FACTORS AFFECTING TAX COMPLIANCE IN LOCAL …
Transcript of FACTORS AFFECTING TAX COMPLIANCE IN LOCAL …
TAX COMPLIANCE IN LOCAL GOVERNMENT
AUTHORITIES IN TANZANIA
A CASE STUDY OF SUMBAWANGA DISTRICT COUNCIL
TAX COMPLIANCE IN LOCAL GOVERNMENT
AUTHORITIES IN TANZANIA
A CASE STUDY OF SUMBAWANGA DISTRICT COUNCIL
By
Kerry Asumwisye Mwansele
A Research Report Submitted in Partial Fulfillment of the Requirements for
Award of Master of Science in Accounting and Finance Degree of Mzumbe
University
2014
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CERTIFICATION
We, the undersigned, certify that we have read and here by recommend for the
acceptance by the Mzumbe University, a dissertation entitled Tax Compliance in
Local Authorities in Tanzania: The case study of Sumbawanga District Council,
in partial fulfillment of the requirements for the award of the degree of Master of
Science in Accounting and Finance Degree of Mzumbe University
Signature
___________________________
Prof. Jeremiah Kirway
Major Supervisor
Signature
___________________________
Internal Examiner
Signature
___________________________
External Examiner
Accepted for the Board of the School of Business
____________________________________________
CHAIRMAN, SCHOOL OF BUSINESS BOARD
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DECLARATION
I, Kerry Asumwisye Mwansele, declare that this dissertation is my own work and
that it has not been presented and will not be presented to any other university for a
similar or any other degree award. Where it is indebted to the work of others, due
acknowledgement has been made.
Signature……………………………
Date ……………………………
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COPYRIGHT
This dissertation is a copyright material protected under the Berne convention, the
copyright Act 1999 and other international and national enactments, in that behalf,
on intellectual property. It may not be reproduced by any means in full or in part,
except short extracts in fair dealings, for research or discourse with an
acknowledgement, without the written permission of Mzumbe University, on behalf
of the author.
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ACKNOWLEDGEMENT
The completion of this research is a result of both direct and indirect support of many
people to whom I owe acknowledgement. I owe great gratitude to my supervisor,
Professor Jeremiah Kirway for his constructive comments and guidance that made
the production of this dissertation possible.
Sincere appreciation to my wife Fika Kerry Mwansele and my whole family for their
outstanding sacrifices they made over time. I am very grateful to my friends for the
encouragement, moral support, motivation and love. Thank you for being such great
friends.
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DEDICATION
I dedicate this entire work to my late brother Fr. Deogratias Atupele Mwansele, we
miss you dearly.
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ACRONYMS
CMI Chr. Michelsen Institute
DT District Treasurer
DTO District Trade Officer
FY Financial Year
GDP Gross Domestic Product
LAAC Local Government Accounts Committee
LGA Local Government Authority
LGRP Local Government Reform Programme
MOF Ministry of Finance
MTEF Medium Term Expenditure Framework
NIBR Norwegian Institute for Urban and Regional research
OECD Organization for Economic Co-operation and Development
R/ACC Revenue Accountant
REPOA Research on Poverty Alleviation
SDC Sumbawanga District Council
SPSS Statistical Package for Social Sciences
URT United Republic of Tanzania
VEO Village Executive Officer
WEO Ward Executive Officer
WRC Ward Revenue Collector
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ABSTRACT
The study was carried out to assess factors that affect tax compliance in Local
Authorities in Tanzania with particular emphasis on Sumbawanga District Council.
The study was prompted by the persistent revenue collection shortfalls that have
made it difficult for Sumbawanga District Council to fully implement its budgets.
The study employed a descriptive study design on a sample size of 51 respondents,
who were selected using purposive sampling from Sumbawanga District Council
officials and revenue collecting agents, and simple random sampling from traders of
agricultural produce. Data from this source were supplemented by secondary data.
Data were gathered using a self-administered structured questionnaire.
The study found five major factors that affect tax compliance. These include:
inappropriate enforcement, complexity of the by-laws, behavioural attitude,
unsatisfactory return in form of service delivery, and absence of trustworthiness in
the local government. This result implies that the council is not doing well in tax
collection. In order to overcome the problem of non tax compliance, the following
were the major recommendations: improvement of service delivery such as roads,
health services, education, water etc.; enforcement of tax laws; provision of tax
education to tax payers and the citizens as a whole.
Basing on the findings of the study, it is recommended that officials at low levels
involved in tax collection be trained about taxation, citizens should be educated on
the importance and benefits of taxes, the collected tax revenues should be remitted to
head office within the month it has been collected. Furthermore, it is recommended
that tax collectors be motivated basing on good work incentives.
Similar study is recommended in other council because this research was a case
study therefore its findings cannot be generalized, and another area of research is to
establish reasons for failure of councils to collect tax
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TABLE CONTENTS
CERTIFICATION ......................................................................................................... i
DECLARATION .......................................................................................................... ii
COPYRIGHT............................................................................................................... iii
ACKNOWLEDGEMENT ........................................................................................... iv
DEDICATION.............................................................................................................. v
ACRONYMS............................................................................................................... vi
ABSTRACT................................................................................................................ vii
LIST OF TABLES....................................................................................................... xi
LIST OF FIGURES .................................................................................................... xii
LIST OF APPENDICES............................................................................................ xiii
CHAPTER ONE ......................................................................................................... 1
INTRODUCTION....................................................................................................... 1
1.1 Background to the Problem................................................................................ 1
1.2 Statement of the Problem................................................................................... 3
1.3 Objectives of the Study...................................................................................... 3
1.3.1 Specific Objectives ............................................................................................ 4
1.4 Research Questions ............................................................................................ 4
1.5 Significance of the Study ................................................................................... 4
1.6 Scope of the Study ............................................................................................. 5
1.7 Limitation of the study....................................................................................... 5
1.8 Organization of the study.................................................................................... 5
CHAPTER TWO ........................................................................................................ 6
LITERATURE REVIEW .......................................................................................... 6
2.0 Introduction........................................................................................................ 6
2.1 Definitions of Key Concepts.............................................................................. 6
2.1.1 Tax ..................................................................................................................... 6
2.1.2 Tax base ............................................................................................................. 6
2.1.3 Local taxes ......................................................................................................... 7
2.1.4 Tax evasion ........................................................................................................ 7
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2.1.5 Tax avoidance .................................................................................................... 8
2.1.6 Tax compliance .................................................................................................. 9
2.1.7 Voluntary compliance .................................................................................... 11
2.2 Causes of tax evasion.......................................................................................... 12
2.3 Reducing tax evasion ....................................................................................... 12
2.4 Factors affecting tax compliance ..................................................................... 13
2.5 Local Government Authorities ........................................................................ 16
2.6 Characteristics of good revenue sources .......................................................... 18
2.7 Local government revenue sources in Tanzania .............................................. 21
2.7.1 Methods of Local Government revenue collection in Tanzania ...................... 24
2.8 Empirical literature review............................................................................... 24
2.9 Conceptual Framework .................................................................................... 25
CHAPTER THREE .................................................................................................. 30
RESEARCH METHODOLOGY ............................................................................ 30
3.1 Introduction...................................................................................................... 30
3.2 Research Design............................................................................................... 30
3.3 Study Area ....................................................................................................... 30
3.4 Study Population .............................................................................................. 31
3.5 Sample Size and Sampling Techniques ........................................................... 31
3.6 Research Variables........................................................................................... 32
3.6.1 Independent Variable ....................................................................................... 32
3.6.2 Dependent Variable.......................................................................................... 32
