SMALL AND MEDIUM ENTERPRISES (SMEs) PERCEPTIONS OF INCOME TAX COMPLIANCE AND ITS EFFECTS ON FINANCIAL PERFORMANCE IN MALAWI

Ali Nyondo FINAL thesis
Ali-Nyondo-FINAL-thesis.pdf

Purpose: This quantitative research aims to evaluate the perceptions of Small and Medium Enterprises (SMEs) in the cities of Malawi, namely Lilongwe, Blantyre, Zomba, and Mzuzu, concerning their income tax compliance and its influence on their financial performance for the fiscal year ended on December 31, 2022. The study investigates the extent of SME compliance with income tax regulations enforced by the Malawi Revenue Authority (MRA) and analyzes how this compliance, or lack thereof, affects their financial performance.

Methodology: To assess SMEs’ compliance with income tax laws, the study conducts a comprehensive descriptive analysis of personnel and entity characteristics alongside the level of tax compliance. To examine the impact of income tax compliance on sales and profitability, the study employs simple descriptive statistics in the form of graphs and tables. This descriptive analysis includes cross-tabulations to determine the proportion of SMEs that are compliant or non-compliant with income tax laws and explores SMEs’ perceptions of these laws and their willingness to comply.

 

Findings: The research reveals that the income tax compliance status has minimal impact on the decision-making process of SMEs, primarily because a significant majority of them are non-compliant. Among the 413 SMEs studied, 40.63% were fully compliant, 18.9% were partially compliant, and 40.39% were entirely non-compliant. The low compliance rate can be attributed to various factors, including poor implementation of general tax deterrence elements, high income tax rates, perceived unfairness in the tax system, skepticism about the taxpaying behavior of others, belief in the ease of tax evasion, skepticism regarding MRA’s ability to detect non-compliance, inadequate tax penalties as a deterrent, and insufficient tax education provided by MRA

Study limitations: Some limitations should be noted. Firstly, the study exclusively focuses on profit-oriented SMEs. Secondly, it only estimates SMEs’ perceptions regarding the impact of income tax compliance on sales and profitability, without considering historical behavior. Furthermore, the study is confined to the specific financial year of 2020 and does not investigate the dynamics of SMEs’ tax compliance behavior over multiple years. Lastly, the research is based on a sample of SMEs rather than the entire population, potentially limiting the generalizability of the results to the broader SME sector in Malawi.

 

Practical/policy implications: This study holds significance in guiding the Malawi Revenue Authority to formulate effective deterrence strategies, enforcement measures, and tax education initiatives to enhance tax compliance among SMEs. Encouraging voluntary tax compliance will contribute to increased fiscal revenue collection and reduced national budget deficits. SME taxpayers, with the support of MRA, are encouraged to enhance their knowledge of tax matters, enabling them to navigate tax-related issues more effectively


Item Type:
Doctoral
Subjects:
Accounting and Finance
Divisions:
OF INCOME TAX COMPLIANCE, SMEs
Depositing User:
Ali Nyondo
Date Deposited:
13 December 2023 16:30