State legitimacy and tax compliance among small and medium scale enterprises: a case study of Dodowa district, Ghana

Abstract

Purpose Improving tax compliance would drive the needed development in Ghana. Small and medium scale enterprises (SME) constitute a sizable proportion of the Ghanaian economy but its contribution to tax revenue is below expectation. This study aims to determine whether SME's perception of state legitimacy affects tax compliance. Design/methodology/approach A structured questionnaire was administered to 200 SMEs randomly drawn from Dodowa in the Shai-Osudoku District of Greater Accra Region. Descriptive statistics and the Probit model with sample selection were used to analyse the data. Findings The study found that SME's perception of government legitimacy exerts a significant negative effect on reducing profit to avoid tax liability (ß = −0.0305, p < 0.05). Other factors such as education and fear of fines and penalties were also found to reduce the likelihood that the firm would reduce profit to avoid high tax liability. Still, tax knowledge had a positive effect on this behaviour. Practical implications This study would help deepen policymakers' knowledge of how to improve tax compliance among SMEs in Ghana. Originality/value The originality of this work is that it explicitly models the role of fiscal exchange theory in explaining tax compliance among SMEs in Ghana by using robust methodology.

Tax compliance of small and medium sized enterprises in Ghana

“…Thus, SMEs facilitate avenues for minimizing unemployment and alleviating poverty. SMEs constitute approximately 92% of the private sector (Ababio and Mangueye, 2021) and 98.2% of all businesses (Carsamer and Abbam, 2020). There is no single definition for SMEs globally Enterprise tax compliance in Ghana since the literature on SMEs is quite broad and diverse, with multiple or varying definitions (Kiconco et al, 2019).…”

“…However, the developmental gap between developing and developed countries continues to be defined by gaps in tax revenue mobilization due to the inability of developing countries to raise enough tax revenue (Ababio and Mangueye, 2021). While between 28% and 45% of GDP can be collected as tax revenue in some developed countries, such as France, Denmark and Sweden, the proportion of revenue to GDP in Ghana has been estimated to be 16.3% between 1960 and 2014, whereas between the same period, the expenditure to GDP ratio is reported to be 19% (Aboagye and Hillbom, 2020).…”

“…Given that this study uses isomorphic forces, tax fairness and strategic response as possible explanations for SME tax compliance, these two theories remain core. Apart from the limited studies undertaken on SME tax compliance (Ababio and Mangueye, 2021), empirical studies that investigate tax compliance research using TRA and utility theory in Ghana are far limited. According to the TRA, two social cognitive constructs determine the intention to engage in specific behaviors.…”

“…While various determinants of SMEs’ tax compliance have been documented (e.g. Carsamer and Abbam, 2020), knowledge on the institutional and socioeconomic dimensions is limited (Ababio and Mangueye, 2021). Understanding the sociological and psychological dimension of a taxpayer can drive voluntary compliance (Kiconco et al ., 2019).…”

Strategies to Improve Taxpayers’ Compliance of Indonesian Micro Small and Medium Enterprises: PRISMA Approach

“…First, tax authorities must provide tax education and training to MSME business actors (Ababio & Mangueye, 2021;Al-Ttaffi et al, 2021;Bornman & Ramutumbu, 2019;Duy & Tran, 2021;Ghani et al, 2020;Le et al, 2021;Newman et al, 2018;Resmi et al, 2021;Peprah et al, 2020;Ullah et al, 2018;Wadesango & Nyamwanza, 2020) in the hope of increasing tax knowledge and compliance. Second, the tax authority must carry out modernization on an ongoing basis (Arendsen et al, 2014;Dickinson, 2013;Purnamasari & Sari, 2018;Purwono et al, 2021;Saeed et al, 2017;Widjaja, 2021) so that tax services become better, faster, and more accurate.…”