CHAPTER ONE

 INTRODUCTION

1.1 Introduction

The study is made up of five chapters. The content of each chapter is organized as follows; Chapter one is the introductory chapter. It introduces the study stating the background of the study in relation to earlier researches, the problem to be addressed, the research questions and objectives, the hypothesis, the importance and scope of the study. Chapter two deals with literature review and focuses on review of past research work on same topic.  Chapter three describes the methodology stating the study area, the research design, the target population, method of data collection and the method for data analysis. Chapter four dwells on data presentation and analysis. Finally, chapter five contains the discussion of findings, recommendations based on the findings, and conclusion of the whole work.

1.2 Background to the Study

Governments today are under an increasing pressure to improve the delivery of public services in cost-effective ways. To meet this challenge for example tax authorities are turning to e-government led solutions like electronic tax filing (e-filing) (Ojha et al., 2009). To date, the use of ICT is prominent in business and tax settings. Notably, tax authorities around the world are using electronic tax administration systems to interact with taxpaying public in tax collection, administration and compliance settings. Technology has influenced the way we work, play, and interact with others. The use of technology to improve the effectiveness of tax administration, expand taxpayer services, and enhance tax compliance has come to attract increasing attention in developed and developing countries (Dowe, 2008).  

Njoroge (2019), opined that the rapidly increasing pace of technological change will have a significant impact, positive and negative, direct and indirect, on Tax compliance. Information technology, which includes telecommunications and computerized systems is set to increase tax processes substantially while saving both time and money, while at the same time affording customers a better service.  All the tax systems and databases should be integrated and have available the tools required to combat tax non-compliance; facilitate tax compliance and satisfy information requirements at the operational and internal control levels for the effective management of a modern Tax Administration (Alink and Van Kommer, 2011).

A study of South Korea and Turkey on User evaluation of tax filing web sites was done by Lee et al. (2005), to compare the design and the complexity of the web sites and the ease with which taxpayers are able to file tax returns and queries on their tax status. While Turkey had a complex online system, to the contrary Turkish users did not find online tax filing system difficult to use and that was attributable to the fact that they relied on accounting professionals to do their tax returns online. On the other hand, South Korean system was considered less complex but few taxpayers were using it as expected. Having in place an electronic tax filing system is one thing, but being able to be used by taxpayers is another thing. This has influence on the current study in a way that the tax website ease of usage must be considered before such a system is rolled out to taxpayers. Other factors to be considered should also be the capacity of the system and its efficiency.

Sifile Obert, Kotsai Rodgers, Mabvure Joseph Tendai and Chavunduka Desderio (2018) studied the effect of e-tax filing on tax compliance in Harare, Zimbabwe. The study concluded that the respondents had a very positive attitude towards e-filing.

They also concluded that e-filing is a positive step towards tax compliance but it does not lead to tax compliance on its own. Olaoye Clement Olatunji (Ph.D) &Kehinde Busayo Ayodele (2017) looked at the impact of information technology on tax administration in southwest, Nigeria; the study revealed that information technology online tax filing, online tax registration and online tax remittance affect tax productivity. The study concluded that information technology enhances the level of tax productivity and administration. It is therefore recommended that the respective agencies (federal, state and local government) responsible for tax collection should carry out one on one awareness in the form of seminars and sensitization of the process and suitability of information technology on tax administration. Berger (2011) said that South Africa improved its ranking on tax payments from number 32nd to 11th, largely due to the success of e-filing and the way in which returns are filed. 

Online tax filing also known as electronic tax filing or e-filing is a process where tax documents or tax returns are submitted through the internet, usually without the need to submit any paper return. The e-filing system encompasses the use of internet technology, the Worldwide Web and Software for a wide range of tax administration and compliance purposes (Muturi &Kiarie, 2015).  Electronic taxation differs among countries hence the name of the system differs from country to country (Wasao, 2014). It has also been called online taxation payment or e-tax lodgement by Turner and Apelt (2004).

