An Investigation into the Causes of Tax Evasion and Avoidance by Small and Medium Enterprises (SMEs) and Their Effect on the Zambian Economy in Chililabombwe District
Kondwani Nyirenda
The University of Zambia, Graduate School of Business, 10101
https://doi.org/10.47191/jefms/v7-i3-22ABSTRACT:
This study was purposed to investigate the causes of tax evasion and avoidance and its effect on the Zambian economy in Chililabombwe District of the Copperbelt Province. It had two-fold objectives: to examine the causes of tax evasion and avoidance in Chililabombwe District by SMEs, and to determine the effect of tax evasion and avoidance in Chililabombwe District on the Zambian economy. The study used a mixed method approach combining both qualitative and quantitative paradigms in which 110 sample size was targeted. One Hundred and ten (110) questionnaires were distributed and 79 were returned representing 72%. Purposive and convenient sampling techniques were used. Quantitative data was analysed through the SPSS version 16 while qualitative data was analysed through content analysis focusing on main unfolding themes from the interviews. The study discovered that that there are loopholes in the Zambia Revenue Authority's (ZRA) tax administration system which are due to inefficiencies or inadequate competence of tax collectors, which taxpayers exploit in evading and avoiding tax. The investigation also revealed that on account of the established loopholes, certain revenue collectors collude with taxpayers to commit tax fraud by accepting bribes from them while poor sales, high tax rates, and lack of tax education to SMEs were noted to be among key reasons for tax avoidance. Consequently, the study ascertained with concern that the levels of development in the district, in terms of social amenities, schools, road network, and youth / women empowerment programmes are very low. The study concluded that tax evasion and avoidance were real and rife among the SMEs on account of the factors cited and that mitigative policy measures were required without any further delays. Arising from the results of the study, it was strongly recommended that for tax evasion and avoidance to be mitigated, the revenue authority needs to urgently reform the tax system to make it equitable and fair coupled with rigorous tax education to the traders for sufficient tax knowledge and thereafter digitize tax remittances with ease for the traders to file returns without need for middle persons. Tax morale and ultimately revenue collection can be improved through tax education programs, integrity of tax collectors, and reduction of tax rates chargeable to SMEs. Enhanced training and sensitization to create awareness, reduce compliance cost, and simplify online technology for the overall positive impact on compliance among the SMEs are elements of paramount import for the success of the nation in meeting its socio-economic goals through guaranteed revenue collections by the Revenue House.
KEYWORDS:
Tax Evasion, Avoidance, Effect, Economy, Chililabombwe, Zambia.
REFERENCES:
1) Adebisi, J. F. & Gbegi, D.O. (2013). Effect of Tax Avoidance and Tax Evasion on Personal Income Tax Administration in Nigeria. American Journal of Humanities and Social Sciences, Vol. 1, No. 3, pp. 125.
2) Alm et al. (2007 Alm, James and Jorge Luis Martinez-Vazquez. (2007). Tax morale and tax evasion in Latin America, Andrew Young School of Policy Studies.
3) Alm, James, Jorge Martinez-Vazquez, and Friedrich Schneider, (2003). ‘Sizing’ the Problem of the Hard-To-Tax” a paper presented at The AYSPS ‘Hard to Tax’ conference
4) Allingham, M. & Sadmo, A. (1972). Income Tax Evasion: A Theoretical Analysis, Journal of Public Economics, 1,323-338
5) Bloomquist, K.M. (2003) ‘Tax evasion, income inequality and opportunity cost of compliance’, 96th Annual Conference of the National Tax Association, Drake Hotel, Chicago, IL November, pp.1–28.
6) Bruce, D. (2000). Effects of the United States tax system on transitions into self employment. Labour Economics, 7(5), 545-574.
7) Chen, B.-L (2003), Tax Evasion in A Model Of Endogenous Growth. Review of Economic Dynamics 6,381-403. The Institute of Economics, Academia Sinica
8) Chipeta, C. (2002). The Second Economy and Tax Yield in Malawi, Research Paper No. 113, African Research Consortium, Nairobi.
9) Cobham, Alex (2005), Tax evasion, tax avoidance and development finance, QEH Working Paper Series, No. 129.
10) Coetzee, H. (1993). Reluctance to pay tax: what do people expect from a tax system in the new South Africa? Accountancy SA November-December, 5-7.
