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                                         6

1.1Background of the Study                                                  6

1.2Statement of the Research Problem                                         7

1.3Research Objectives                                                9

1.4Research Hypotheses                                                       10

1.5Significance of the Study                                                10

1.6Scope of the Study                                                       11

1.7Limitations of the Study                                                12

1.8Definition of Terms                                                    12

CHAPTER TWO: LITERATURE REVIEW                                  13

2.0Introduction                                                       13

2.1Conceptual Clarification                                                13

2.1.1Defining Small and Medium Scale Enterprises (SMEs)                     13

2.1.2Defining Tax Compliance                                         15

2.2Tax Compliance of SMEs                                                16

2.3Determinants of Tax Compliance of SMEs                                  18

2.3.1Financial Viability And Profitability and Tax Compliance of SMEs       19

2.3.2Financial Literacy and Exposure of SMEs Owners/Managers 

and Their Tax Compliance                                                        20

2.3.3Probability of Detection and Degree of Punishment for Tax Non-Compliance and Tax Compliance of SMEs                                                        21

2.3.4Perceived Fairness of Tax Rates and Tax Legislations and

Tax Compliance of SMEs                                                        22

2.3.5Government Accountability and Tax Compliance of SMEs               23

2.4Empirical Literature                                                 24

2.4.1SMEs Specific Studies                                                 26

2.5Empirical Framework                                                 28

2.6Summary                                                               29

CHAPTER THREE: RESEARCH METHODOLOGY                              31

3.1Introduction                                                         31

3.2Research Design                                                         31

3.3Study Population                                                         31

3.4Study Sample and Sampling Technique                                    32

3.5Data for the Study                                                         32

3.6Instrumentation: Questionnaires                                           32

3.7Method of Data Analysis                                                  33

CHAPTER FOUR: PRESENTATION OF RESULTS AND ANALYSIS                34

4.1Introduction                                                         34

4.2Demographic Details, Firm Data and Tax Compliance of SMEs                34

4.2.2Firm Data Analysis                                                  36

4.2.3Preliminary Analysis: Tax Compliance of SMEs                       37

4.3Empirical Analysis: Correlation and Multiple Regression Analysis                39

4.3.1Correlation Analysis                                            39

4.3.2Multiple Regression Analysis                                            41

4.4Test of Research Hypotheses                                                   43

4.5Discussion of Results                                                   44

CHAPTER FIVE: SUMMARY, POLICY RECOMMENDATION AND CONCLUSION         47

5.1Introduction                                                          47

5.2Summary of Findings                                                   47

5.3Policy Recommendations                                                   48

5.4Conclusion                                                                 49

Bibliography                                                          51

Appendix I: Questionnaire                                                   57

Appendix II: SPSS Results                                                   60