3.6.3 Validity of Instruments .................................................................................... 33
3.7 Sources of Data ................................................................................................ 33
3.8 Data Collection Instruments ............................................................................ 33
3.8.1 Questionnaires.................................................................................................. 33
3.9 Data processing and Analysis .......................................................................... 34
3.9.1 Data processing................................................................................................ 34
3.9.2 Data analysis .................................................................................................... 34
3.10 Limitations to the study ................................................................................... 34
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CHAPTER FOUR..................................................................................................... 36
PRESENTATION AND DISCUSSION OF FINDINGS ....................................... 36
4.0 Introduction....................................................................................................... 36
4.1 Profile of the Respondents ............................................................................... 36
4.2 Causes of tax evasion and avoidance in Sumbawanga District Council ......... 39
4.3 Accounting for Collected Taxes ...................................................................... 43
4.4 Procedures used to collect taxes in Sumbawanga District Council ................. 44
4.4.1 Council Head Office ....................................................................................... 44
4.4.2 Ward Executive Officers’ Office ..................................................................... 44
4.4.3 Village Executive Officers’ Office .................................................................. 45
4.4.4 Tax Collecting Agents .................................................................................... 46
4.5 Tax Evasion and Avoidance Practices ............................................................. 46
4.6 Summary of the Findings................................................................................. 50
4.6.1 Causes of tax evasion and avoidance in Sumbawanga District Council ......... 50
4.6.2 Accounting for Collected Taxes ...................................................................... 51
4.6.3 Procedures used to collect taxes in Sumbawanga District Council ................. 51
4.6.4 Tax Evasion and Avoidance Practices ............................................................. 52
CHAPTER FIVE ...................................................................................................... 53
CONCLUSION AND RECOMMENDATIONS .................................................... 53
5.1 Conclusions...................................................................................................... 53
5.2 Recommendations............................................................................................ 54
5.3 Area for Further Research................................................................................ 54
REFERENCES.......................................................................................................... 55
APPENDICES ........................................................................................................... 59
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LIST OF TABLES
Table 2.1: Closed List of Revenue Sources for Local Governments (2005) ............. 23
Table 3.1: Samples drawn from different population categories ............................... 31
Table 4.1: Title of Surveyed Respondents ................................................................. 36
Table 4.2: Characteristics of Respondents by Title and Experience.......................... 37
Table 4.3: Characteristics of Respondents by Age and Sex ...................................... 38
Table 4.4: Reasons driving people not to pay tax ...................................................... 41
Table 4.5: Measures to Encourage People Pay Tax.................................................. 42
Table 4.6: Remittances and accountability of collected tax...................................... 43
Table 4.7: Tax Collection Procedures by Ward Executive Officers’ Office ............. 45
Table 4. 8: Tax Collection Procedures by Village Executive Officers’ Office ......... 45
Table 4.9: Tax Collection Procedures by Agents ...................................................... 46
Table 4.10: Practices of Tax Evasion and Tax Avoidance ....................................... 48
Table 4.11: Measures of Intervention to control Tax Evasion.................................. 50
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LIST OF FIGURES
Figure 2.1: Conceptual Framework ........................................................................... 29
Figure 4.1: Sex of the Respondents ........................................................................... 38
Figure 4.2: Level of Education of the Respondents................................................... 39
Figure 4.3: Formal Knowledge in Taxation............................................................... 40
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LIST OF APPENDICES
Appendix 1: Questionnaires to the respondents.......................................................... 59
Appendix 2: Interview guide....................................................................................... 63
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Problem
Local Governments in Tanzania have been given the mandate to raise their own
revenue to finance their activities (URT, Local Government Finances Act. 1982). A
large portion of this revenue is from taxes and according to (Wilkinson 1984), taxes
play a much larger role in the society and the general economy than mere raising
revenue. However, a good number of councils failed to raise substantial funds from
taxes due to a number of limiting factors, among of them being non tax compliance
of tax payer. A tax is confined to compulsory and inequitable payment to the general
government.
The system of local taxation in Tanzania was significantly reformed in 2003 (and
further modified in 2004) by proclamation of the Minister of Finance (MOF) during
the Budget speech. The reform effort known as the ‘rationalization and
harmonization’ of local revenue sources which eliminated the Development levy,
abolished eight fees (for bicycle, culture, healthy facility registration, health
inspection, business premises inspection, water connection, land, hides and skin);
eliminated two types of license fees (for application of licenses on intoxicating liquor
and local liquor, and abolished the local brew cess and livestock cess (MOF, 2006).
The Local Government Finance Act, 1982 as reformed in 2003 and 2004 provided
Local Government Authorities (LGAs) with a list of taxes, levies and fees that local
governments are allowed to collect. LGAs are mostly assigned with low-yielding tax
bases making them so harder to have substantial revenue source of their own, thus
compliance is another sort of enhancing local revenue.
No one likes taxes people do not like to pay them. Governments do not want to
impose them. But taxes are necessary to both to finance desired public spending in a
non-inflationary way and also to ensure that the burden of paying for such spending
is fairy distributed. While necessary, taxes impose real costs on society. Good tax
policy seeks to minimize those costs (Richard and Bird, 2003).
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As (Bird and Zolt, 2003) correctly stated that tax design (i.e. tax policy) in
developing countries is strongly influenced by economic structure. For example,
developing countries often have large traditional agricultural sectors that are difficult
to tax. Many developing countries have a significant informal economy that also is
largely outside the formal tax structure. This presents its own unique challenges in
the design of tax policy and to the tax administration. Given that the potential tax
base is a relatively small portion of total economic activity, this may pressure
governments to increase tax rates, which creates further incentives for tax evasion.
Tax evasion is one form of tax noncompliance which refers to the failure to pay taxes
that are legally due and is a criminal offense (Allingham and Sandmo, 1972). Tax
evasion is a common problem in most countries, particularly in developing countries
including Tanzania where the information systems are weak. Tax evasion is
contrasted to tax avoidance which refers to changing behavior in such a way as to
reduce tax liability (Chipeta, 2002) hence tax avoidance is legal while tax evasion is
illegal and may result from deliberate actions, carelessness, errors, misunderstanding
of the law and regulations and requirements relating to recordkeeping and filing tax
returns.
Tolerance for tax evasion breeds more evasion and also provides further breeding
ground for corruption. A high level of evasion puts pressure on otherwise “law-
abiding citizens” who have to compensate for the additional burden resulting from
large scale tax evasion. This is likely to create a tendency of tax evasion among at
least some of these honest tax payers (Mikesell and Birskyte, 2003).
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1.2 Statement of the Problem
The Central Government funds Local Government Authorities with most of its
salaries, recurrent grants for Agricultural extensions, education, health, water, roads
and administration, and other grants for development expenditures.
Local government authorities also have the mandate to raise certain revenues through
taxes, levies, fees and grants from donors within the limits provided by the Central
Government. Local Government Authorities retain all of such revenues and use it as
part of their budgets, although the collected funds by LGAs are running short of the
estimated amount due some factors that limits the collectability of those taxes.
Funds granted by Central Government for implementation of certain programs are
usually for centrally determined priorities of which may not necessarily meet local
felt needs. Moreover grants from central government are sometimes not released on
time or not released as budgeted or not released at all. To respond to the challenges
of the locally felt needs, untimely and under release of funds, local government
authorities have been trying to find ways to enhance local revenues to support the
implementation of specific and locally felt programs in this respect. However, low
tax compliance is a matter of serious concern in many LGAs, limiting the capacity of
local government authorities to raise enough local revenues to facilitate both
recurrent and developmental purposes.
It is commonly acknowledged that many factors contribute to the weakness of tax
compliance; hence the study intended to assess contributing factors to non tax
compliance in Sumbawanga District Council (SDC).
1.3 Objectives of the Study
The overall objective of the study was to assess factors that affect tax compliance in
Local Government Authorities (LGAs), with specific reference to Sumbawanga
District Council.
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1.3.1 Specific Objectives
(i) To establish why tax payers avoid paying taxes in Sumbawanga District
Council.