11) Cummings, Ronald G., Jorge Martinez-Vazquez, Michael McKee and Benno Torgler (2005), Effects of Tax Morale on Tax Compliance: Experimental and Survey Evidence, GSU paper 0516, International Studies Program, Georgia State University
12) Creswell, J. W. (2003). Quantitative, qualitative, and mixed methods approaches. 2nd Edition. USA: Sage Publication
13) Creswell, (1994) Educational research: Planning, conducting, and evaluating quantitative and qualitative research 2nd Edition. USA: Pearson Education Company. Daft, R. 2005. The Leadership Experience. Canada: Webcom Limited
14) Davies, R. and Rattsø, J. (1996) ‘Growth, distribution and environment: macroeconomic issues in Zimbabwe’, World Development, Vol. 24, No. 2, pp.395–405
15) Everest-Phillips, Max (2008), Business tax as state-building in developing countries: applying governance principles in private sector development, International Journal of Regulation and Governance 8(2), pp. 123-154
16) Fagan, E. D. (1938, August). Recent and Contemporary Theories of Progressive Taxation. The Journal Of Political Economy, 46(4). https://www.jstor.org/stable/1824777
17) Fagbemi, O. T., Uadile, O. M. & Noah, A. O., 2010. The ethics of tax evation: perpetual evidence from Nigeria. European Journal of Social Sciences, 17(3), pp. 360-371.
18) Feige's (1979) Feige. E.L, 1990. “Defining and Estimating Underground and Informal Economies” the New Institutional Economics Approach”. World Development 18,7
19) Fisher, R., Coddeeris, J. & Young, J. (1989). ‘‘Participation in Tax Amnesties: The Individual Income Tax’’: National Tax Journal, 42(2), 15-27.
20) Feige. E. L, ed. (1989). “The Underground Economies: Tax Evasion and Information Distortion” (Cambridge, New York, Melbourne: Cambridge University Press).
21) Fishlow, A. and J. Friedman (1994), Tax evasion, inflation and stabilization, Journal of Development Economics, Vol. 43, No. 1, pp. 105-123
22) Franzoni. A. L (1998). Tax Evasion and Tax compliance, University of Bologna, Italy.
23) Friedman. S, (2003), “Sending Them a Message: Culture, Tax Collection and Governance in South Africa”, Policy: Issues and Actors, Vol. 16, no. 3 (June): 1-17.
24) Fjeldstad, O.-H. and Rakner, L, (2003), “Taxation and Tax Reforms in Developing Countries: Illustrations from Sub-Saharan Africa”, Chr. Michelsen Institute Report, No. 2003: 6,Bergen
25) Fuest, C. and Riedel, N. (2009) ‘Tax evasion, tax avoidance and tax expenditures in developing countries: a review of the literature’, UK Department for International Development (DFID) report, pp.3–34.
26) Global Financial Integrity (GFI) (2010). Illicit Financial Flows from Africa: Hidden resource for development
27) Gorter. J, (2004), "Reform of the Zambian Tax System" – DFID selected papers, Tax Policy Issues in Zambia, 2006, Fringila, Zambia.
28) The Government of the Republic of Zambia. (2022, September 30). Budget Speech 2022. National Assembly of Zambia. Retrieved March 2, 2023, from https://www.parliament.gov.zm/sites/default/files/images/publication_docs/2023%20Budget%20Speech.pdf
29) Henry, G.T. (1990) Practical Sampling, Sage Publications, Newsbury Park
30) Khanal, M. (2016). “Income Tax Evasion and Its Effects on The Economy”, An unpublished M.phil degree thesis, submitted to Central Department of Economics, T.U., Kathmandu, Nepal
31) Kirchler, Erich, Stephan Muehlbacher, Barbara Kastlunger and Ingrid Wahl (2007).Why Pay Taxes? A Review of Tax Compliance Decisions, International Studies Program, Working Paper 07/30, Andrew Young School of Policy Studies Georgia State University
32) Kombo, D.K and Tromp, D.L.A (2006). Proposal and Thesis Writing. Pauline Publications Africa, Kenya
33) Loeprick, J. (2009). Small business taxation: Reform to encourage formality and firm growth (World Bank Investment Climate in Practice: Business Taxation No. 1).
