe, Maseko (2013) reports no correlation between tax knowledge and tax registration but a weak negative correlation with tax compliance. Tax knowledge in SMEs is presented to have no influence on decisions to either register or not register for tax.
2.5.2 Tax registration and tax compliance among SMEs
An effective tax system encourages taxpayer compliance with registration obligations. Therefore the tax community should be provided with clear and comprehensive descriptions of the requirements that lead to registration and tax administrations should facilitate taxpayers to make the procedural requirements as easy as possible. Online registration by taxpayers adequately serves the needs of taxpayers thus promotes compliance, reduces the number of unintentional errors and is cost efficient (Gerit, 2011).
Hendy (2013) asserts that the basic registration functionality of a tax IT system includes the storing and maintenance of taxpayer identifying information, the automatic issuance of TINs (identification number) and taxpayer certificates and the automatic determination of taxpayer filing requirements. He also said that effective registration with tax digital tax systems uses unique TINs to facilitate exchange of information between government agencies to ease the detection of non-compliance.
Joshi, Prichard and Heady (2014) do not divert much from the ideas submitted by Besley and Persson (2014) and they observe that SMEs generate enough income to warrant taxation but find it easy to escape the attention of the tax administration or to conceal a substantial part of their tax liability, because of their location, size, and/or nature of their businesses. This means that without identification and registration of these businesses, compliance is rather impossible.
2.5.3 Tax Assessment and tax compliance among SMEs
According to Atawodi and Ojeka (2012), high tax rates and complicated filing procedures are the two most vital factors making SMEs in Northern Nigeria not to comply with tax laws and regulations. Barbutamisu (2011) asserted that factors like level of income, tax benefits, penalties, fines, tax audit, audit probabilities, assumed fairness, attitude, personal, social and national norms affect the level of tax compliance. Another significant barrier to tax compliance by SMEs is that sizeable amount of their transactions are cash based, which makes their transactions challenging to track. A considerable amount of transactions are done outside banking medium (Obara & Nangih, 2017). This makes assessment difficult and thus lowers compliance levels.
According to Kidder and Craig ( 2011), taxpayers always work hard to increase their benefit through consideration of the threat that they may be discovered and be reprimanded due to non-compliance activities pertaining to tax requirements.
Alm (2013) in his study concluded that the impact of fines and penalties to non-compliance is virtually zero. Some were also neutral and they assert that fines were only a means which is used by revenue authorities to punish taxpayers but it is not a way to foster compliance or non- compliance.
2.5.4 Tax Compliance costs and tax compliance among SMEs
Mahangila (2017) determined whether or not an increase in income tax compliance costs leads to a decrease in income tax compliance. The tax context experiment involved 75 small and medium entrepreneurs based in Dar es Salaam, Tanzania’s business hub. The participants were first randomly assigned to one of the three experiment treatments. In the first treatment, the tax compliance cost was TAZ 50,000; in the second, it was TAZ 100,000; and in the third, it was TAZ 166,667. Each participant in each treatment received income of TAZ 1,000,000. TAZ is a laboratory currency which, at the end of the experiment, was exchanged at the rate of TAZ 120 for 1 actual Tanzania shilling (Tsh). Generally, the results indicated that tax non-compliance significantly increased as tax compliance costs increased. Although the study used small samples of SME taxpayers, therefore the results may not be generalisable, the results imply that tax compliance costs may be responsible for the unsatisfactory tax compliance levels of SME taxpayers.
SME taxpayers may face economic hardship as a result of proportionately higher compliance costs (Schoonjans, Van Cauwenberge, Reekmans & Simoens, 2011) and their tax compliance levels may be lower (Arachi & Santoro, 2007). High tax compliance costs may explain why SMEs’ tax compliance levels are lower than expected, as many of these business entities may perceive the tax systems to be unfair. Subsequently, knowing whether tax compliance costs impact on the SMEs’ tax compliance is useful when considering how to combat their tax non-compliance.
A report by the consortium consisting of Ramboll Management Consulting, the Evaluation Partnership and Europe Economic Research (2013) for the European Union on the methods of measuring tax compliance costs methodologies suggested that reducing tax compliance costs might increase voluntary tax compliance costs.
2.6 Research Gap and Conclusion
From the above review, most authors seem to agree that tax compliance is a serious challenge to most revenue authorities in both the developed, emerging and under developed economies. There is a however, a diversion in approach as to what is the best way to improve tax administration systems to generate better compliance. Braithwaite (2003) explains tax motivation through the Motivational Postures Theory. A number of authors point out the relationship between tax compliance and tax administration system (Palil,2010; Amayi & Machogu, 2013; Gerit, 2011; Hendy, 2013; OECD, 2014; Barbutamisu, 2011; Byamukama, 2013) . However, it is not clear whether the above relationships pointed out are relevant to Uganda’s tax compliance levels among SMEs and tax administration systems. Besides, statistical evidence is lacking or inadequate hence creating a gap to be closed. This justifies the need for afresh empirical study to bring out the Ugandan context.
