You are probably one of the many people who would still pay taxes even when you have an opportunity or an incentive to evade or avoid paying. So, what makes you pay taxes voluntarily? And what could make you evade or avoid taxes? Understanding taxpayers’ behaviours and factors that influence tax compliance are crucial for a successful tax administration. But, unfortunately, there are no hard and fast rules.
Tax obligations can, broadly, be clustered into four groups: (a) registration in the system (think of TIN and VAT registrations); (b) timely filing of tax returns; (c) reporting of complete and accurate information (typically, this also incorporates good record keeping and the use of EFDs); and (d) payment of tax on time. If you abide by these, you are tax-compliant. Breach any, you are non-compliant!
So, what sort of factors influences tax compliance or non-compliance? The question has been a subject of numerous theoretical and empirical studies. But a consensus is still far away. Some factors influencing individuals may not apply to organisations and vice versa. So far, research has identified two categories of factors influencing tax compliance. Economic and behavioural (social) factors. Under these two, several factors are significant in explaining tax compliance behaviours. To start with, I discuss three here.
Carrots or sticks?
The potential amount of interest, penalties or fines for non-compliance tends to influence taxpayer compliance. Also, tax compliant folk tend to want those who are non-compliant folk to be punished. However, studies of the impact of these financial deterrents as well as the threats of prosecution(s), suggest that they may have a time-limited effect on compliance of taxpayers. Prevalence of the informal economy in most countries (including Tanzania) is a good example.
Studies have shown that giving taxpayers incentives may have a positive effect on taxpayers becoming compliant. I recall a few years back, when TRA used to organize Taxpayers’ Day on which the best taxpayers in various categories were rewarded.
The ability-to-pay principle
There appears to be a relationship between the amount of tax liability and taxpayer compliance. If a business owner or an individual has a tax liability that can easily be paid, they may be willing to comply. But if the liability is considered huge by the taxpayer and threatens the viability of the business, chances are that the owner might evade the tax. One way of doing this is to fraudulently adjust the data (for example, reducing sales or increasing expenses) so that a lesser amount of tax is paid. Another way is to bribe the taxman.
The costs of compliance
Taxpayers may face several costs to comply with their tax obligations in addition to the actual amount of tax they pay. Think of the time taken to comply with tax obligations, the cost of hiring a tax consultant, or the costs of attending tax trainings courses. There are also ‘psychological’ costs such as stress that comes from not being certain that you have met all the tax rules. Record keeping may also be costly to some taxpayers. The methods of effecting tax payments may also come with costs. Some taxpayers especially small businesses often express resentment about being ‘tax collection agents’ for taxes such as withholding tax and VAT. Think of when VAT is due for payment but as a taxpayer you have not have collected the tax from your customer. Should you borrow to pay the tax? If yes, at what cost?