34) Murphy, R. (2008) The Missing Billions: The UK Tax Gap, Trade Unions Congress/Touchstone, Precision Printing, London
35) Murphy, R. (2011). The Cost of Tax Abuse: A Briefing Paper on the Cost of Tax Evasion Worldwide. The Tax Justice Network .
36) Pashev, K. (2005). Tax Compliance of Small Business in Transition Economies: Lessons from Bulgaria. Working paper 05-10. Andrew Young School of Policy Studies. Atlanta Georgia.
37) Fjeldstad, Odd-Helge and Mick Moore (2009), Revenue authorities and public authority in sub-Saharan Africa, Journal of Modern African Studies, 47, I (2009), pp. 1-18
38) Khanal, M. (2019). Tax Evasion and its Effects on the Economy. Nepal Journals Online. Retrieved March 3, 2023, from https://www.nepjol.info/index.php/JMCRJ/article/download/43065/32679/126275
39) MoF (2009). Economic survey, (Various Issues), Kathmandu: Singha Darbar.
40) Naiyeju, J.K. (1996), “Improving the Nigeria tax system from Canadian Experience”, Wordsmith Printing and Packaging ltd, pages 101-104
41) Prabhakar R (2012). What Do The Public Think of European Social Policy. 22(1): 77-89.
42) Popoola, N. (2009). “A Good Tax System’ 11 Enhance Economic Development”. Retrieved from: http://www.puncling.com/ Articl.aspx? theartic
43) Prabhakar (2012 Prabhakar R (2012). What Do The Public Think of European Social Policy. 22(1): 77-89.
44) Ogunedele E.A. (1999). Elements of Taxation, Lagos: Libri Services Nig. Ltd.
45) Okafor R. G (2012), “Tax Revenue Generation and Nigerian Economic Development”
46) Onuigbo, 0. (1986). Banking and Finance for Professional, Aba: Yonkee Standard Press Ltd,
47) Orewa, G.0. (1957). Taxation in Western Nigeria, London: Oxford University Press.
48) Sandmo, A. (2004). The Theory of Tax Evasion: A Retrospective View. National Tax Journal, 58(4). https://www.jstor.org/stable/41790296
49) Schneider, F. (2008). Shadow Economies and Corruption all over the World: Empirical Results for 1999 to 2003. International Journal of Social Economics, Vol. 35, No. 9, September, p. 4.
50) Schneider, F., Buehn, A. & Montenegro, C.E. (2010). Shadow Economies All over the World/Policy Research Working Paper 5356. The Word Bank Development Research Group Poverty and Inequality Team & Europe and Central Asia Region Human Development Economics Unit, July, pp. 3-34
51) Smulders S, Stiglingh M, Franzsen R, Fletcher L (2010). Tax compliance costs for the small business sector in South Africa – establishing a baselinee; Journal of Tax Research (Australia)..
52) Tanzi, V. (1998). Corruption Around the World: Causes, Consequences, Scope and Cures. IMF Staff Papers, Vol. 45, No.4, December, Retrieved May 4, 2008,
53) Toby (1983) Toby, R. (1983) The Theory and Practice of income Tax, Lagos: Macmifian Press Ltd.
54) Uadiale, et al (2010), Uadiale, O.M., Fagbemi, T.O. & Ogtmleye, J.O. (2010). ‘‘An Empirical Study of the Relationship between Culture and Personal income Tax Evasion in Nigeria’’: European Journal of Economics, Finance and Administrative Sciences, 20,116-126.
55) Whait (2012 Whait RB (2012). From Responsive Regulation To Dynamic Participation: A New Model For Voluntary Tax Compliance. Aust. Tax Forum. 27(1): 107-148.
56) Wallschutzky, G. (1984) ‘Possible causes of tax evasion’, Journal of Economic Psychology, Vol. 5, No. 4, pp.371–384.
57) Zambia Institute For Policy Analysis Research. (2014). Uncovering the Unknown: An Analysis of Tax Evasion in Zambia. Illicit Financial - Flows. Retrieved March 2, 2023
58) ZRA, Third Corporate Plan 2008/009 – 2012/2013
59) Zambia Revenue Authority. (2016). Annual Report 2012. Lusaka: Zambia Revenue Authority.
60) Zambia Revenue Authority. (2017). Annual Report 2012. Lusaka: Zambia Revenue Authority.