(ii) To examine how the collected tax is accounted for in Sumbawanga District
Council.
(iii) To find out how the imposed taxes are collected.
1.4 Research Questions
(i) What are the causes of tax evasion and avoidance in Sumbawanga District
Council?
(ii) How are the collected taxes accounted for in Sumbawanga District Council?
(iii) What are the procedures used to collect taxes in Sumbawanga District
Council?
1.5 Significance of the Study
The study will generate knowledge to policy makers, administrators, collectors and
to the ministry of local government about the general factors that affect local tax
compliance. The study is further expected to show ways used by tax payers to evade
and avoid local taxes. It will also show on procedures used to collect local taxes in
the council, and its accountability and then suggest solutions to the persistent
financial problems of Sumbawanga District Council.
The research findings will provide LGAs’ officials with the necessary knowledge,
abilities and skills to curb tax evasion and avoidance by instituting proper education
and enforcement on the available tax by – laws in order to enhance local revenues.
The study is expected to increase on the existing literature on local tax evasion,
avoidance and compliance costs in relation to local tax compliance in Tanzania,
hence creating more knowledge and information to future researchers and
academicians.
The research work can become a role model in conducting similar researches in other
communities of Tanzania and other countries.
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1.6 Scope of the Study
The study was limited to Sumbawanga District Council. The findings of the study
may thus not be generalized to councils not visited by this study.
1.7 Limitation of the study
The study focused on the factors affecting tax compliance, tax evasion and avoidance
and tax compliance in Sumbawanga District Council. Factors for tax compliance
were determined using attributes that influence tax payer’s decision to pay or not to
pay taxes, these factors include ; service delivery, behavioral attitude, complexity of
tax laws, enforcement and trust worthiness of the government. Tax evasion and tax
avoidance were studied in terms of practices used to evade or avoid taxes such as
declaration of less income or overstating deductions and tax laws weaknesses. Under
tax compliance in Sumbawanga District Council, the study looked at correct
reporting, timely filing and timely tax payment.
1.8 Organization of the study
This report is organized in five chapters. Chapter one introduced the study by giving
the background to the study, statement of the problem, objectives of the study,
research questions and significance of the study. Scope of the study and the
limitation has been also included in this chapter.
The remaining chapters of this study have been structured as follows: chapter two
discusses the literature review, while the methodology adopted and applied in the
study is provided in chapter three. The findings on objectives of this study have been
given in chapter four, while the conclusions, recommendations arising from the
findings and areas for further research are in chapter five.
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CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
The first part of this chapter provides definitions of key concepts, while the second
section of the chapter explains causes of tax evasion. The third part discusses ways of
reducing tax evasion while the fourth section explains factors affecting tax
compliance. The fifth part provides local government authorities in Tanzania and the
sixth section explains characteristics of good revenue sources. The seventh part
provides local government revenue sources in Tanzania, while the eighth section is
about empirical literature review and the last part provides the conceptual
framework.
2.1 Definitions of Key Concepts
2.1.1 Tax
Tax is an involuntary fee levied on corporations or individuals that is enforced by a
level of government in order to finance government activities. Tax according to
(Mannesh 2000) is paid without corresponding returns in terms of goods and services
from the government to particular taxpayers. The World Bank (2000) reiterated that
taxes are compulsory transfers of resources to the government from the rest of the
economy. Adeyeye (2004) described tax as liability on account of tax payers as
contribution in some quantum measure to the fund available for use by the
government in providing necessary infrastructure for her citizens. Taxes are
compulsory levy by the tax subject (government) through her designated agent on the
tax subject (the tax payers).
2.1.2 Tax base
Tax base is a sum of taxable activities, collective value of real estates and assets
subject to tax within a community. According to Lubega (1999), the tax base is the
object on which a tax is based, for example income tax is based on income.
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2.1.3 Local taxes
Local taxes are taxes that are due in addition to state and federal taxes. They are
broad source of revenue that is not linked to any particular service provided by local
government. Local taxes vary from country to country but typically include property
tax and sometimes one or more business taxes and consumption taxes. A sound local
tax should establish a link between the jurisdiction in which a tax is levied and the
area in which the benefits are received from the local services funded with that
revenue sources. Thus, the tax base should be readily identifiable with the local
authority area. Local taxation should be clearly perceived by local residents. That is,
local taxpayers should be aware they are paying the tax, of its amount, and to whom
it is payable and for what purpose. This enables local residents to evaluate the
efficiency of local government services as to how much value they get for the money
they pay (Bird, 1999)
2.1.4 Tax evasion
Tax evasion is an attempt to escape tax liability (wholly or partially) by breaking the
tax law and it is a criminal act since it is achieved principally by making false
declarations such as under-reporting income or over-reporting relieves and
allowances.
Tax evasion is one form of tax noncompliance which refers to the failure to pay taxes
which are legally due and therefore is a criminal offence if one is discovered could
lead to imposition of criminal proceedings against the tax payer (Allingham and
Sandmo, 1972). Soyode and Kajola (2006), defined tax evasion as a deliberate and
willful practice of not disclosing full taxable income so as to pay less tax and as a
contravention of tax law where by a taxable person neglects to pay tax due or reduces
tax liability by making fraudulent or untrue claims on the income tax form.
Tax evasion is a universal phenomenon which has been in existence for a long time
and still continues to impose growing challenges on tax authorities and governments.
(Whiteman and Wheat Craft, 1965) defined tax evasion as a reduction of tax liability
by omitting certain items from returns.
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WallSchutzky (1983) asserts that tax evasion is mainly as a result of the exchange
relationship which considers the benefits from the government, the social orientation
and administration officers may influence tax payer’s response. To further the
argument, (Glasser and Denhardt, 2000) asserts that citizens are increasingly
reluctant to pay taxes based on the perception that they are getting a poor return on
tax dollars invested. Wentwoth et al (1985) also asserts that, causes of tax evasion
are the exchange, social class and chances available for evasion. Evaders in that
study reported that they were not getting value for their money, tax rates were too
high and that government did not spend tax payer’s money wisely, that the burden of
taxes fell on low income and salary earners. However, on the issue of tax rate,
(YitZhaki and Etzioni, 1986) argue that evasion is basically independent of the tax
rate. Tax evasion according to Kay (1980), takes place when facts of transaction are
admitted but having been arranged or presented in such a way that the resulting tax
treatment differs from that intended by the relevant legislation. Tax evasion usually
entails tax payers deliberate misrepresenting or concealing the true state of their
affairs to the tax authorities to reduce liability. It also includes; dishonest tax
reporting such as declaring less income, profits or gain than actually earned; or
overstating deductions (Alm and Martinez, 2001).
2.1.5 Tax avoidance
Tax avoidance is the practice and technique where by one so arranges his business
affairs such that he pays little or no tax at all but without contravention of the tax
laws. Tax avoidance takes advantage of any loopholes and weaknesses, deficiencies
and loose or vague clauses in tax legislations to minimize or eliminate tax liability
altogether. Tax avoidance is not punishable in law. Where the tax authorities detect
the practice, the only solution is to amend the law in order to plug the loopholes and
the weaknesses in the laws that allow the possibility of tax avoidance.
Soyode and Kajola (2006), defined tax avoidance as the arrangement of tax payers
affairs using tax shelters in the tax laws, and avoiding tax traps in the tax laws, so as
to pay less tax than ought to be paid, hence the person pays less by taking the
advantage of the loopholes in the tax laws. Sayode and Kajola (2006) again asserted
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that, if you over do tax avoidance, you will eventually enter into tax evasion, tax
evasion begins where tax avoidance ends. Abdulrazaq (2001) gave this example to
differentiate between tax evasion and tax avoidance. If two people marry in order to
reduce their tax liabilities, they are involved in tax avoidance, but when they tell the
tax authority that they are married when they are not, they are quite of tax evasion,
and would be prosecuted. Even though tax evaders and tax avoiders have a similar
end (i.e. reduction of tax liability) their means to that end differs.