Electronic tax filing was first coined in United States, where the Internal Revenue Services (IRS) began offering tax return e-filing for tax refunds only (Muita, 2011). This has now grown to the level that currently approximately one out of every five individual taxpayers is now filing electronically. This however, has been as a result of numerous enhancements and features being added to the program over the years. Today, online tax filing systems have extended to other developed countries like Australia, Canada, Italy United Kingdom, Chile, Ireland, Germany, France, Netherlands, Finland, Sweden, Switzerland, Norway, Singapore, Brazil, Mexico, India, China, Thailand, Malaysia and Turkey (Ramayah et al., 2006).

Governments introduce e-filing to enhance efficiency in tax administration as well as increasing tax revenue. African governments adopted ICT to improve on service delivery with the aim of increasing accessibility to government information, which is on the rise (Ondara, 2016). One of the ways for the government to improve on tax administration is the introduction of tax collection through electronic or computerized form, where tax returns are filled online through the use of the internet. Taxpayers are thus able to file tax returns at home or cybercafés as opposed to manual filing, which were taking a lot of time. The online tax returns eliminate and reduce errors associated with manual filing as the system auto checks the application (Nzioki &Osebe, 2014).

Muturi &Kiarie (2015) found that for a government to match its performance with the growth and expectations of its citizenry, it has to dramatically increase its fiscal depth without incurring costly recurring overheads. Efficient revenue collection is an impetus to economic growth and development when the funds are used in viable projects. 

However, tracer studies conducted in various countries show mixed response on the impact of computerisation on revenue collection by businesses and individuals. In Malaysia, Azmi and Kamarulzaman (2010) noted that despite rapid adoption of e-filing in the country, the system has not been reliable due to high perception of risk that members of the public have towards it. In Developing countries, Nisar (2013) observed that most tax authorities were facing significant challenges in tax compliances despite adoption and implementation of online tax systems. 

Ndayisenga and Shukla (2016) found out that revenue collection was low and tax administration weak and this was believed to be due to manual system of tax administration characterized by low tax collection, delays and poor record keeping. To rectify the situation and improve compliance, the Rwanda Revenue Authority decided to automate tax collection and management systems to address the loopholes identified. Ndayisenga and Shukla further indicated that computerised tax systems provides many aspects of convenience to tax payers for example tax filing can be conducted at any time, filing can be done in any location, easy use of the system, information search and other online transactions that is not available in the traditional channels.

Muita (2011) explains that tax authorities needed to embrace modern technologies in tax administration to increase efficiency and reduce wastage through computerization process. Mutisya (2014) informs that this process involves tax authorities investing in modern technologies like ICT to improve tax effectiveness and efficiency.  Online tax declaration and revenue collection in developing countries has gained increasing prominence in the policy debate recently. In Gambia, the government saw the need to invest in computerized tax systems’ infrastructure as a need to catapult an efficient revenue collections system in order to ideate better fiscal mechanisms and tactics of addressing the issues of fiscal corruptions, frauds, tax evasion and avoidance that result to loss of public revenues (Jallow, 2016). On the other hand, Gidisu (2012) found out that the automation is a powerful monitoring tool for Ghana Revenue Authority. 

Tax compliance means adhering to the tax laws of a given country and paying taxes promptly without being followed or threatened by heavy fines and as such tax compliance is concerned on the timely and accurate submission of tax remittance information to the revenue authority (Tracey et al. 2020).  Tax noncompliance is referred to as any difference between the actual amount of taxes paid and the amount of taxes due. This difference occurs because of overstating and understating income, expenses, and deductions. Non-compliance comprises both intentional evasion and unintentional non-compliance, which is due to calculation errors and an inadequate understanding of tax laws (Robben et al., 1990 and Webley, 2004). Getting citizens to pay their taxes painlessly without any delay is a dream that has never been achieved by the governments (Muturi &Kiarie, 2015).

