Abstract
This article provides a composite index for Pay-As-You-Earn (PAYE)tax using Principal Components Analysis (PCA). The study uses time series from April 2012 to March 2020 (using monthly data) for the ratios derived from the four compliancemeasures namely, payments on time, registration on time, filing on time and accurate declarations. The index is computed using the weights of the four derived principal components. According to the model results, the PAYE tax compliance index averages around 75.0% for the period, with the lowest value of 72.3% in 2013/14 and the highestvalue of 77.1% achieved in 2018/19. There is a clear upward trend, indicating improving levels of compliance in PAYE. Similarly, setting the baseline index of 100 i.e. assuming 100% compliance for 2012/13, results in PAYE tax compliance index averaging around 101.6% for the period, with the lowest value of 97.72% in 2013/14 and the highest value of 104.26% achieved in 2018/19. The study recommends this methodology to be applied to all the tax products and that the overall tax compliance index be computed. This will assist tax authorities all over the world to actively monitor tax compliance levels and institute timeous corrective measures in order to address non-compliance and ultimately maximise PAYE revenue collections. Moreover, this study also serve as a base for many of the future tax compliance indices studies.
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