1.1 Background to the Study
Small and Medium Enterprises (SMEs) are considered to be the main driving force for growth and development of any nation. SMEs’ data in Ghana is hard to come by because of scarce statistics from the Registrar General’s Department. This indicates that more than 90 per cent of companies registered are micro, small and medium enterprises. In Ghana, SMEs account for the provision of about 85 per cent of employment in manufacturing and as well contribute about 70 per cent to the country’s GDP, and as a result, have a significant effect on economic growth, income and employment (Awunyo-Vitor et al. 2012; Steel & Webster 1991).
Internationally, SMEs in India, amount to almost 30 million operators, they have been the driving force of several innovations in the area manufacturing and service sectors, and is seen as the major link in the supply chain between corporate entities and public establishments or organisations. In India, SMEs contribute about 20 per cent to GDP; 45 per cent of industrial output; 40 per cent of exports; employ 60 million people; create 1.3 million jobs every year; and produce more than 8,000 quality products for the Indian and international markets. In South Africa, the small business sector represents a considerable portion of the economy. They contribute more to the South African GDP than the cumulative amount of the corporate giants (Soontiëns 2002). Most large organisations stem their roots from small and medium enterprises depicting that the future large organisations are the SMEs of today that must be nurtured to ensure their growth. Therefore, developing economies like Ghana needs to further the development of its private sector by creating a favourable environment for the growth of SMEs (Chu et al. 2008). This will ensure that they can adequately play the role expected of them in economic transformation.
Apart from being considered as an essential source of employment and income in many developing countries, SMEs with their flexible nature have a better adaptability to changing market conditions, making them better suited to withstand cyclical downturns. The dispersion of SMEs across the nation promotes better distribution of income, and generates additional value in raw materials and products as they bring about efficiencies in domestic markets. Furthermore, they have the capacity of reaching the farthest corners of the country unlike the larger organizations. For this reason, an ideal tax policy needs to be adopted in order to ensure voluntary compliance, economic growth and proper utilization of resources rather than suffocating the entrepreneur initiative they should cater for (Atawodi & Ojeka 2012).
It is obvious that the revenue generated from the taxation of individuals and businesses is a fundamental source of income for government. In an economy like Ghana’s that is struggling to remain afloat, it is even more important. Tax revenue is the source of funds used for development projects such as the provision of infrastructure like good roads, stable power supply, and a stable water supply; all of which combine to create a favourable environment for business operations and as well the economy at large to grow (Atawodi & Ojeka 2012). Ghana’s IRS has devised various means of taxation over the years to rope into the tax net as many self-employed persons as possible. These include standard assessment, identifiable groupings and, most recently, the tax stamp. Otieku (1988) revealed that non-compliance by the self-employed is a major factor accounting for tax authorities receiving less than what the law allows in Ghana. An effective income tax enforcement strategy is therefore warranted; however, the available of studies in the field of taxation have mainly centered on the problems of tax administration (Otieku 1988).
Taxation is a contributor to development and welfare through three sources: it must be able to generate enough funds to help in financing public services and social transfers at a high level of quality; it should offer more opportunities for employment and for an efficient and lasting use of natural resources; and finally, it should be able to reallocate income Holban (2007). However, the problem of tax compliance has been in existence for donkey years. According to Apronius & Deogratias (2010) the informal sector in Tanzania contributes about 40% to GDP. Ghana’s economy is mainly of individual and small-scale enterprises and therefore referred as informal sector. The sector makes provision for various sources of income and if properly taxed, would increase government internally generated revenue. The Institute of Statistical, Social and Economic Research observed that “the main informal sector is the source of employment in Ghana. The sector provides employment opportunities for at least 80% of the labour force”.
Consequently, in the case of SMEs, taxing must be done in such a way that takes their income and need for survival into consideration. It is expedient that SMEs make enough profit to allow them to expand their businesses. The tax policy must be one that will not encourage SMEs to remain in the informal sector or to evade or avoid tax payments. More so, many small firms in Africa, including Ghana, choose to remain in the informal sector because the perceived benefits outweigh the perceived costs. Compliance costs are high because firms hardly see their tax contributions at work and as a result, discourage compliance. Several studies have been conducted on tax compliance but few on few concentrate majorly on SMEs in Kumasi. This study will therefore examine factors that influence tax compliance on small and medium scale enterprises in Kumasi metropolis.
1.2 Statement of the Problem
Tax plays an important role in the growth of any economy so tax evasion is harmful to the economy. Tax evasion hampers government revenue collection thus inefficiency in Government spending because it diminishes the capacity of the state to mobilize domestic revenues, resources that are needed for investments. In 2010, for example the amount lost to tax evasion represented about twice the amount the country spent on health care. Tax evasion also damages the country's growth capacity by discouraging both local and foreign investors.
