THE INFLUENCE OF TAXATION KNOWLEDGE AND TAXATION FAIRNESS ON TAX COMPLIANCE: A CASE STUDY AMONG SMES IN BEREKUM

CHAPTER ONEINTRODUCTIONBackground of the study Governments around the world are under increasing pressure to come up with effective ways of generating sufficient money to pay for rising government spending brought on by population expansion and the ensuing need for infrastructure and other forms of social and economic investment (Depersio, 2021). … See more

CHAPTER ONEINTRODUCTIONBackground of the study Governments around the world are under increasing pressure to come up with effective ways of generating sufficient money to pay for rising government spending brought on by population expansion and the ensuing need for infrastructure and other forms of social and economic investment (Depersio, 2021). Because of this, taxes is now recognized by law as one of the most effective ways to raise money throughout the world. However, governments do not generate any income on their own (Gasper et al, 2017). They must consequently come up with ways to get money in order to carry out their duties.According to the definition of tax, it is "a obligatory charge, imposed by government or other tax raising agency, on income, spending, or capital assets, for which the taxpayer receives nothing specific in return" (Deyganto, 2018). Charges, tolls, and other levies are paid to acquire a specific service and are not precisely tax payments, therefore they are not all considered to be contributions to the government. Since the beginning of civilized cultures a thousand years ago, taxation has been a significant factor (Lymer & Oats, 2019). It is common knowledge that taxes of citizens and corporations provides the government with a significant source of cash (Atawodi & Ojeka, 2012). In its purest form, tax income literally supports the state's existence by financing everything from social programs to infrastructure construction (Ibrahim et al., 2015). Taxation also has a significant impact on how benefits are distributed since it serves as the foundation for redistribution from wealthy to poor people and gives the government the ability to promote some activities while discouraging others by changing the relative pricing of those activities (Atawodi & Ojeka, 2012). In terms of capability, taxes are the backbone of government administration and lay the groundwork for the delivery of public goods and the application of efficient regulation. Additionally, as taxes are the means by which people interact with the government on a most personal level, they have the potential to significantly influence public demands for receptiveness and culpability (Ibrahim et al., 2015).Taxation is also designed to assist societal goals such as curbing undesirable behaviour and maintaining the environment (Alan & Fernanda, 2021). Excise taxes on alcohol and cigarettes, for example, are used to discourage usage and encourage healthier lives. Another way that taxes are expected to ensure economic goals is the ability of the taxation system to influence resource allocation, such as moving resources from the private sector to the government to finance public investment programs, or directing private investment into desired channels through measures such as regulating tax rates and granting tax incentives (Egbunike, Emudainohwo, & Gunardi, 2018). Import tariffs may also be used to protect area sectors from overseas competition. As a consequence, some demand for imported products shifts to locally produced ones (Tien, 2019). According to what is known, taxes serve two primary functions: fiscal and regulatory. The budgetair function as a tax to fund government expenditure. The regulatory role, on the other hand, establishes policies in the social and economic sectors (Kasim, Arianty & Hikmah. 2018).For all nations, industrialized and developing alike, raising a significant amount of tax income is crucial. Compliance with tax laws is crucial for successful taxation. Tax compliance is significant because, in the broader context of governmental performance and the operation of public finance systems, it indicates the readiness of tax payers to fulfill their tax obligation in accordance with existing legislation (Batrancea, Nichita & Batrancea, 2012). The terms of vertical reciprocity, or the relationship between taxpayers and the government in terms of taxes paid and government consumed, and horizontal reciprocity, or the relationship between taxpayers in terms of equality, determine the willingness to comply. Tax compliance may suffer from unfavorable vertical and horizontal linkages (Bazart & Bonein, 2014).The act of reporting all income and paying all taxes in conformity with laws, regulations, and court orders is known as tax compliance (Mohd, 2010). Another definition of tax compliance is the process of correctly revealing all taxable income, paying all taxes owed on time, and without having to wait for follow-up actions from the relevant authorities (Singh, 2003). According to Singh (2003), taxpayers must complete the