DETERMINANTS OF TAX COMPLIANCE IN SMALL AND MEDIUM SIZE ENTERPRISES IN LIMBE MUNICIPALITY
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The purpose of the study was to examine the determinant of tax compliance in SMEs in Limbe Municipality. In an attempt to do this, three objectives were developed: to examine the extent to which tax rate encourages tax compliance among Small and Medium Enterprises Limbe, to examine the availability of tax information as a factor influencing tax compliance among Small and Medium Enterprises in Limbe and to determine the extent to which costs incurred by Small and Medium enterprises in Limbe influence their level of tax compliance. Primary data was collected with the help of a Likert scale questionnaire. Data was coded into Excel 2007 and analyzed in SPSS. Correlational analysis was used which showed a positive relationship between tax compliance and the sub-construct selected. In testing the Hypothesis, it was done at a 95% confidence interval with an alpha of 0.05 and the results revealed that there is a significant relationship between determinant and tax compliance
Keywords: Tax compliance, Tax rate, and Tax information
A tax is a compulsory financial charge or some other type of levy imposed upon a taxpayer (an individual or a legal entity) by a government organization to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law. Taxes consist of Direct and Indirect taxes and may be paid in money or as its labor equivalent. The first known taxation took place in Egypt around 3000-2800BC.
Most countries have a tax system in place to pay for public, common or agreed on national needs and government functions. Some levy needs and government functions. Some levy a flat percentage rate of taxation on personal annual income, but most scale taxes based on annual income amounts. Most countries charge a tax on an individual’s income as well as on corporate income. Countries or subunits often also impose wealth taxes, inheritance taxes, sales taxes, estate taxes, gift taxes, property taxes, sales taxes, payroll taxes, or tariffs. In economic terms, taxation transfers wealth from households or businesses to the government. This has an effect that can both increase and reduce economic growth and economic welfare.
The levy of taxes aims to raise revenue to fund the government or alter prices to affect demand. States and their functional equivalents throughout history have used the money provided by taxation to carry out many functions. Some of these include expenditures on economic infrastructural (roads, public transportation, public safety, education, health care services, etc.) public works, military, scientific research, cultural and arts, public insurance an operation of government itself, etc. A government’s ability to raise tax is called its fiscal capacity.
Tax increases reduce the Gross Domestic Product (GDP). “Tax changes have very large effects: an exogenous tax increase of 1% of gross domestic product lowers real gross domestic product by roughly 2 to 3%” rather, under the tax system, any positive shock to output raises tax revenues by increasing income.
An income tax is a tax the government imposes on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations; they are used to fund public services, pay government obligations, and provide goods for citizens. Income taxes are the major source of government revenue in a developing country. However, the revenue amounts the relevant authorities generate for government expenditure by far does depend on numerous factors, especially on the readiness of taxpayers to comply with the laws of the country. In case a taxpayer fails to be his/her stipulated tax provision it is the term has been non-compliant.
Tax compliance is a degree to which a taxpayer complies (or fail to comply) with tax rules of his/her country, by declaring income, filing a return, and paying the tax due on time. While tax evasion is an illegal activity in which an individual or entity deliberately avoids paying a true tax liability. Those caught evading taxes are generally subjected to criminal charges and substantial penalties.
Tax compliance needs two forms of compliance that are distinct and reporting for organizations. These categories are divided into either administrative or technical compliance. The first category refers to the compliance with all administrative roles of not only lodging but also of paying taxes the administrative form of compliance is also known as reporting compliance. Technical compliance refers to the requirements of the tax law on a technical perspective; such as in the calculations of tax or understanding the provision of the tax laws in paying their share of the tax.
From the theoretical point, both the taxpayer and the tax collectors; compliance with tax regulation implies conformity to laws that differ from one nation to another. The revenue authorities have the fundamental mandate of fostering compliance by the GDP (gross domestic product) of many nations; tax compliance is quite a big challenge in different nations across the world especially in many developing countries, even though the GDP has been improving over the years.
Small and medium-sized enterprises (SMEs) are businesses whose personnel number varies between countries, with the most frequent 250 employees, as in the European Union. However, some countries set their limit at 200 employees, while the United States uses 500 employees. Small firms are generally those fewer than 50employees, while micro-enterprises have at most 10, or in some cases 5 workers. The abbreviation “SME” is used by international organizations such as World Bank, the European Union, the United Nations, and World Trade Organization (WTO).