The increasing trend of disparity between the levels of submitted annual income tax returns, reported tax assessments and voluntarily paid tax liabilities, among SMEs, on the one hand, and the trend of business birth and growth, on the other hand, has been a cause of worry to the government of Ghana. Generally, if the informal sector remains untaxed, and as more people transition in to the sector, the government is likely to continue losing billions of shillings. Such a scenario will impact on government’s ability to achieve its revenue targets and consequently its development agenda.
The question as to why some people pay tax while others do not has raised a lot of concern among economists, governments and tax administrators alike. Tax revenues have, for quite some time, remained low relative to the number of both registered and non registered firms and individuals who are legally qualify to pay tax. Continued low revenue collection levels for government is detrimental to economic development of this nation (Cobham, 2005). A large segment of the informal sector, especially the SMEs in Industrial area in Kumasi exhibit low tax compliance levels. This is a great loss of revenues meant for public expenditure. It is for this reason that research need to be undertaken to identify the causes for low tax compliance among small and medium enterprises in Industrial area. In this context SMEs in Kumasi’s Industrial area exhibit low tax compliance levels and this requires an understanding on the determinants of tax compliance to enable the government to improve on its tax collection among the SMEs in Kumasi metropolis.
1.3 Research Objectives
The general objective or main objective of this study is to examine the factors that influence tax compliance on small and medium scale enterprises in Kumasi metropolis. The specific objectives are:
i) To identify the factors that influence tax compliance on small and medium scale enterprises in Kumasi metropolis
ii) To establish the impact of small and medium scale enterprises on the economic growth of Ghana
iii) To find out the importance of tax on revenue generation
1.4 Research Questions
The following are some of the questions which this study intends to answer:
i) What are the factors that influence tax compliance on small and medium scale enterprises in Kumasi metropolis?
ii) What are the impacts of small and medium scale enterprises on the economic growth of Ghana?
iii) What is the importance of tax on revenue generation?
1.5 Research Hypotheses
The following hypotheses were postulated to guide the conduct of this study;
i) There is a significant correlation between SMEs and economic growth
ii) There is a significant influence of tax on economic growth
1.6 Significance o the Study
This study focused on how social, cultural and personal factors influence tax compliance. It is anticipated that the results of this study will provide concepts and grounds on which to develop a framework. The knowledge accruing from this study could benefit the Government of Ghana and its revenue collection body Ghana Revenue authority in its effort to design suitable tax policies for SMEs. This study has provided concepts which to develop a framework to explore tax compliance behaviour among SMEs. It has opened the underlying factors that promote tax compliance. The research will be useful to the business community and organization’s management teams for purposes of knowing the tax compliance environmental factors and how the conditions can be improved or dealt with. Finally, the research will be of interest to scholars and researchers who may require developing and/or advancing their knowledge in the field of tax compliance and administration.
1.7 Scope of the Study
This study shall be carried out among the small and medium scale enterprises in Kumasi metropolis. This is because it focuses on the factors that influence tax compliance on small and medium scale enterprises in Kumasi metropolis
1.8 Limitation of the Study
Time constraint was a limiting factor because the study is to be concluded within a short time. Availability of funds was also a limiting factor to the study since the researcher is self sponsored. There was no assurance that the respondents will return all the questionnaires duly completed, neither was there a guarantee that those who will be interviewed would respond to all the questions put forward to them comprehensively for fear that it would expose their noncompliance to the government. To counter these limitations, the researcher took leave from work to make time to interview the respondents and also sought for funding from relatives. The SMEs fear of participation was overcome by explaining to them the intent of the study and issuing the transmittal letter as well as the supervisors contact for verification purposes.
1.9 Definition of Terms
The following terms were used in the course of this study:
Tax: A compulsory financial contribution imposed by a government to raise revenue, levied on the income or property of persons or organizations, on the production costs or sales prices of goods and services, etc.
Tax Compliance: The Degree to which a taxpayer complies (or fails to comply) with the tax rules of his country, for example by declaring income, filing a return, and paying the tax due in a timely manner.
Tax Evasion: It refers to the conscious or unconscious action and behaviour of a person who is liable to pay tax but who fails to fulfill this duty by either under reporting his tax liability or failing to account for his income generating activities altogether. Tax evasion also refers to the reduction or minimization of tax liability by illegal methods.
Small and Medium Enterprises: Those entities with full-time employees not exceeding 100 or annual sales turnover.
Small Enterprises: An enterprise with 10-50 Employees
Medium Enterprises: An enterprise with 50 -100 Employees