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DETERMINANTS OF TAX COMPLIANCE AMONG SMEs

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RESEARCH INFORMATION

[icon type=”icon-pencil”]: DETERMINANTS OF TAX COMPLIANCE AMONG SMEs
[icon type=”icon-book”]: Chapter 1 – 5
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Keywords:DETERMINANTS OF TAX COMPLIANCE AMONG SMEs


RESEARCH BODY

ABSTRACT

This research study provides empirical evidence on the determinants of tax compliance of SMEs. Using the survey research design, questionnaires were distributed to 100 firms cutting several sectors of the economy. Responses from 92 respondents from the management cadre of the firms were analysed with simple percentage analysis, correlation and multiple regression analysis using the Statistical Package for the Social Sciences 20.0. Preliminary analysis with simple percentage analysis confirms that tax compliance by SMEs is low. Correlation analysis show tax compliance of SMEs have significant positive relationship with financial viability and profitability of SMEs, financial literacy and exposure of SMEs owners/managers, perceived fairness of tax system, and government accountability, but an insignificant negative relationship with probability of detection and degree of punishment. Also, the correlation analysis has the most significant positive relationship with financial literacy and exposure of SMEs owners/managers. Multiple regression analysis show that financial viability and profitability of SMEs, financial literacy and exposure of SMEs owners/managers, perceived fairness of tax system, and government accountability have significant positive impacts on tax compliance of SMEs. Probability of detection and degree of punishment was shown to have a positive but insignificant impact on tax compliance of SMEs. Also, the multiple regression analysis show that financial viability and profitability of SMEs has the most significant positive impact on tax compliance of SMEs. Thus, it was recommended that loan accessibility should be increased for SMEs as well as bookkeeping made mandatory for SMEs, so as to improve the financial viability and performance of SMEs. Also, financial literacy programs targeted at SMEs should be developed.

 TABLE OF CONTENTS

 CHAPTER ONE: INTRODUCTIONS

1.1        Background of the Study

1.2        Statement of the Research Problem

1.3        Research Objectives

1.4       Research Hypotheses

1.5        Significance of the Study

1.6       Scope of the Study

1.7        Limitations of the Study

1.8       Definition of Terms

 

CHAPTER TWO: LITERATURE REVIEW                                                                             

2.0       Introduction

2.1        Conceptual Clarification

2.1.1     Defining Small and Medium Scale Enterprises (SMEs)

2.1.2     Defining Tax Compliance

2.2        Tax Compliance of SMEs

2.3       Determinants of Tax Compliance of SMEs

2.3.1     Financial Viability And Profitability and Tax Compliance of SMEs

2.3.2     Financial Literacy and Exposure of SMEs Owners/Managers and Their Tax Compliance

2.3.3    Probability of Detection and Degree of Punishment for Tax Non-Compliance and Tax Compliance of SMEs

2.3.4    Perceived Fairness of Tax Rates and Tax Legislations and Tax Compliance of SMEs                                       2.3.5    Government Accountability and Tax Compliance of SMEs