SMEs outnumber large companies by a wide margin and employ more people. SMEs are important for economic and social reasons, given the sector’s role in employment. Due to their sizes, SMEs are headed by their Chief Exudative Officers, a.k.a. CEOs. The CEO of SMEs often is the founders, owners, and managers of SMEs. The duties of the CEO on the small and medium size enterprises are difficult and mirror those of the CEO of a large company: CEO needs to strategically allocate his/her time energy, and assets to direct SMEs. Typically, the CEO is the strategist, champion, and leader for developing SME or the prime reason for business failure.
At the employee level, Petrakis and Kostis (2012) explore the role of interpersonal trust and knowledge in the number of small and medium size enterprises. They conclude that knowledge positively affects the number of SMEs, which in turn, positively affects interpersonal trust. Note that the empirical result indicates that interpersonal trust does not affect the number of SMEs. Therefore, although knowledge development can reinforce SMEs, trust becomes widespread in societies when the number of SMEs is greater.
SMEs are considered the most reliable engine of development for less developed countries (LDCs). This is because they employ a wide geographical presence, ensures more equitable income distribution, employ a high number of poor persons, and facilitates diffusion skills (Panitchpakdi 2006). For SMEs to achieve their goal the government must provide the necessary infrastructure to the sector. One of the ways through which the government generates income is through taxes paid by SMEs.
Although there is a general perception that taxes are an important source of revenue for the development of an economy and provision of social services, the problems faced are in a negative relationship between taxes and the business ability to sustain itself and to expand, small and medium-sized enterprises are faced with the problem of high taxes, multiple taxations, complex tax regulations, and lack of proper orientation or education on tax-related issues. Notwithstanding other challenges small and medium-size enterprises face in developing countries like Cameroon include inadequate capital, poor technical and managerial skills, environmental effects, multiple taxes, and government regulations which most often affect the operation of small and medium-sized enterprises. These factors have led to the close-up of small and medium size enterprises.
Tax plays an important role in the growth of any economy, so tax evasion is harmful to the economy. Tax evasion hampers government revenue collection thus inefficiency in Government spending because it diminishes the capacity of the state to mobilize domestic revenues, resources that are needed for investments. The amount lost to tax evasion represents about twice the amount the country spent on health care. Tax evasion also damages the country’s growth capacity by discouraging both local and foreign investors. The high tax rate and burden in Cameroon, which is related to the high levels of tax evasion, is the leading disincentive to business activity. The increasing trend of disparity between the levels of submitted annual income tax returns reported tax assessments and voluntarily paid tax liabilities, among SMEs (small and medium-sized enterprises), and the trend of business birth and growth, on the other hand, has been a cause of worry to the government of Cameroon.
The SMEs are continuously expanding and has the potential to increase the revenue flows but has been otherwise left out of the tax bracket.
Generally, if the informal sector remains untaxed, and as more people transition into the sector, the government is likely to continue losing millions. Such a scenario will impact on government’s ability to achieve its revenue targets and consequently its development agenda. The question as to why some people pay tax while others do not has raised a lot of concern among economists, governments, and tax administrators alike. Tax revenues have, for quite some time, remained low relative to the number of both registered and non-registered firms and individuals who are legally qualifying to pay tax. Continued low revenue collection levels for the government is detrimental to the economic development of our nation. A large segment of the informal sector, especially SMEs in Limbe exhibits low tax compliance levels. This is a great loss of revenues meant for public expenditure. It is for this reason that research needs to be undertaken to identify the causes for low tax compliance among small and medium enterprises in the Industrial area. It is also instructive to note that there is little research that has been done in this area. In this context SMEs in Limbe exhibit, low tax compliance levels and this requires an understanding of the determinants of tax compliance to enable the government to improve on its tax collection among SMEs in Limbe.
This research is aimed at answering the following question;
- To what extent does a tax rate encourage tax compliance among Small and Medium Enterprises in Limbe?
- How does the availability of tax information influence tax compliance among Small and Medium Enterprises in Limbe?
- To what extent does the cost of tax compliance explain tax compliance among Small and Medium Enterprises in Limbe?
This study if focuses on having the following objectives.
- To examine the extent to which tax rate encourages tax compliance among Small and Medium Enterprises Limbe.
- To examine the availability of tax information as a factor influencing tax compliance among Small and Medium Enterprises in Limbe.
- To determine the extent to which costs incurred by Small and Medium enterprises in Limbebeing tax compliant influence their level of tax compliance.