The variables determining income tax compliance can be classified into three categories: economic determinants; socio-demographic determinants; and, socio psychological determinants. Economic determinants include the tax rate, the fines for evasion, and the audit probability and socio-demographic determinants include age, gender, and education. Tax compliance is the timely filing and reporting of required tax information giving the correct self-assessment of taxes owed, and the timely payment of those taxes without enforcement action (Stark &Kirchler, 2017). 

Tax compliance is the ability to pay taxes on time and timely reporting of the correct tax information. Other definitions of tax compliance concentrate on the accuracy of the information contained in the tax returns and the cost of making the tax returns (Ssetuba, 2012). For example, Auyat (2013) defines tax compliance as the supply of accurate and timely lodgment of income tax return together with the required payments whenever due.

There are two types of tax compliance; voluntary and involuntary tax compliance (Mandola, 2013). The voluntary tax compliance requires no state enforcement for the taxpayers to comply with the tax requirements in contrast to the involuntary tax compliance (Hussein et al., 2010).

The online filing system has a direct impact on the tax compliance levels (Nakiwala, 2010). The system ensures that the taxpayer has filled all the required mandatory fields before allowing him to proceed to the next level. This has the effect of ensuring that the revenue authority receives relatively high quality data compared to the manual returns of the data (Nakiwala, 2010). The online filing of the tax returns ensures that there is lack of inconsistencies, missing information and unintentional errors (Mandola, 2013). SMEs are faced with numerous challenges in the context of taxation. For example, Odongo (2014) found tax compliance levels among the SMEs to be very low. There are several factors that led to low tax compliance levels, which includes poor bookkeeping, low sales turnovers, and frequent ownership changes of SMEs (Nakiwala, 2010). Other challenges include large proportion of SMEs who are ignorant of taxation processes and computations, and lack of comprehensive sensitization programmes (Odongo, 2014).

The introduction of Electronic tax filing was aimed to remove manual and paper returns which proved very tiresome to handle and file the records by tax administration owing to volumes of returns filed by taxpayers. The introduction of electronic tax filing was also aimed at ensuring accuracy and timely reconciliation of the data contained, since electronic tax filing systems provides automatic reconciliation and validation of the returns. The aim of tax reforms in many countries is therefore, to achieve higher voluntary compliance and one way to do this is by introducing online tax filing system (Muturi &Kiarie, 2015).

In Cameroon, various taxes are filed and remitted by due dates, which are mandatory dates for tax return to be remitted to (DGT), failure of which leads to noncompliance and attract penalties (see Appendix II).

The non-declaration and payment by Small and Medium-sized enterprises constitute non-compliance on their part, which constitute an offence punishable by law. In Cameroon, the above mentioned taxes are incurred by Small and Medium-sized enterprises depending on their size and annual turnover.

Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs) are businesses whose personnel numbers fall below certain limits. Actually the SME sector plays an extremely important part in modern economy, proving to be the most attractive and tremendous innovative system. The number of employees in SMEs vary from industry to industry (Al-Herwi, 2019). The World Bank estimates that formal SMEs contribute up to 60% of total employment and up to 40% of national income (measured by the GDP), in emerging economies.  These numbers are significantly higher when informal SMEs are included. SMEs are the main engine of economic growth in most developing countries. Developed countries enjoying a growing and booming economy attribute most of their achievements to a flourishing SMEs sector (Denis & Lenora Foretia Foundation Report, 2019).

This study also refers to the OECD (2004), which characterizes small businesses as: “Small business owners are responsible for collecting as well as remitting taxes (Christensen et al., 2001). They are hence important players in a country’s tax system”. Tax authorities world over have classified taxpayers as small, medium or large (Terkper, 2003). The categorization generally depends on the turnover, level of complexity and other specific categorization as per each tax authority. Small and medium taxpayers are grouped with the traditionally “hard-to-tax” group, which may also include the informal sector. Recent trends in tax administration reforms in developing countries often place large entities in a large taxpayer center (LTC) and roughly equate medium sized and Small sized entities in the same tax centers (Wasao, 2019). 