2.4       Empirical Literature

2.4.1     SMEs Specific Studies

2.5       Empirical Framework

2.6       Summary

CHAPTER THREE: RESEARCH METHODOLOGY

3.1        Introduction

3.2       Research Design

3.3       Study Population

3.4       Study Sample and Sampling Technique

3.5       Data for the Study

3.6       Instrumentation: Questionnaires

3.7       Method of Data Analysis

CHAPTER FOUR: PRESENTATION OF RESULTS AND ANALYSIS

4.1       Introduction

4.2       Demographic Details, Firm Data and Tax Compliance of SMEs

4.2.2    Firm Data Analysis

4.2.3    Preliminary Analysis: Tax Compliance of SMEs

4.3       Empirical Analysis: Correlation and Multiple Regression Analysis

4.3.1    Correlation Analysis

4.3.2    Multiple Regression Analysis

4.4       Test of Research Hypotheses

4.5       Discussion of Results

CHAPTER FIVE: SUMMARY, POLICY RECOMMENDATION AND CONCLUSION

5.1        Introduction

5.2       Summary of Findings

5.3       Policy Recommendations

5.4       Conclusion

Bibliography

Appendix I: Questionnaire

Appendix II: SPSS Results

CHAPTER ONE

INTRODUCTIONS

1.1         BACKGROUND OF THE STUDY

As a developing country, small and medium scale enterprises (SMEs) permeate the Nigerian economy as a pivotal sub-sector, contributing its quota in the nation’s socioeconomic development process. The SMEs was introduced into the development landscape of most developed nations as early as the late 1940s with the primary aim of improving trade and industrialization (Organization for Economic Cooperation and Development (OECD), 2004). For Nigeria in particular, Nwankwo, Ewuim and Asoya (2012) traced the historical background of SMEs back to 1946 when the essential paper No. 24 of 1945 on “A Ten Year Plan of Development and Welfare of Nigeria” was presented.

For Nigeria, the Nigerian Council of Industry define SMEs as those enterprises with a total capital employed not less than N1.5 million, but not exceeding N200 million, including working capital, but exceeding cost of land and/or with a staff strength of not less than 10 and not more than 300 (Ohachosim, Onwuchekwa &Ifeanyi, 2012). Nwankwo et al (2012) report that Nigeria’s economy is dominated by SMEs in all its sectors, as available statistics from the Federal Office of Statistics show that 97% of all businesses in Nigeria employs less than 100 employees, implying that 97% of all businesses in Nigeria,  are “small  businesses”. In view of their preponderance in the Nigerian economy, the taxation of the SMEs sub-sector in Nigeria primarily constitutes a source potentially huge tax revenue critically needed by the Nigerian government.

Ogbonna and Appah (2012) asserts that a functional tax system constitutes one of the means through which revenue for providing critically needed infrastructure are harnessed by the government. While the relevance of taxation remains undisputed, between imposing a tax and getting people to pay, the assurance of people paying and people’s attitude towards tax  payment are critical determining factors of the functionality of the tax system. For Nigeria, Akintoye and Tashie (2013) report that willingness to pay tax remains a key taxation challenge in Nigeria.

The taxation of SMEs formally became a global economic concern, following the proceedings of the 2007 International Tax Dialogue (ITD) Global Conference on Taxation of Small and Medium Scale Enterprises, where all participating countries irrespective of size or level of economic development expressed serious concerns over taxation of SMEs in their respective countries (Carter, 2013).

For developing countries (like Nigeria), Slemrod  (2007) asserts that the bulk of tax receipts and tax administration involves mainly the large businesses as well as border operations. Taxation of SMEs in Nigeria the presents a dilemma as the level of taxation set must be friendly and not stifle the running of the  business. On the one hand SMEs in Nigeria operate in a harsh business environment which leaves tax incentives either in the form of tax reliefs or tax holidays very much desired. On the other hand, a functional tax system that provides an adequate coverage of the Nigerian SMEs sub-sector places the Nigerian government within reach of a potentially massive tax revenue, which the government sorely needs to prosecute development agendas.

Despite this dilemma, the obtainable reality in Nigeria is the absence of a functional tax system that effectively covers the SMEs sub-sector with low tax compliance from the sector being the bane of tax administration in this sector (Fagbemi & Abogun, 2014). Imam, Sugeng and Yuli (2014) asserts that the size of a country’s tax revenues will be determined by the extent of tax compliance of its community, thereby bringing the low tax compliance of the SMEs sub-sector in Nigeria into perspective.

It is against this background of prevalent low tax compliance from the SMEs sub-sector in Nigeria, that this research study is undertaken to determine the factors that influence tax compliance by SMEs in Edo State.

