SME Characteristics and Value Added Tax Compliance Costs In Nigeria

E Eragbhe,A.S Omoye

doi:10.5901/mjss.2014.v5n20p614

Abstract

This study examines the effect of SME characteristics on tax compliance cost in Nigeria. Specifically, it investigates the effect of Business age (LIFET), Outsourcing (OUTS), Employee size (WRKS), Export status (FOT), Turnover (TURO), Industry class (INDCLAS) and Distance to tax office (DISTANCE) on tax compliance costs for Value Added Tax (VAT) in Nigeria. The study utilized the survey research design using questionnaire as the research instrument and primary data as the data type. The population consists of all registered SME’s in Nigeria as at the study period. A sample of 750 taxpaying SMEs across the six (6) geo-political zones of Nigeria was used for the study and this was done using the purposive sampling technique. 597 responses were received out of which 574 were adjudged valid. Our analysis revealed that the effect of LIFT, TURO, INDCLAS, DISTANCE and WRKS on Tax Compliance Costs of VAT (CVAT) is negative while the effect of FOT and OUTSOURCING appear to be positive. However, none of the variables appear to be significant going by their t-ratios and this suggests that SME attributes do not impact significantly on CVAT in Nigeria. The study concludes that the porosity of the tax system coupled with the fact that the activities of SME’s in developing countries are domiciled within the shadow economy may explain the insignificance of SME attributes in determining and hence in predicting tax compliance costs. This study on this note, suggests that more empirical studies are needed in Nigeria in this areas. DOI: 10.5901/mjss.2014.v5n20p614

Highlights

The replacing of sales tax with the value-added tax (VAT) through the VAT Act No 102 of 1993 was an important landmark in tax reform in Nigeria
None of the variables appear to be significant going by their t-ratios and we fail to reject the hypothesis (H1-H6) and this suggest that SME attributes do not impact significantly on tax compliance costs of VAT in Nigeria
The aim of this paper is to provide greater insight into how SME characteristics may influence tax compliance costs of VAT in developing economies

Summary

Introduction

The replacing of sales tax with the value-added tax (VAT) through the VAT Act No 102 of 1993 was an important landmark in tax reform in Nigeria. VAT is retained at 5 per cent regardless of the stage of production or distribution. This assumes the absence of cascading effects. The introduction of VAT in most countries has significantly increased business tax compliance costs. They represent an additional burden on taxpayers, including SME taxpayers which are acting as unpaid tax collectors, especially in the case of VAT compliance costs (Pope, 2001).These compliance costs compass mainly record keeping for VAT-purposes only, preparation and filling of VAT returns, checking accounts, obtaining information about new procedures for filling VAT returns, changes in the law and other relevant information (O’Keefe and O’Hare, 2008). VAT was cited as the largest source of tax compliance costs in 8 out of 11 OECD countries that were surveyed (Pope, 2001)

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Conclusion