In line with EU SME Performance Review, the number of jobs in SMEs increased at an average annual rate of 1.9 percent while the number of jobs in large enterprises increased by only 0.8 percent between the years 2002 and 2008. The expression SMEs covers different types of enterprises. It is generally assessed according to the number of workers and the level of revenue generated. The total SMEs sector accounts for 84 per cent of all private employment and the SMEs represent an estimated 80 per cent of the total formal sector (EC, 2009). They contribute more to the South African GDP than the cumulative amount of the corporate giants (Soontiëns, 2002). Thus, SMEs are generally perceived to be the seedbed for indigenous entrepreneurship and generates all the many small investments, which would otherwise not have taken place (Aryeetey & Ahene 2004). Therefore, developing economies like Cameroun needs to further the development of its private sector by creating an environment favorable for the growth of SMEs, strengthening the factors that lead to business success, and addressing the problems threatening the existence and advancement of small and medium enterprises (Chu et al., 2008).

In general, Small and Medium taxpayers are in the formal sector, are structured and have the capacity to keep records that conform to the accounting standards and corporate or tax laws. In contrast, Small Taxpayers mostly fall in the informal entities. They are not well structured and they may have genuine difficulty in keeping adequate records, more so using electronic filing of tax returns (Picur et al., 2006).  In Kenya for example, Ouko (2010), asserts that any person who has registered for and obtains a Unique Identification Number (UIN), technically qualifies as a small taxpayer. This wider classification includes but not limited to employees and even students who mandatorily register for UIN to obtain loan facilities for their higher educational needs.

The Small enterprises are characterized by low business turnover, small capital, unspecialized merchandize, sole employee structure (in most cases the proprietor runs the business with assistance of one or two assistance), poor records keeping and generally non-compliance with tax matters (Kamleitner et al., 2010).  

In Cameroon, the Ministry of Small and Medium Enterprises, Social Economy, and Handicraft is the tutelage ministry in charge of SMEs. The SMEs in Cameroon are classified according to Law No. 2015 du 16 July 2015 modifying and completing certain disposition of Law No. 2010/001 du 13 April 2010 on the Promotion of Small and Medium Enterprises. In Cameroon, SMEs are classified following table 1.2 below:

Table 1.2: Classification of SMEs in Cameroon

Source: Cameroon Law No. 2010/001 of 13 April 2010 to lay down the Promotion of Small and Medium-sized Enterprises in Cameroon                                                               

The Directorate General of Taxes (DGT) is a government entity charged with tax collection in Cameroon, which has as aim to increase collection of tax through improved means by increasing the number of active taxpayers annually to meet the target set by the government of Cameroon. They do this by enhancing access to information and allowing the taxpayers through ICT technology and other investigative means (DGT Report, 2014). Directorate General of Taxes introduced the Electronic Tax Filing System (E-Filing System) that allows most of Cameroons taxpayers to access government tax services online without having to move physically. The online tax filing system has been developed by the Directorate General of Taxes to replace the manual tax filing system. E-filing is a web-enabled application system providing fully-integrated and automated solution for administration of domestic taxes (DGT Report, 2016).  For the purpose of this study, SMEs are considered as registered businesses in line with the classification by the Ministry of Small and Medium Sized Enterprises. Non registered business are not considered, this is because such businesses do not carry out online tax declarations.  In Cameroon, only businesses with a registration number gotten either through the business incubation Centres or through the court can be registered in the online tax platform and as such can they carry out online tax declarations. 