1.2        STATEMENT OF THE RESEARCH PROBLEM

Nigeria as a developing country faces a multifaceted development problem, featuring social, economic and political challenges. Key to overcoming these development challenges is the massive mobilization and consistent commitment of revenue on the part of the government to development agendas. Thus, for Nigeria like most other sub-Saharan countries raising more domestic revenue is a priority (Drummond, Daal, Srivastava & Oliveira, 2012). Appah and Eze (2013) asserts that a tax system offers itself as one of the most effective means of mobilizing a nation’s internal resources needed by the government in discharging its pressing obligations, and creating an environment conducive to the promotion of economic growth.

However, tax inefficiencies of developing countries have caught the attention of policymakers and academicians home and abroad, as well as multinational organizations. Stern and Loeprick (2007) report that only 5% of taxable base complies with fiscal obligations in developing countries (according to OECD estimates), and as such governments rely on this  narrow base to provide the revenues needed. In the view of International Development Committee (2012) it is imperative that the revenue authorities of developing countries are able to collect taxes effectively, if developing countries are to escape from aid dependency, and from poverty more broadly.

The International Monetary Fund (IMF) (2011) reports that the domestic tax bases in most African countries are undermined by widespread tax avoidance and evasion. While tax payer non-compliance is a recognized growing global problem, the view exist from many indications that developing countries many of which are in sub-Saharan Africa are the worst hit by the problem (Fuest &  Riedel, 2009; McKerchar & Evans, 2009). In the view of Anyaduba, Eragbhe and Modugu (2012), the existing deterrent tax measures in Nigeria are inadequate and have not helped to promote tax compliance in the country.

The tax compliance behaviour of SMEs in Nigeria is brought into perspective, given their pole position in the Nigerian economy. Nonetheless, Nigeria like most other developing nations suffers the dual problems of lacking a strong and virile SMEs sub-sector which is plagued by a myriad of problems, as well as lacking a coherent SMEs tax regime or policy framework that effectively covers the sector and promotes investment (Carter, 2013; Adigwe, 2012).

Irrespective of the epic proportions of low tax compliance/non-compliance in developing economies like Nigeria and its far-reaching implications, it has not attracted considerable scholarly or academic interest, leaving only to a handful of studies on the subject matter for developing countries (D’Arcy, 2011; Chau & Leung, 2009). This is first research gap this study intends to fill. Also, investigations into the tax compliance behaviour for SMEs is even fewer leaving an almost non-existent body of literature. This is another research gap this study intends to fill.

In response to the above research gaps, this study constitutes an addition to the few scholarly attempts to explain tax compliance behaviour in developing countries like Nigeria. Also, this study empirically identifies several factors that explain the low tax compliance of Nigerian SMEs in Edo State. Arising from the above, are the following research questions:

  1. Is financial viability/profitability of SMEs a significant determinant of their tax compliance behaviour?
  2. Does the level of financial literacy and exposure of the owners/managers of SMEs have a significant impact on tax compliance by SMEs?
  3. Does the probability of detection and degree of punishment for tax non-compliance have a significant impact on their tax compliance?
  4. Does the perceived fairness of tax rates and tax legislations on the part of SMEs have a significant impact on their tax compliance?
  5. Does the perception of government accountability by SMEs have a significant impact on their tax compliance?

 1.3        RESEARCH OBJECTIVES

The primary aim of this study is empirically identify the determinants of tax compliance behaviour of SMEs. In this regard, this study will:

  1. Determine if financial viability/profitability of SMEs significantly explains tax compliance by SMEs.
  2. Establish the relationship between the level of financial literacy and exposure of the owners/managers of SMEs and the tax compliance of SMEs.
  3. Determine if low probability of detection and degree of punishment for tax non-compliance has a significant impact on the tax compliance of SMEs.
  4. Ascertain if perceived fairness of tax rates and tax legislations on the part of SMEs has a significant impact on their tax compliance.
  5. Ascertain if perception of government accountability by SMEs has a significant impact on their tax compliance.