2.1.6 Tax compliance
Tax compliance is a process of following the country’s tax system. Every country
has its own taxing system, which is regulated and managed by the government. The
system is based on the country’s economics and its inner political situation and
international politics. From the personal consequence perspective tax compliance is
viewed as an income maximizing decision, balancing the net gain of under reporting
income or over claiming against the added risk of detection and penalization
(McGraw and Scholz, 1991).
Taxation theories indicate that collecting more tax revenue requires revenue
authorities to fix lower marginal tax rates, high penalty rate and intensify tax
inspections or audits. From theories and practices, raising tax compliance requires
more inspections (Fjelstard, 2004). Moreover, through inspection or audits, tax
payers will be able to get clarification on tax laws, practices and clear mistakes and
confusions in tax calculations and quickly note any defaults in tax collections and
non compliance. Conducting optimal tax audits and inspections also requires having
optimal amount of staff.
Bird (2003) correctly states that; “Abundant experience around the world has made it
clear that the single most important ingredient for effective tax administration is clear
recognition at the highest levels of politics of the importance of the tax and the
willingness to support good administrative practices even if political friends are hurt
(Bird and Casanegra de Jantscher,1992). Unfortunately very few developing
countries have so far proved able to leap this initial hurdle.
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According to Cuccia (1991) tax payer compliance has been primarily viewed from
three theoretical perspective; the general deterrence theory, economic deterrence
models and fiscal psychology. Deterrence theory is concerned with the effects of
sanctioned threats on criminal and undesirable behavior, however this had problems
of identifying sanctions, determining how much effect and specifying the mechanism
by which the effect occurs. On the other hand, the economic deterrence model
smoothened out the problems of deterrence theory for instance by use of utilitarian
approach to measure sanction threats.
Tax compliance is a complex term to define. According to Brown and Mazur (2003),
tax compliance is multi-faceted and theoretically it can be defined by considering
three distinct types of compliance that is payment compliance, filing compliance and
reporting compliance. Organization for Economic Cooperation and Development
(2001), advocates, dividing compliance into categories in considering definitions of
tax compliance.
These categories are administrative compliance and technical compliance where the
former refers to complying with administrative rules of lodging and paying otherwise
referred to as reporting compliance, procedural compliance or regulatory compliance
and the latter refer to complying with technical requirements of tax laws in
calculating taxes or provisions of the tax laws in paying the share of tax.
Theoretically, views of the tax payers and tax collectors are that tax compliance
means adhering to the tax laws, which are different from one country to another.
Discouraging non-compliance is only one aspect of improving compliance (Bird,
2003). Treating tax payer in a professional manner, in another words, more like
customers rather than like suspects or thieves, may do much more to promote and
improve compliance (Bird, 2003; Mikesell and Birskyte, 2007; Wang, 2010).
Providing tax payers with various payment options (e.g. Banks, supermarkets,
internet, ward offices), easy filing and assistance (e.g. On-line or at shopping malls
and sports stadiums) not only reduces actual compliance costs, but can reduce
unintentional non-compliance. The revenue authorities in a number of African
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countries have already been successful in this regard and improved service levels
through training and knowledge exchanges should result in further gains in future.
2.1.7 Voluntary compliance
Silvan and Baer (1997:11) “define voluntary compliance” as “the timely filing and
reporting of required tax information, the correct self-assessment of taxes owed, and
timely payment of those taxes without enforcement action”. The goal of tax
administration is to foster voluntary tax compliance (Silvani, 1992) and hence reduce
tax gap (difference between taxes paid and owed for all taxes and tax payers).
Compliance can be motivated by the presence of government expenditures,
individuals may pay tax because they value the goods provided by the government,
recognizing that their payments are necessary both to help finance the goods and
services and to make others contribute (Andreoni et al.1998; Cowell and Gordon
1988). Hence, a tax payer may be seen as exchanging purchasing power in the
market in return for government services. Fiscal exchange, however, requires trade-
off gains that may be seen as prerequisites of voluntary compliance (Levi 1988:56).
The existence of positive benefits measured according to quantitative and qualitative
criteria, may therefore increase the probability that tax payers will comply
voluntarily, without direct coercion. Plumley (1996) also asserts that, voluntary
compliance is explained by dimensions like timely filing of any required return,
accurate reporting of income and tax liability and timely payment of tax obligations.
In developing countries the tax compliance has been constrained by the significant
number of changes to the tax laws, that they are now so complex and only a handful
of tax experts can understand them. This creates additional problems for compliance
by tax payers who do not have access to sophisticated tax specialists (Oberholzer,
2008).
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2.2 Causes of tax evasion
According to Nzotta (1995), a number of factors are responsible for tax evasion and
these includes;
(i) The high level of corruption by the government officials at all levels and lack of
fiscal transparency this affects the willingness of tax payers to pay tax in the
sense that they believe part of it will go to top government officials private
pockets.
(ii) Corrupt practices of some tax officials encourage tax evasion who sometimes
collude with tax defaulters
(iii) Complexity of tax laws and by-laws contribute to tax evasion. There have been
instances of multiple taxes by two –tier at the same time. This gives room for
tax evasion.
(iv) Absence of strong deterrent punishments and willingness to prosecute tax
offenders whether mighty or poor contribute to rampant tax evasion.
(v) Nature of administration by many Inland Revenue Service offices hampers the
task of assessment, investigation and administration of taxes. There has been
poor database and inadequate information system for effective tax planning.
(vi) Detoriating standard of living with reduction in level of income contributes
largely to tax evasion.
(vii) Lack of adequate information and improper education of the citizens on their
obligations to the state about taxes; affect the willingness to pay taxes.
(viii) Low level of patriotism among the citizen affects the attitude to taxes and
willingness to pay taxes.
2.3 Reducing tax evasion
The primary goal of a revenue authority is to collect taxes and duties payable in
accordance with the law and to do this in such a manner that will sustain confidence
in the tax system and its administration. The action of tax payers, whether due to
ignorance, carelessness, recklessness, or deliberate evasion as well as weakness in a
tax administration mean that, instances of failure to comply with law are inevitable.
Therefore, tax administration should have in place strategies and structures to ensure
that non-compliance with tax law is kept to a minimum.
13
A high degree of tax evasion has unpleasant repercussions on resources, it affects
wealth redistribution and economic growth, creates artificial biases in macro-
economic indicators. No matter how fair a tax system appears to be on paper, it will
lack the standards of equity if there is high incidence of tax evasion or artificial tax
avoidance. Sayode and Kajola (2006), was of opinion that, where there are
manipulations of various kinds which have the effect of reducing considerably the
revenue that is due to the government, such practices should be prevented. Tax
evasion and tax avoidance present one of the fundamental problems of tax
administration in developing countries. All forms of tax in developing countries are
to some extent avoidable and evaded largely because the administrative machinery
that ensures effectiveness is weak. Tax evasion and uncontrollable tax avoidance
must be viewed seriously. It leads to loss of revenue for the government, causes even
honest tax payers to lost faith in tax system and tempted to join the leagues of tax
dodgers if it is too wide spread and unchecked.
The important task of tax administration is to reduce tax evasion, in other words
dealing with those tax payers who act dishonestly. To be able to understand the scope
of the problem of evasion, tax authorities require estimates of the extent and nature
of the potential tax base, for example, by estimating what is sometimes called the
“tax gap” (Bird and Zolt, 2003). The penalty structure should be such “that those
who should register do so, that those who should file do so, and that those who under
report their tax bases are sufficiently penalized to increase the costs of evading tax”
(Bird and Zolt, 2003).
2.4 Factors affecting tax compliance
Several writers have come up to suggest what really affects the tax payer’s
compliance leading to evasion of taxes.