1.3 Statement of the Problem

Worldwide, taxpayers’ resistance, underutilization and reluctance to use electronic filing system remain a great concern and still plague various tax agencies, which are embracing electronic tax administration systems (EATAAC, 2002). The importance of understanding and influencing taxpayer’s acceptance of online tax filing system is critical, given the investment in technology and the potential for cost saving. Despite the increasing need to increase revenue collection and enforcement to provide public services, developing countries still face the challenges of low tax compliance and tax administration (Wasao, 2019).

Small taxpayers are instrumental in the growth of the economy as they create jobs and help fight poverty. The government of Cameroon recognized the potential lying within the small taxpayers through the introduction of E-filing tax system in the 2016 finance law. The sector has for long operated without formal structures. However since the Small taxpayers were brought to tax bracket, no documented and empirical studies exists on tax compliance behaviour among small tax payers, more so the effect of online tax filing on their tax compliance levels. This casts doubts on the ability of the government to actually increase revenue collection and improve tax enforcement efforts.

In Cameroon, there are about one million seven hundred thousand registered taxpayers (DGT REPORT, 2021). Out of this number, the Small and Medium-Sized enterprises make up less than two thousand taxpayers therefore comprising the minority sector. This implies that most of the Small and Medium-Sized enterprises are found in the informal section and are not known to the tax administration. Majority of taxpayers fall in the category of Large Enterprise and salary taxpayers.  It goes without saying that the Small and Medium-Sized enterprises are the least in terms of tax declaration. However, no empirical studies have been done in Cameroon to establish the Effect of the online tax filing on tax compliance among Small and Medium-Sized enterprises taxpayers. Online tax filing entails adapting to structured approach of business operations, which has been lacking among Small and Medium-Sized enterprises and in addition, taxpayers will have to acquire basic information technology knowledge, which majority of these taxpayers lack. It would be therefore interesting to study how the DGT intends to achieve compliance among such Small and Medium-Sized enterprises taxpayers.  

However, there are challenges in the use of the online tax filing system, which gives ways for citizens who are bent to evade paying tax. Muturi &Kiarie (2015) posits that despite the increasing need to increase revenue collection and enforcement so as to provide public services, developing countries still face the challenges of low tax compliance and tax administration. Ondara, Maina and Kwasira (2016) assert that some of the challenges facing the taxation of the SMEs include the fact that small businesses are normally owned by the owners, who are also in charge of the accounting book. There is thus less incentive to comply with tax requirements. Many issues contribute to tax compliance such as computer literacy by tax payers, lack of tax information on tax compliance and the culture of resistance to change among small businesses plus the high tax rate, which is a burden are the leading disincentive to business activity. While previous studies on tax compliance have focused on the SMEs, no study has been carried in the area of online tax declaration among SMEs in Cameroon.  The researcher will attempt to find out what makes small and medium-Sized enterprises to be reluctant to fill online tax return forms when the e-filing has made it easy to file the same. The study therefore, seeks to fill this gap in knowledge, by answering the following research question. What is the effect of online tax filing system on tax compliance of small and medium sized enterprises in Fako Division? 

1.4 Research Questions

1.4.1 Main Research Question

The main research question of this study is Does online tax filing system influence tax compliance of Small and Medium sized enterprises in Fako Division?

1.4.2 Specific Research Questions

1. What is the effect of computer literacy on tax compliance among Small and Medium sized enterprises in Fako Division?
2. To what extent is tax knowledge affecting tax compliance among Small and Medium sized enterprises in Fako Division?
3. What is the effect of tax culture on tax compliance among Small and Medium sized enterprises in Fako Division?

1.5 Objectives of the Study

1.5.1 Main objective

The main objective of the study is to evaluate the extent to which online tax filing system influences tax compliance among medium-sized enterprises in Fako Division.

1.5.2 Specific Objectives

The specific objectives of the study include:

1. To determine the effect of computer literacy on tax compliance among Small and Medium sized enterprises.
2. To examine the effect of tax knowledge on tax compliance among Small and Medium sized enterprises.
3. To assess the impact of tax culture on tax compliance among Small and Medium sized enterprises.