Evaluation and analysis of Value Added Tax (VAT) compliance: A case study of small and medium enterprises in Tanzania

Abstract

This study adopted a positivistic paradigm and employed mixed research methods in data collection and analysis. Covering seven tax regions in Tanzania, surveys and semi-structured interviews were administered to collect data from 205 VAT registered SME taxpayers and 32 Tanzanian Revenue Authority (TRA) tax officials respectively. A deductive logic guided the statistical testing of a range of hypothesised relationships between tax compliance factors and nine measures of VAT compliance in Tanzania. The researcher identified tax compliance factors from economic and behavioural theories of tax compliance and the general tax literature. Content analysis of qualitative data provided results to corroborate the results from statistical analysis of quantitative data.

The findings of the current study indicate partial ability of the economic theory to explain VAT compliance in a developing country, Tanzania. Based on the economic theory, findings indicate several (but not all) factors were associated with VAT compliant behaviour (e.g. perceived detection likelihood and perceived influence of VAT sanctions). Furthermore, the compliance factor that was more significant and indicated a more consistent association with measures of VAT compliance was the perception that collected VAT is a business asset. This finding adds to the existing evidence that shows most SMEs taxpayers fail to differentiate between business money and VAT money. In addition, not all the associations between compliance factors and measures of VAT compliance were consistent with the economic theory predictions. Overall, while this study contributes to the empirical evidence that supports the applicability of tax compliance theories in a developing country context, it is the behavioural theory of tax compliance that appears to have more support from the current study’s findings than economic theory of tax compliance.

One key difference between the current study and other studies in developing countries is the mixed approach adopted in investigating VAT compliance. The approach has helped the researcher to investigate the phenomenon of VAT compliance in a much broader way, and generated broader understanding and explanation of the factors influencing VAT compliance, which might be unique for developing countries. In addition, the current study captures the fragmented and less developed characteristic of tax system in a developing country context by testing the compliance factors’ association with compliant behaviour at the different stages of the VAT compliance cycle (i.e. from the initial stage of identifying/registering taxpayers to the final stage where tax authorities collect/receive VAT revenues). Consequently, the research finds taxpayers’ compliance behaviour to be different at every stage of the VAT compliance cycle. For example, compared to female taxpayers, male taxpayers were less compliant during VAT registration (early stage of the VAT compliance cycle), but became more likely to be compliant by agreeing that they were less likely to make intentional mistakes to reduce VAT liability (later stage of the VAT compliance cycle). Likewise, older SMEs taxpayers were more compliant by voluntarily registering for VAT purpose (early stage of the VAT compliance cycle) but indicated that they were more likely to submit their VAT returns late (later stage of the VAT compliance cycle), which is a VAT non-compliant behaviour. Based on this, uniquely compared to other studies the findings indicate taxpayers’ compliance behaviour could change from being compliant to being non-compliant even within one VAT complying circle.

In conclusion, the overall findings of this study contribute to the limited body of knowledge of VAT compliance in developing countries context. The study also contributes to the knowledge of existing tax theories applicability to both VAT compliance and developing countries context.

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