Chin and Reinikka (1999) argue that people engage in tax evasion when the expected
benefits (low taxes) are equal to the expected costs (bribes and punishments). In the
standard economic model of tax payer behavior, the perceived quality of government
does not influence the level of taxes remitted. The basic behavioral assumption is
that people are free-riders; no one will voluntarily contribute to the government
14
unless the threat of punishment makes it sensible (Allingham and Sandmo, 1972).
But an increasing amount of evidence from experimental studies and survey data
reveals that the rate of contribution to a public good is affected by factors such as
citizens’ trust in others and perceptions of trustworthiness of the government
(Slemrod, 2003).
As Scholz (1998:137) pointed out, without trust there is little basis for social co-
operation and voluntary compliance with laws and regulations that could potentially
benefit everyone. Thus, without trust coercion provides a reasonable guide for
governance. The temptation not to comply even if others do comply defines the free-
riding problem that is endemic in collective action situation in private as well as in
public institution (Hardin, 1982). Why should the tax payer not take the advantage of
the opportunity for a free-riding? In this perspective, Levi (1998) argues that citizens
are likely to trust the government only to the extent that they believe that it will act in
their interests, that its procedures are fair and reasonable, and that their trust of the
state and others is reciprocated. She stresses that government trustworthiness, plus
the perception that others are doing their share, can induce people to become
‘contingent consenters’ who co-operate even when their short-term interest would
make free-riding the individuals best option. Accordingly, citizens’ willingness to
pay taxes voluntarily rests on the local government’s capacity to provide services and
its demonstrated readiness to secure the compliance of the otherwise non-compliant.
Following the analytical approach suggested by Levi (1998, 1997) the relationship
between a taxpayer and the local government includes at least three elements. First,
there is an element of fiscal exchange, as payment of taxes and the provision of
services may be interpreted as a contractual relationship between the tax payer and
the local government. A citizens’ decision to pay derives from his /her perception
that the local government is trustworthy. Second, there is an element of coercion, as
represented by enforcement activities of tax collectors and the penalties imposed on
those detected for non-payment. The credibility or trustworthiness of the revenue
administration’s sanctions against defaulters is important in this context. A third
element is the impact of social influences and norms on the taxpayer’s compliance
15
behavior. For example, attitude toward the government may affect the tax payer’s
normative commitment to comply with the law. An individual’s perceptions, in
combination with her opportunities, may thus determine her current choice of
whether or not to be a tax evader.
Trust and coercion are closely linked in the new perceptive on compliance and
governance (Scholz, 1998: 163). The government is sometimes crucial in
establishing levels of trust among citizens that make possible a whole range of social,
political and economic transactions that would otherwise not be possible (Levi,
2002:20). Critical to this task is its use of coercion to ensure that non-compliers are
punished. As argued by Scholz (1998), no law can reshape behavior without the
backing of an effective enforcement agency. On the other hand, an effective
enforcement agency does not deter each citizen from breaking the law but instead
tries to provide a basis for trust buy ensuring that non-compliers will be made to
obey the law.
Enforcing a tax system is neither an easy nor a static task. It is especially difficult in
the dynamic environments prevailing in developing countries. Unless this task is
approached professionally and with consistency, even a well-designed tax system
will fail to produce good results (Bird and Zolt, 2003). This is especially evident at
local government level where tax collectors seldom use the available enforcement
mechanisms provided by law, or where they do enforce, inappropriate mechanisms
are sometimes used.
Bird (2003) states that, “due attention must be given to the extent to which revenue is
attributable to ‘enforcement’ (the active intervention of the administration) rather
than ‘compliance’ (the relatively passive role of the administration as the recipient of
revenues generated by other features of the system)”. However, distinguishing
between enforcement and harassment seems to be an issue in some jurisdictions.
Wang (2010) concludes that, tax payers’ confidence is largely dependent on; the
efficiency and efficacy of government services, i.e. whether the services provided is
cost-efficient (i.e. perceived to represent “value for money”) and whether the revenue
16
is appropriately spent in a transparent and accountable manner: and the perceived
level of fraud and corruption in the government, and whether the government is
serious in combating fraud and corruption.
In an environment where tax payers generally trust the government, voluntary tax
compliance is more apparent. With references to the local government in Tanzania
Fjeldstad (2006:24) states that “tax payers’ unwillingness to pay is not perceived to
be the main problem in revenue collection. The survey data point at misuse of tax
revenues by council staff (particularly by tax collectors) and councilors as a major
problem. Hence, strong punishment of council staff and councilors whose
mismanagement is detected is perceived to be a key measure for improving the
present system.
Mikelsell and Birskyte (2007), states that, complexity can also frustrate tax payers in
their efforts to comply with the tax laws and create a sense of unfairness. Technical
complexity and the demand for legal completeness produce significant alienation of
tax payers leading to lower tax morale and consequently evasion. In developing
countries the compliance has been constrained by the significant number of changes
to the tax laws, that they are now so complex and only a handful of tax experts can
understand them. This creates additional problems for compliance by tax payers who
do not have access to sophisticated tax specialists (Oberhoizer, 2008).
2.5 Local Government Authorities
Local government in Tanzania is established under Article 145 (1) of the United
Republic of Tanzania (URT) Constitution of 1977 which provided that; “There shall
be established Local Government Authorities in each region district, urban areas, and
village in the United Republic of Tanzania which shall be of such types and
designation as shall be prescribed by legislation enacted by the National Assembly or
the House of Representatives of Zanzibar”.
It is usual in local government for people to elect their representatives to their local
council. But the freedom to one’s representatives also imposes responsibilities upon
the citizens to pay taxes in order to finance many of the services for their wellbeing
17
in their jurisdiction. Local Authorities have legal obligation in fulfilling their mission
to the public. It is the role of local authorities to make by laws that empower it to
impose and collect revenues for financing local public services. Both rural and urban
Authorities in the United Republic of Tanzania were abolished in 1972 and the
decentralization introduced in 1973 under the control of central Government.
According to Haonga (2003), after Local Authorities were abolished urban councils
were merged with neighboring rural areas. The government focus was on rural areas
and this led to rapid deterioration of condition in urban areas, schools had no desks,
textbooks, buildings and roads remained un- maintained, dispensaries lacked drugs.
An outbreak of cholera in many urban areas in 1976 prompted the government to
create an investigation team to recommend on the future administration of urban
areas. The report that was submitted recommended the reintroduction of urban local
government in the year 1982 a legislation was enacted to establish Local Authorities
at a level in accordance with provision of the law.
According to Klaus (1998), the Local Government Authorities have many functions,
but among those functions are;
1. Effective collection and proper utilization of revenues of Local Government
Authorities.
2. The consideration, regulation and coordination of development and
mobilization of productive forces to combat poverty, diseases and
ignorance, and to control and improve agriculture, trade, commerce and
industry.
3. Other functions of local authorities can be performed depending on the
availability of resources, these include;- control of prescription of methods
of husbandry on agricultural land, the building , equipments and letting of
shops and dwelling houses, establishment, maintenance operations, control
of drainage and sewerage woks, and any other functions which may be
beneficial to the residents in their jurisdiction. The Local Government Act
of 1982 laid the foundation for the financial management and revenue
raising powers of local authorities. Section 13 and 15C of this Local
18
Government Act allowed Local authorities to impose flat rate property
taxes by enacting by-laws which were subject to central government
approval.
2.6 Characteristics of good revenue sources
Characteristics of good revenue sources are very intuitive and have been known for
many centuries. In 1776, Adam Smith, a classic economist, formulated some of these
principles in his seminal The Wealth of Nations. “The subject of every state ought to
contribute towards the support of the government, as nearly as possible, in proportion
to their respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state”.