 1.4        RESEARCH HYPOTHESES

In order to achieve our research objectives, the following research hypotheses are formulated and presented in the null form:

HO1: Financial viability/profitability has no significant impact on the tax compliance of SMEs.

HO2: The level of financial literacy and exposure of owners/managers of SMEs has no significant impact on the tax compliance of the SMEs.

HO3: Probability of detection and degree of punishment for tax non-compliance has no significant impact on the tax compliance of SMEs.

HO4: The perception of the fairness of tax rates and tax legislations on the part of SMEs has no significant impact on the tax compliance of SMEs.

HO5: The perception of government accountability on the part of the SMEs has no significant impact on the tax compliance of SMEs.

1.5        SIGNIFICANCE OF THE STUDY

The significance of this study is primarily underscored by its focus on tax compliance which stands as one of the major challenges of our nation’s tax system, as well as on the SMEs sub-sector as a relevant sector of the economy. In this regard, this study will provide insight into the factors responsible for the near-absence of a comprehensive and coherent tax policy for the Nigerian SMEs sector.

The relevance of our study is further reinforced for by the dearth of scholarly and empirical literature on tax compliance in the Nigerian economy, especially studies focusing on the tax compliance of SMEs in Nigeria. In this regard, this research study is an addition to the already existing body of knowledge in this area and would be beneficial to researchers in similar analysis or investigations.

Finally, besides academic interests into tax compliance determinants in this critical sector, this study is relevant from a policy perspective. In the view of Ali, Fjeldstad and Sjursen (2013), a more informed tax policy design would require systematic and coherent information on taxpayers’ attitudinal disposition towards tax legislations and rates, as well as tax administration and enforcement. In this regard, this research study empirically establishes the critical determinants of tax compliance of Nigerian SMEs and there from propose result-based recommendations for policy makers, as well as tax and revenue authorities.

 1.6        SCOPE OF THE STUDY

The scope of this research work covers all the SMEs in Edo State, Nigeria. For our field study, a number of SMEs will be randomly selected from the Benin Metropolis as the representative sample of the study. Specifically, 100 SMEs will be randomly selected from the Benin Metropolis from which 100 respondents will be drawn from the management or ownership cadre of the establishments. In this regard our sample comprises of SMEs drawn from the following sectors: oil, agribusiness, eateries, hotels, bakeries, building and construction, transport companies, schools, shopping malls, beauty shops and ICT-firms. Respondents were drawn from the management and ownership cadre of these establishments.

 1.7        LIMITATIONS OF THE STUDY

A major limitation faced in this study is the relatively few works that has been done in this area, particularly for SMEs in the Nigerian economy. Hence, accessing available theoretical and empirical information for referential purpose proved difficult. This posed a huge constraint to this study.

Another limitation of this study relates to the time, funds and logistics constraints of obtaining primary data from our field study for analysis, given the sporadic nature of SMEs. The reluctance of some respondents to complete the questionnaires promptly and those who even failed to complete them at all was a major limitation of this study. Also, literacy levels of some respondents also came into question at some points, in terms of their requiring additional explanation to fully comprehend the questions posed in the data collection instrument. However, these limitations will be adequately managed so as not to compromise the findings from this study.

 1.8        DEFINITION OF TERMS

In this study, the following key terms are defined thus:

Determinants: Something that determines the nature or outcome of something else or an event. A factor that explains or determines an outcome or a behaviour.

Tax Compliance: The degree to which a taxpayer complies with the tax rules of his country, involving declaring one’s income, filing a return, and paying the tax due in a timely manner.

SMEs: These are small and medium scale enterprises. For Nigeria, in terms of number of employees and total cost (including working capital), small scale industries employ 11-35 workers and has a total cost ranging from  N1 million-less than 40 million. Medium scale enterprises employ 36-100 workers and has a total cost of 40 million-less than 200 million.

 

Keywords: DETERMINANTS OF TAX COMPLIANCE AMONG SMEs



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Keywords:DETERMINANTS OF TAX COMPLIANCE AMONG SMEs