Compliance Cost and Tax Compliance among Small Taxpayers in Ghana

Abstract

This study estimates compliance cost incurred by small taxpayers for different tax handles and the extent of influence of compliance cost on tax compliance. The study goes further to examine the extent to which the effect of compliance cost on tax compliance vary among geographical location, business type and sex of taxpayer. The standard cost model was used to estimate compliance cost and Two-Stage Least Square technique was also used to examine the effect of compliance cost on tax compliance due to the simultaneous endogeneity between compliance cost and tax compliance. Data collected by Directorate of Research, Innovation and Consultancy (DRIC) of the University of Cape Coastwas used. The study finds the average compliance cost to be GH¢85 per month and varies across the different tax handles. Moreover, compliance cost is found to have a decreasing effect on tax compliance and that the effects differ among geographical location and business type. Tax knowledge, tax rate, fine rate, perception about government use of tax revenue and tax audit are significant factors of tax compliance. Therefore, the study recommends that the Ghana Revenue Authority should consider simplifying the tax laws by organising workshops and seminars to educate taxpayers so as to equip them with the needed skills and knowledge to understand the tax laws and easily file tax returns since taxpayers perceived it to be a major factor that influence tax compliance.