This sentence carries the seeds of what is today known as the “ability to pay”
principle and the “benefit principle”. The first principle states that tax payers with
greater ability to pay should pay more. Today these two fundamental principles of
taxation are perceived by some as mutually exclusive. The range of services provided
by government might have indeed benefited the wealthier more. Also in the same
paragraph Smith asserts that, “The expense of government to the individuals of a
great nation is the expense of management to the joint tenants of a great state, who
are obliged to contribute in proportion to their respective interests in the state”.
Thus, by saying that citizens should be taxed “in proportion to the revenue which
they respectively enjoy under the protection of the state” Adam Smith probably
meant that to be in proportion to benefits from the government services.
“The tax which each individual is bound to pay ought to be certain, and not
arbitrary. The time of payment, the manner of payment, the quantity to be
paid, ought all to be clear and plain to the contributor to pay it. Every tax
ought to be contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into public treasury
of the state. In other words a good revenue source should minimize the costs
of compliance by tax payers as the latter represent a pure waste to the society
being a loss of time and efforts for the tax payer without any associated gains
19
for the state budget. In addition to the Smith canons, the modern public
literature generally recognizes a number of principles as commonly
acknowledged characteristics of a good revenue source, among them are;-
Adequate revenue yield: The revenue yielded by local taxes should be
adequate. Among others, revenue adequacy should be considered relative to
the funding needs of the local government level and relative the size of the
economic base of the local community.
Revenue buoyancy: Overall, revenue should change roughly in proportion to
the economic base. This does not mean that government revenue should
follow short-term economic fluctuations. Rather, as the long-term economic
development makes tax payers demand a wide range and a better quality of
services from the government, this trend should be matched by increasing
yield of the tax system applied to the growing economy.
Equity: Good revenue sources are “fair” or equitable. Economists consider
two dimensions to fairness in a fiscal system.
1. The notion of horizontal equity which suggests that tax payers in similar
circumstances should be treated similarly by the tax system. The tax
should be fair not only in terms of definition but also application. Thus,
tax assessment should be uniform and comprehensive. A perception of the
tax as being “fair” is believed to contribute to the probability of voluntary
compliance.
2. In addition to horizontal equity, the tax system should also displays
vertical equity, or fairness between tax payers at different rungs on the
income ladder. The determination of what is “fair” is subjective, but at a
minimum, most people believe that wealthier tax payers should pay more
in taxes. As noted earlier, this principle is known as the “ability to pay”
principle. The other notion of vertical equity often considered
(particularly at the local level) is the benefits principles. As discussed
20
above, the benefits principle suggests that tax payers should pay tax in
(approximate) proportion to the benefits received from public services.
Efficiency: An efficient tax revenue source minimizes administration and
compliance cost, and in particular generates an amount of revenues well
above these costs. Good tax policy should not give tax payers incentives to
change their behaviors and discourage productive activities in the economy.
Good taxes should be difficult to avoid and evade.
Politically acceptable: A good revenue source is politically acceptable and
sensitive to the historical and institutional framework in a country.
Correspondence: A local tax base should establish a link between the
jurisdiction in which a tax is levied and the area in which the benefits are
received from the local services funded with that revenue source.
Smith also argued that local revenue sources should have an immobile base, so that
local tax payers are not able to move to avoid the local tax. However, in reality this is
only a requirement if the local tax system fails to satisfy some of the principles for
sound local revenue. For instance, if the benefit principle is preserved in assigning
local taxes, the potential mobility of taxpayers would not necessarily bring about
economic distortions, since tax payers would be receiving local benefits in
accordance with local taxes paid. Meanwhile, the potential mobility of tax payers and
tax bases can actually increase efficiency in the delivery of substantial government
services by forcing local officials to provide a balanced basket of substantial services
and substantial taxes. However, if non-benefit taxes are applied to mobile tax bases,
inefficiencies can arise from tax avoidance costs, as tax payers could try to reduce
their substantial tax liability by moving between substantial jurisdictions without
affecting the benefits received from publicly provided goods and services. Equally
distorting, and therefore to be avoided, are local taxes that can be “exported” to tax
payers in other jurisdictions. Such local “tax exporting” is practice that violates the
correspondence principle.
21
2.7 Local government revenue sources in Tanzania
Although Local Government Authorities get most of their money, around 90% from
grants and transfers from central government, they also collect their own local tax
revenues (often referred to as “own source revenues”).own source revenues, on
average make up 10% of a Local Authority’s revenue. Local revenues are important
for two reasons. First, unlike many of the intergovernmental grant mechanisms, they
are not tied to any particular sector or type of expenditure, which gives LGAs some
freedom to respond to local needs and priorities. Second, because these sources are
raised from the local population it can be argued that they strengthen the
accountability of local governments to the local community (William, 2007).
Until 2003, Tanzania followed a “permissive” approach to local government
taxation, meaning that LGAs were essentially allowed to come up with their own
local tax structure, this open approach to local revenue was a major contributing
factor to a highly fragmented local tax system. It was felt by many that the
fragmented local tax structure imposed an excessively high burden on local tax
payers (through high cumulative rates and administration costs) and caused an
environment not conducive to economic growth. The system of local taxation in
Tanzania was significantly reformed in 2003 (and further modified in 2004) by
proclamation of the Minister of Finance during the budget speech. The reform effort
known as “rationalization and harmonization” of local revenue sources eliminated
taxes that are considered nuisance.
Fiscal decentralization is not a new theme in policy agenda of the Government of
Tanzania. Since the reintroduction of democratically elected local government in
1984, the government has been systematically expanding the roles and financial
responsibilities of Local Government Authorities in a well-structured and considered
manner.
As noted in the Local Government Fiscal Review (2004), local governments are an
important and an integral part of public sector finances of Mainland Tanzania today,
as local governments have significant responsibility in the delivery of key
government services. While local government authorities collect roughly 3-5 percent
of all public sector revenues, they are responsible for over 20 percent of public sector
22
spending. As such, a sound framework for local government finances is a key factor
in assuring that the public sector delivers quality public services; provides an
enabling environment for economic growth; and pursues an aggressive agenda of
poverty reduction.
The Government’s vision of the, country’s local government system is clearly set
forth in its policy paper on Local Government Reform (MRALG, 1998), which was
developed in a deliberative and Consultative process. The vision is based on the
principle of “decentralization and devolution” by which autonomous local
governments are empowered with political and administrative control and provided
with the financial resources to assure the effective delivery of services to the public.
While the policy paper provides the broad outlines for the system of local
government finances, the document falls short from defining a comprehensive
strategic framework for local government finances. In 2004, the Government of
Tanzania determined that it would be useful to undertake a comprehensive review of
the policy framework underpinning the structure of the financing of local
government, in a light of a number of ongoing reform initiatives impacting local
government finance. Based on a thorough review of the existing approach to local
government finance in Tanzania, sound principles of fiscal policy, and international
best practices, this documents set forth the Government’s strategic framework for
financing local government authorities, including the assignment of expenditure
responsibilities, the collection of own local revenues, the role of intergovernmental
transfer schemes, as well as local government borrowing.
The Local Government Finances Act 1982, as reformed in 2003 and 2004 provides
LGAs with a list of taxes, levies and fees that local governments are allowed to
collect as in table 2.1. In contrast to the permissive approach to local taxation that
prevailed before 2003, this current list is a so-called “closed list” local governments
are not allowed to levy any taxes, levies or fees which are not on this list. Thus local
governments are now required to set their own revenue policy within the limits set by
the central government. In principle revenue sources in Tanzania are administered by
the local government and they are fully retained by them. The rates applicable to
these local levies and fees are in many cases determined by the local governments
23
although practically there is a maximum rate determined by the central government.
It is unclear to what degree local governments strictly adhere to the new “closed list”
and the maximum rates. In practice, it appears that local governments tend to focus
their revenue efforts on a few local tax instruments to maximize yield relative to
collection efforts. As a result, LGAs do not pursue all the taxes assigned to the local
government level with equal effort. The tax rates applied to many smaller local
revenue sources (or revenue sources that are considered a “nuisance” locally) tends
to be lower than the maximum.