Income Tax Form with all required information within the time limit specified, and the form must correctly represent the taxpayer's tax burden in accordance with existing laws, regulations, and court judgements. People who deliberately or inadvertently breach tax laws are considered to have violated the law. Other taxpayers have a large influence on taxpayers. Furthermore, the frequency and quality of audits will influence a taxpayer's tax compliance practices (Meinarni, 2013).The behavior of people who pay their taxes is a complex research topic that cannot be fully described by a single component (McKerchar, 2010). Due to the extensive body of research on tax compliance behavior, it would be exceedingly difficult to include all potential components in a single study. As a result, this study makes an effort to comprehend tax compliance behavior using a few chosen variables, including tax knowledge and tax fairness. The understanding of taxation is a crucial element determining tax compliance. Due to its high level of abstraction and use of technical jargon, tax law is complicated (Saad, 2014). It was estimated that at least 13 years of education are needed to understand British tax law; the reading age in the United States was estimated to be 12.5 years of education, while estimates in Australia increased to 17 years. Unsurprisingly, the majority of taxpayers do not correctly understand tax law, and they complain that their subjective knowledge is inadequate (Barbuta-Misu, 2011). Evidence suggests that mistrust is bred by a lack of understanding of the tax system (Wilson et al, 2019). People not only struggle to understand tax legislation, but also exhibit a lack of understanding of tax rates and other fundamental ideas. When questioned about the actual tax rates for different income bands, British citizens, for instance, understated them by roughly 11%. (Lewis, 2017). While inadequate knowledge might lead to mistrust and unfavorable attitudes toward taxes, adequate tax knowledge is correlated with favorable tax attitudes (Jayawardane & Low, 2016).It has been discovered that compliance and perceived tax fairness closely correlate. On the one hand, tax compliance is determined by perceived fairness (Taing & Chang, 2021). Conversely, bringing up unfairness justifies and rationalizes tax compliance violations (Ali, Fjeldstad & Katera, 2018). The perceived balance of taxes paid and public goods received, as well as the perceived justice of the processes and penalties for breaking the rules, are all factors in determining fairness.Tax authorities' fiscally motivated policies and procedures sometimes have a negative impact on how retributive justice is viewed. Tax amnesty is one controversial policy example. Tax amnesties allow tax evaders to file their taxes retrospectively without being penalized, increasing tax revenue. Tax amnesties, however, may have a negative impact on the compliance of honorable taxpayers who feel materially disadvantaged (Junpath, 2013).In terms of employment and revenue generation, small and medium-sized businesses are essential to the growth of a nation's economy (Young, 2011). The largest business units in Ghana are small and medium-sized enterprises (Registrar General, 2013), but they only contribute 25.6% of the country's total business tax revenue (GRA, 2012). Since SMEs make up the majority of businesses in the nation, their adherence to tax laws and regulations would boost government revenue. The majority of the business units in the municipality of Berekum are small and medium-sized businesses (Registrar General, 2013). Most SMEs are sole proprietorships and do not employ professional accountants for accurate bookkeeping. The ability of managers or owners of SMEs to comply with tax rules is crucial for small and medium-sized businesses. In order to inform policy decisions and increase tax compliance, it is therefore important to investigate factors influencing the tax compliance behavior of SMEs in the Berekum Municipality.Problem statementThe creation of the necessary tax money for the state is one of the major obstacles to the implementation of government policies and initiatives. Compliance with tax laws and regulations is necessary to achieve this. According to Asante and Seidu (2011), the issue of tax compliance is as old as the tax system itself. Small and medium-sized businesses' degree of tax compliance is essential for generating the required tax income. 