Abstract:
This study investigated the influence of institutional capacity dimensions on voluntary
tax compliance among small and medium enterprises (SMEs) that are reported to have
low tax compliance while taking Arusha City, as a case study. The study aims to
evaluate how dimensions of institutional capacity operational efficiency, regulatory
capacity, and institutional integrity affect SMEs' willingness to comply with tax
obligations. This cross-sectional, descriptive, mixed explanatory sequential study was
guided by the behavioural theory of tax compliance alongside a critical empirical
review. A logistic regression analysis was employed to analyse the data collected from
309 SMEs out of 379 pre-identified sample size that was determined by a random
sampling approach, giving a response rate of 81.5%. Employing a mixed-methods
research design, the study combines qualitative and quantitative data to capture a
comprehensive understanding of taxpayer perceptions.Key findings indicate that
operational efficiency significantly enhances tax compliance, with administrative
effectiveness and technology utilization emerging as crucial factors. Regulatory
capacity, particularly the perceived fairness of tax processes and the clarity of tax
regulations, also plays a vital role in fostering compliance. Moreover, institutional
integrity, characterized by trust in tax authorities and transparency, strongly influences
compliance behavior, suggesting that taxpayers are more likely to comply when they
perceive the tax system as equitable and accountable.The research highlights the
importance of enhancing trust and transparency within tax authorities to improve
compliance rates. Recommendations for policymakers include developing user
friendly tax information platforms and ensuring high-quality support services to
empower SMEs. This study contributes to the academic discourse on tax compliance
and offers practical insights for policymakers and tax authorities, emphasizing the need
for effective engagement strategies to promote a cooperative tax environment.
Ultimately, fostering institutional integrity can lead to a more compliant taxpayer base,
thereby increasing overall tax revenues in Tanzania
Keywords: Institutional capacity, voluntary tax compliance, operational efficiency, regulatory capacity,
Institutional capacity.