Table 2.1: Closed List of Revenue Sources for Local Governments (2005)
Tax on property Property tax
Turnover taxes Service levy
Taxes on goods and services Crop cess (maximum 5% of farm gate price) Forest produce cess
Taxes on specific services Guest house levy
Motor vehicles, other equipments and ferry licenses Vehicle license fees Fishing vessel license fees
Administrative fees and charges Market stalls/ slabs dues Magulio fees Auction mart fees Meat inspection charges Land survey service fee Building permit service fee Permit fees for billboards, posters or hoarding Tender fees Abattoir slaughter service fee Artificial insemination service fee Livestock dipping service feeOther taxes on the of Goods, permission to use Goods Forest produce license fees Building materials extraction license fee Hunting license fee Muzzle loading guns license fees Scaffolding/ Hoarding permit feesEntrepreneurial and property income Dividends Other domestic property income Interest Land rentFines, Penalties and Forfeitures Stray animals penalty Share of fines imposed by magistrates court Other fines and penalties
Livestock market fee Fish landing facilities fee Fish auction fee Health facility user charges Clean water service fee Refuse collection service fee Cesspit emptying service fee Clearing of blocked drains service fee Commercial fishing service fee Intoxicating liquor license fee Private health facility license fee Taxi license fee Plying (transportation) permit fees Other business license fees Revenue from the sale of building plans Building valuation service fee Central bus stand fees Sale of seedlings Insurance commission service fee Revenue from renting of houses Revenue from renting assets Packing fees
Source: Ministry of Finance, 2005
24
2.7.1 Methods of Local Government revenue collection in Tanzania
According to joint report (2005) between NIBR/CMI/REPOA on Local governance,
finances and service delivery in Tanzania conducted on six case councils: Local
government tax collection is the responsibility of the council staff and is completely
separated from the central government. In district councils it is organized around
three levels, namely the council headquarters, the wards and the villages. At the
council headquarters the responsibility for tax collection rests with the council
treasury, headed by the District treasurer (DT). At the ward level, the responsibility
rests with the office of the Ward Executive Officer (WEO). In wards with greater
revenue potentials there will be a ward revenue collector (WRC) to support the
WEO. At the village level, the responsibility rests with the office of the village
executive officer (VEO).
In practice, the organization of tax collection varies between councils, for instance in
some councils the village level has been excluded from collection, and the task is
taken over by the ward level. This is due to incentive problems connected with tax
collection at the village level. Most case councils have introduced new methods to
increase revenues from existing sources by outsourcing some of the revenue
collection to private collectors.
2.8 Empirical literature review
Tax compliance, according to Cobham (2005) is a problem to many countries as
measured by tax to GDP ratio although it has been improving for many countries.
For example, its one-third of GDP in rich countries; Latin America and the
Caribbean- 17% of GDP and low income countries (in Sub Saharan Africa) showed
less than 15% to GDP (the recommended rate). It remains a big challenge to low
income countries. This has promoted radical tax reforms in countries like Bolivia,
Uruguay, Colombia, Jamaica and Spain with notable success (Bird & De Jantscher,
1992).
Due to low income levels and rampant tax evasion in most developing countries
including Tanzania, governments have been facing difficulties to expand their tax
base to meet the revenue needed to finance service delivery. This has encouraged the
25
governments to resort to increasing the same type of taxes every year in order to cope
with the yearly increased budgetary demand for service delivery in the country. Lack
of proper information has also denied the government of Tanzania to raise substantial
revenue from non- tax sources such as on properties taxes, user fees and other non-
tax sources whereas in developed countries this has been contributing to more than
30% of the government revenue (Chipeta, 2002). For instance in FY 2012/2013 the
domestic tax revenue collected in Tanzania is project to amount to 53% of total
budget and non-tax revenue contributes to only around 0.7% of total government
revenue while the deficit amounting to around 39% is to be financed by foreign and
domestic loans and grants that will contribute to around 40% of the total budget.
2.9 Conceptual Framework
The Conceptual framework is an assemblage set of research concepts cum variables
together with their logical relationships often represented in the form of: diagrams,
charts, graphs, pictographs, flow-charts, organ gram, or mathematical equations
(Ndunguru, 2007). The study describes a casual model that shows factors for tax
compliance affecting tax compliance in the Sumbawanga District Council. The
independent variable of this study is Factors for tax compliance while the dependent
variable is the Tax compliance. Between the two variables, there are intervening
variables used to achieve tax payer’s decision to comply or not to comply, these
intervening variables are tax evasion and tax avoidance.
The term Factors for tax compliance refer to attributes that influence tax payer’s
decision to pay or not to pay tax hence affecting tax revenue collection, these
attributes include; satisfaction of the people on service delivery by the government,
behavioral attitudes of tax payers, complexity of tax laws, tax law enforcement and
trust worth of the government. In the literature review Levi (1998:1997) similarly
pointed out on service delivery as a factor for tax compliance, by arguing that, the
relationship between a tax payer and the local government includes three elements;
among them is the element of fiscal exchange relating to payment of tax and the
provision of services.
26
With regard to enforcement factor: Allingham and Sendmo (1972) reveals that
enforcement is among factors which can induce tax payer’s decision to comply or not
to comply, by arguing that no one will voluntarily contribute to the government
unless the threat of punishment makes it sensible. Scholz (1998) similarly argues
that, no law can reshape behavior without the backing of an effective enforcement
agency. Bird and Zolt (2003) also states that enforcing a tax system is neither an easy
nor a static task. It is especially difficult in the dynamic environments prevailing in
developing countries.
Mikelsell and Birskyte (2007) revealed complexity of tax laws also as a factor to tax
compliance, by stating that complexity can frustrate tax payers in their efforts to
comply with the tax laws and create a sense of unfairness. Technical complexity and
the demand for legal completeness produce significant alienation of tax payers
leading to lower tax morale and consequently evasion.
Slemrod (2003) reveals “trust” is another factor for tax compliance by arguing that,
the rate of contribution to the public good is affected by factors such as citizens’ trust
in others and perceptions of trustworthiness of the government. Similarly Scholz
(1998:137) pointed out that, without trust there is little basis for social co-operation
and voluntary compliance with laws and regulations that could potentially benefit
everyone. Levi (1998) argues that, citizens are likely to trust the government only to
the extent that they believe it will act in their interests.
Tax evasion and tax avoidance are intervening variables used to reduce or avoid tax
obligation. Tax evasion refers to failure to pay taxes which are legally due and
therefore is a criminal offence, the variable involves practices like: deliberate
nonpayment of taxes due, declaration of less income, profits or gains in the returns
and overstating deductions in the financial returns produce for tax purpose in order to
achieve noncompliance. From the existing literature review, Allingham and Sandmo
(1972) similarly explained tax evasion by referring to the failure to pay taxes which
are fairly due. Soyode and Kajola (2006), explained tax evasion in terms of
deliberate and willful practice of not disclosing full taxable income, or reduce tax
liability or by making untrue claims on the income tax form. Whiteman and Wheat
27
Craft (1965) explained the same tax evasion in terms of reduction of tax liability by
omitting certain items from returns.
Tax avoidance is an act of taking advantage of any loopholes and weaknesses,
deficiencies and loose or vague clauses in the tax legislations to minimize or
eliminate tax altogether if the tax authority detect this, the only thing is to amend the
tax laws that allow the possibility of tax avoidance. Soyode and Kajola (2006) also
explained tax avoidance by observing dimensions like loopholes in the tax laws,
from which the tax payer takes the advantages to avid tax traps so as to pay less tax
than ought to be paid.
