An assessment of tax compliance costs among Small Medium and Micro Enterprise in South Africa

Abstract

Small, Medium and Micro Enterprises (SMMEs) are significant pillars for sustaining the economies of most countries. In South Africa, SMMEs contribute approximately 67% of employment, 91% of formal business and over a third of the national GDP. However, compared to large enterprises, SMMEs face a number of challenges ranging from poor performance, low profitability and high failure rate. Most SMMEs perceive tax-related matters as the most burdensome. This is because every SMME, regardless of form, size or sector, is lawfully bound to comply with legislation, including taxation. The cost of complying with taxation is a heavy burden to the development and growth of SMMEs. In South Africa, these burdens are compounded by the subjective evidence that tax compliance costs have prevented most SMMEs from registering their business with the Companies and Intellectual Property Commission (CIPC), the South African Revenue Service (SARS) and other regulatory bodies. The purpose of this study was to assess tax compliance costs among SMMEs in South Africa. The study employed a systematic qualitative review of relevant literature for insight into the various challenges SMMEs experience in complying with tax authority requirements. The study also strove to establish why tax compliance costs are highest among SMMEs in South Africa compared to other countries. The study established that the main drivers of tax compliance cost among SMMEs are government departments and the non-integration of enterprises. There are also significant challenges in the inefficiency of SARS, specifically inefficiencies in tax administration, complex and incessant changes in tax legislation, SMMEs level of inefficiencies and tax practitioner costs. The study further identified other factors such as lack of tax education, non-registration, low incomes and high tax rates as impediments in the compliance with tax administration among SMMEs. The study concludes that in framing tax policies, the South African government should consider the various factors affecting tax non-compliance, especially among SMMEs. The study recommends that tax authorities in South Africa should improve tax compliance by ensuring favourable and fair tax rates, especially among SMMEs. The study further suggests that SARS should encourage non-compliant SMMEs to regularise their affairs by encouraging voluntary disclosure applications for a limited timeframe before imposing non-compliance penalties. Recommendations for future research are also provided.