Unravelling the Effects of Perceived Severity of Penalties on Income Tax Compliance for Tanzanian Small and Medium Enterprises

Enhancing tax compliance behaviour among SMEs will improve revenue collection, thus enable government to finance social-economic welfare of its citizens. Therefore, this study investigated the effects of perceived severity of penalties on individual income tax compliance among Tanzanian Small and Medium Enterprises. A cross-sectional survey of 382 SMEs was conducted in six tax regions of Tanzania – Kinondoni, Kariakoo, Temeke, Mtwara, Singida and Tabora, selected using simple random technique. Descriptive and Partial Least Square Equation Modelling were used for data analysis. The findings of the study show that perceived severity of penalties has positive and significant effects on the decision of the individual to register with the tax system and make correct declaration of income. On the other hand, it has a positive, but insignificant effect on the decision of the taxpayer to pay taxes within due dates. The findings imply that penalties are more effective in enhancing compliance behaviour at the registration and declaration than on payment stage. Thus, government through the Tanzania Revenue Authority should continue to use penalties and other administrative measures including inter alia, taxpayer education, good customer care and services, to enhance tax compliance behaviour among SMEs.