DETERMINANTS OF TAX COMPLIANCE BEHAVIOUR AMONG SMALL AND MEDIUM ENTERPRISES

Abstract

This study investigates the determinants of tax compliance behavior among small and medium enterprises (SMEs) in Tanzania, focusing on the effects of tax penalties, tax knowledge, and the perceived fairness of the tax system. SMEs play a significant role in the Tanzanian economy, employment, income generation, and economic growth. However, despite their importance, SMEs often exhibit lower levels of tax compliance compared to larger enterprises. The study used a quantitative approach, emphasizing numerical data, hypothesis testing, and statistical analysis to understand tax compliance behaviors. A cross-sectional design was chosen to gather data at a single point in time, providing an efficient snapshot of the population. The research was conducted in Arusha City, selected for its vibrant SME sector and unique economic context. The target population consisted of 7,500 SMEs in Arusha, with a sample size of 98 calculated using a margin of error of 10%. Non probability sampling, specifically purposive sampling, was used to ensure a representative sample of SMEs. Primary data was collected via closed-ended questionnaires using a Likert scale to assess tax compliance among SMEs. Descriptive statistics, including mean and standard deviation, were used to analyze responses and identify trends in tax compliance behavior. The study revealed that tax penalties have a moderate effect on SMEs' tax compliance behavior, with penalties often seen as a cost of doing business rather than a strong deterrent. Additionally, a significant barrier to compliance is the lack of tax knowledge, with SMEs recognizing the need for tax education to improve their understanding and filing practices. The research also found that the perceived fairness and transparency of the tax system positively influence SMEs’ willingness to comply with tax regulations. Tax compliance among SMEs is influenced more by education, fairness, and transparency than by penalties alone. While penalties are acknowledged, they do not serve as a primary driver for compliance. Increasing tax knowledge and ensuring a fair and transparent tax system are crucial for improving voluntary compliance among SMEs.Policymakers should adopt a comprehensive approach that combines tax penalties, education, and system fairness to enhance compliance. SMEs should prioritize tax education and foster a culture of compliance. Further research should investigate the role of social and cultural factors, tax administration reforms, and technological innovations in improving tax compliance behavior