ASSESSING TAXPAYERS' PERSPECTIVES ON THE INFLUENCE OF INSTITUTIONAL CAPACITY ON VOLUNTARY TAX COMPLIANCE AMONG SMES IN TANZANIA

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.