Structural Equation Modeling: Taxpayer Compliance of Msmes in Kediri City

Abstract

Purpose: The importance of SMEs in bolstering tax revenue streams, emphasizing their significance in the fiscal landscape of developing economies. The Objective to explore the relationships between tax incentives, tax services, tax sanctions, and tax morale on the tax compliance of Micro, Small, and Medium Enterprises (MSMEs) taxpayers in Kediri City   Method: This study is designed to address the formulated issues and employs a causal research design. The analysis used for testing the model and hypotheses is Structural Equation Modeling (SEM) using the SmartPLS program. Parameter estimation within SEM-PLS is obtained through the following three stages of the iteration process: First Stage; determining weight estimate used to assign scores to latent variables, Second Stage; determining path estimate connecting latent variables and estimating loading between latent variables and their indicators, Third Stage; determining average estimates and parameter locations (regression constant values, intercept) for indicators and latent variables.   Results and conclusions: The tax incentives, tax services, and tax sanctions had a significant and positive impact on tax compliance, but tax morale has a positive but not significant impact on tax compliance of MSMEs taxpayers in Kediri City.   Research implications: The government-regulated tax incentives should be maintained. The measurable tax policy, specific socio-economic and cultural, strategies like educational campaigns, awareness initiatives, and the provision of quality public services should be considered to enhance the impact of tax morale on tax compliance. Business sustainability should be considered as well.   Originality/value: Tax morale, as a critical aspect in achieving tax compliance, exhibits a less favorable response from MSMEs business actors in Kediri, Indonesia. Consequently, this necessitates further research design regarding tax morale to obtain better insights into the behaviors and beliefs of MSMEs business actors towards taxation.