Unravelling the Effects of Perceived Severity of Penalties on Income Tax Compliance for Tanzanian Small and Medium Enterprises

Abstract

Enhancing tax compliance behaviour among SMEs will improve revenue
collection, thus enable government to finance social-economic welfare of its
citizens. Therefore, this study investigated the effects of perceived severity of
penalties on individual income tax compliance among Tanzanian Small and
Medium Enterprises. A cross-sectional survey of 382 SMEs was conducted in
six tax regions of Tanzania – Kinondoni, Kariakoo, Temeke, Mtwara, Singida
and Tabora, selected using simple random technique. Descriptive and Partial
Least Square Equation Modelling were used for data analysis. The findings of
the study show that perceived severity of penalties has positive and significant
effects on the decision of the individual to register with the tax system and make
correct declaration of income. On the other hand, it has a positive, but
insignificant effect on the decision of the taxpayer to pay taxes within due dates.
The findings imply that penalties are more effective in enhancing compliance
behaviour at the registration and declaration than on payment stage. Thus,
government through the Tanzania Revenue Authority should continue to use
penalties and other administrative measures including inter alia, taxpayer
education, good customer care and services, to enhance tax compliance
behaviour among SMEs