90% of Ghana's businesses are small and medium-sized enterprises, which make up the majority of all firms (Oppong et al, 2021). Their adherence to tax regulations is essential in lieu of this.Since SMEs in Ghana tend to operate mostly in the unorganized sector, they typically don't keep accounting records or, at best, keep them incorrectly. Due to the lack of or incomplete records, SMEs face a significant hurdle when preparing their tax returns. Even though SMEs make up the bulk of firms in Ghana, they only generate 22% of all company tax revenue (Oppong et al, 2021). As a result, it is imperative to assess how well SMEs are complying with tax laws. Results from earlier studies have shown that small and medium-sized businesses' noncompliance with tax laws is a result of their owners' cultural values (Young, 2011). This could happen as a result of a lack of or incomplete knowledge of tax-related issues. Palil (2019) also performed research on the factors that influence tax compliance behavior in respect to the Self-Assessment System (SAS). According to the study's findings, tax knowledge is a crucial component of the self-assessment system and is thought to have a favorable influence on compliance behavior.Governments have over the years developed a variety of stimulus packages for the expansion of SMEs in consideration of their significant benefits to growth of the economy. Despite government measures that have helped SMEs succeed, most developing nations, including Ghana, have come to the conclusion that SME economic outcomes have been less than ideal, especially in terms of revenue mobilization. As a result, governments now have a safe haven to annually finance budget deficits by internal and/or external borrowing with the caveat that doing so will ultimately make economies more difficult. Policymakers struggle greatly with low tax compliance, which prevents them from raising personal income taxes to fund growth. Small and medium-sized businesses must also pay taxes because they are profit-making entities. The nature of SMEs means that every tool at their disposal can make a huge difference. Due to the perceived high cost of compliance, a number of Ghanaian SMEs opt to remain in the informal sector. A sizable portion of those who do pay only do so because they are required to by the government. Tax evasion poses a severe danger to the government's ability to collect taxes, hence tax compliance is a growing worry for tax authorities and public policy makers. If taxpayers have sufficient information to comprehend any new system, they will embrace it with no hesitation (Kasipillai, Norhani, and Noor, 2013). So, in order to improve taxpayers' capacity to comprehend the significance of tax on the nation's economic development and to strengthen their trust in upholding their tax obligations, education programs conducted by custom and duty authority or public education institutions are required. It is evident that educating taxpayers on taxes is crucial to running an effective tax system (Palil, 2019). If people can accurately fill out their tax forms and pay the appropriate amount of taxes, an appropriate voluntary compliance level may be reached. Therefore, in order to achieve the goals of voluntary compliance, taxpayers must be knowledgeable, well-educated (especially in tax matters), and their level of tax literacy must be increased on a regular basis in order to keep their knowledge current and applicable. Understanding precisely how education would affect tax payers' attitudes toward tax compliance in Ghana, however, has received less focus. Additionally, prior research suggests that one of the non-economic elements that affects personal income tax compliance is the sense of tax justice (Alabede, Ariffin, & Idris, 2017). The relationship between perceived tax fairness and compliance varies by tax jurisdiction, according to research on tax compliance (Bird, 2014; Cox and Eger, 2013). However, there is no research on the connection between the belief that taxes are paid fairly and personal income tax compliance in Ghana. Given the ongoing uncertainty and questions about the relationship between distributive, procedural, and retributive tax fairness and personal income tax compliance, as well as the need to determine whether these types of tax fairness increase personal income tax compliance in Ghana, the analysis of these associations is essential. Given that the perception of tax fairness is assessed on an individual or societal level, this is necessary. Since Berekum is the study location, this study will broaden the scope of the literature on tax fairness in Ghana and examine how tax knowledge in SMEs affects tax compliance.Research Objectives The main objective of the study is to examine the influence of taxation knowledge and taxation fairness on tax compliance among small and medium scale enterprises in Berekum. To examine SMEs knowledge of taxation in Berekum municipality To examine the effect of taxation knowledge on tax compliance among owners of small and medium-sized enterprises in the Berekum municipality To examine the effect of taxation fairness on tax compliance among owners of small and medium-sized enterprises in the Berekum municipality1.4 Research questions What is the knowledge level of SMEs on taxation in the Berekum municipality?To what extend does taxation knowledge influence tax compliance among owners of small and medium-sized enterprises in the Berekum municipality?What is the effect of taxation fairness on tax compliance among owners of small and medium-sized enterprises in the Berekum municipality?

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