The relationship between tax knowledge and tax compliance : a survey of small and medium-sized enterprises in Durban

Abstract

The self-assessment tax system has become a popular system in most developing and developed countries. It was introduced in South Africa in 2001 through SARS filing with the aim to improve the level of tax compliance and to increase tax collection by the South African Revenue Service (SARS). This system allows taxpayers to calculate and pay their own taxes without the intervention of tax officials. Appropriate enforcements include levying penalties and interest as provided by the law against non-compliant taxpayers. The study focuses on small and medium-sized enterprises (SMEs) in the Durban area. SMEs are key contributors to tax revenue and eventually to economic growth in South Africa. SMEs also play a critical role in creating job opportunities. This study examines the relationship between tax knowledge and tax compliance in the self-assessment system (SAS). A quantitative research methodology was applied. Questionnaires were issued to the SMEs registered in Durban. Data was collected through a survey resulting in 93 responses. The study found that the majority of the respondents were compliant; however, there is still more work to be done to improve the level of compliance. The use of tax practitioners and improvement in the tax knowledge through training and mentoring programs may assist in improving the level of tax compliance. The results also revealed that most taxpayers have good knowledge on taxpayer responsibilities and value-added tax (VAT) and poor knowledge on turnover tax and payroll taxes. Turnover tax is one of the incentives implemented by government to reduce the tax burden of SMEs. The reason for poor knowledge on turnover tax was that the majority of taxpayers are not aware that turnover tax exists. Poor knowledge on payroll taxes negatively affects the business operations as payroll taxes are withheld by employers from the gross salary to be paid to SARS. This results in an incorrect declaration on the EMP201 and income tax returns which creates unnecessary audits and imposition of penalties by SARS. The use of efiling is still an issue as some of taxpayers prefer to join the queues at a SARS branch to submit their returns instead of using efiling. Tax complexity was found to be a barrier to tax knowledge because of frequent changes to tax laws which requires taxpayers to update their knowledge frequently. It was recommended that to address the barriers to tax knowledge, public awareness campaigns by SARS on the importance of taxation, more use of social media platforms by SARS on the importance of taxation, and the introduction of tax education in secondary schools should be implemented. The study did not find a statistically significant relationships between the components of tax knowledge which were tested and tax compliance. However, it does indicate to tax administrators the relative importance of tax knowledge in assisting with the design of tax education programmes, simplifying tax systems and developing an understanding of taxpayers' behaviour.