The term Tax compliance refer to voluntary payment of correct amounts of tax
revenue to the tax authorities, tax compliance enhances local revenues to the LGAs
and can be explained by dimensions like; correct reporting (i.e. accurate declared
taxable income and the tax amount), timely filing (producing tax returns as required),
and timely payment (payment of assessed tax liability before or on due date).
According to Plumley (1996) tax compliance is explained by dimensions like timely
filing of any required return, accurate reporting of income and tax liability and timely
payment of tax obligation. Similarly Brown and Mazur (2003) explained the same by
considering three distinct types of compliance, that is, payment compliance, filing
compliance and reporting compliance.
Several theories of tax compliance exists in the literature, all intended at describing
factors related to influences on the changing behavior of taxpayers’ decision to pay
or not to pay tax. According to the Conceptual framework model in Figure: 2.1, it
constitutes three distinct variables that include: factors for tax compliance, tax
evasion and tax avoidance each having either direct or indirect influence on tax
compliance.
Factors for tax compliance: refers to attributes or reasons that influence taxpayers’
decision to engage in tax evasion or tax avoidance. These factors which influence tax
compliance include; satisfaction in service delivery, behavioral attitude, complexity
of tax laws, enforcement of tax laws and trustworthiness. According to the literature
28
these factors have the most influence on tax compliance and if one or more of these
factors is conceived by tax payers, the same tax payers take a chance to engage in
practices that reduces tax liability or wholly exempt him from tax obligations.
Tax evasion: tax evasion is an attempt to escape tax liability (wholly or partially) by
breaking the tax law and it is a criminal act since it is achieved principally by
making false declarations such as under-reporting income or over-reporting relieves
and allowances. Tax evasion is a variable used to achieve taxpayer’s decision of non-
compliance, hence it starts where either of the factors that affect tax compliance ends
as illustrated in Figure: 2.1. Tax evasion mostly constitute of: deliberate non -
payment of tax obligations; declaring less income, profits or gains and overstating
deductions in order to reduce taxable and tax amounts.
Tax avoidance: Tax avoidance is the practice and technique where by one so
arranges his business affairs such that he pays little or no tax at all but without
contravention of the tax laws. Tax avoidance is used to achieve taxpayer’s decision
of non-compliance by taking advantage of any loopholes and weaknesses,
deficiencies and loose or vague clauses in tax legislations to minimize or eliminate
tax liability altogether. Tax avoidance is not punishable in law like it’s for tax
evasion. Though tax evasion and tax avoidance differs on the means to end, but have
similar end of reducing tax liability. Sayode and Kajola (2006) asserted that, if you
over do tax avoidance, you will eventually enter into tax evasion, tax evasion begins
where tax avoidance ends, this relationship has been shown in Figure 2.1
accordingly.
Tax compliance: Tax compliance is a process of following the country’s tax system.
Every country has its own taxing system, which is regulated and managed by the
government. The system is based on the country’s economics and its inner political
situation and international politics. According to the literature, tax compliance is the
dependent variable which its change is impacted by independent variables, the
logical relationship shown in Figure: 2.1 revealed that, all of the effects of
independent variables ends there, regardless of whether they are positive or negative.
29
Figure 2.1: Conceptual Framework
Source: Author’s Own Construct, 2014
Tax evasion Deliberate non payment Declaring less income, profits or
gains Overstating deductions
Tax compliance Correct reporting Timely filing Timely tax payment
Tax avoidance Tax law loopholes Tax law weaknesses
Factors for tax compliance Service delivery Attitude Complexity Enforcement Trust worth of the government
30
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
The first part of the chapter explains the research design used while the second part
provides the area of the study. Section three of the chapter discusses the study
population and the fourth part gives the sample size and the sampling techniques
used. Research variables and units of measurement are explained in part five, part six
of the chapter covers research instruments, while part seven presents the validity of
the instruments. Part eight is concerned with sources of data. Data collection
methods are presented in part nine, part ten discusses how the collected data were
processed and analyzed and the last part presents the limitations to the study.
3.2 Research Design
The research design was a case study. The case study enabled the researcher to cope
with time and financial constraints allocated for the purpose. However, this design
enabled the researcher to use effectively and efficiently the scarce financial and time
resources endowed for the study. A case study research design creates an enabling
environment for combining a variety of tools such as interviews, documentations and
observations to conduct a thorough inquiry in the phenomenon. A case study design
enabled the researcher to study the factors for tax compliance, procedures of tax
collection, practices used in achieving tax evasion and avoidance and ways collected
taxes are accounted for in Local Government Authority in Tanzania.
3.3 Study Area
The study was conducted at Sumbawanga District Council. The researcher selected
Sumbawanga District Council because of his familiarity and awareness of this Local
Government. The Sumbawanga District Council is among the Local Government
Authorities in Tanzania that is challenged with tax compliance to enhance local
revenue.
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3.4 Study Population
Population refers to larger group from which the sample is taken (Kombo and
Tromp, 2006) In this study the researcher targeted officials of the Sumbawanga
District Council responsible for tax collection, tax payers (crop and animal traders)
and agents for tax collection. The population comprised of both male and female,
targeted personnel for the study were District Treasurer (DT), District Trade officer
(DTO), Revenue Accountant (RA/CC), Ward Executive Officers (WEOs), Village
Executive Officers (VEOs) and Ward Revenue Collectors (WRCs), collecting agents
and business men in agricultural produce. The researcher interviewed the above
population in order to get more clarification about factors that affect tax compliance
and the nature of tax evasion and tax avoidance in Local Government Authority.
3.5 Sample Size and Sampling Techniques
The sample of 51 was considered appropriate for the study; respondents from
different population categories as indicated in Table 3.1 were selected and
interviewed.
Table 3.1: Samples drawn from different population categories
Population category Sample SampleSize
Percentage ofthe Sample
Employees of SumbawangaDistrict Council
Head of Units (DT, DTO, RA/CC) 2 4Ward Executive Officers (WEOs) 14 27Village Executive Officers (VEOs) 25 49
Revenue Collectors Revenue Collecting Agents (RCA) 8 16
Traders/ Business persons Crops (Cereals) 1 2Animals (cows, goats and sheep) 1 2
Total 51 100
Source: Research primary data, 2014
The sample included forty one (41) respondents from the local government authority
which represents eighty percent (80%) of the total sample. Eight (8) revenue
collecting agents represents about sixteen percent (16%) of the total sample, and two
(2) traders representing about four percent (4%) of the total sample. Majority of the
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respondents, however, came from VEOs (49%) and WEOs (27%) because are the
ones at the grassroots level involved in tax collection, thus their views and response
were considered to be of significance for the study.
In this study, the researcher used Purposive and simple random sampling techniques.
Purposive sample design involved selecting units (people) whose views are thought
to be relevant, important and particularly worth obtaining for the research, Kothari
(2010). Thus the researcher deliberately selected units to be included in the sample;
the sampling method was called for, due to the nature of the study which demanded
for the collection of Data from units with involvement, specialist, and experience in
matters or field related to Local Government Authorities taxation where most people
are reluctant to share information. However, for the traders, simple random sampling
technique was used as this offered the researcher with the opportunity to select
respondents who fully represent the entire population. Among the traders category
two (2) people one is dealing with agricultural produce and the other in animal
businesses were picked for the interview and questionnaires filling.
3.6 Research Variables
The principle independent variable was factors for tax compliance and the dependent
variable was tax compliance.
3.6.1 Independent Variable
Factors for tax compliance was measured using satisfaction of tax payers to the
Sumbawanga District Council in form of transparency on the use of collected taxes,
service delivery, tax laws enforcement, complexity of by-laws and behavioral
attitude.
3.6.2 Dependent Variable
Tax compliance as a dependent variable was measured using practices used by tax
payers to evade and avoid local taxes.
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3.6.3 Validity of Instruments
The validity of the instruments was performed by sending the questionnaire to an
expert for rating the relevance of the questions.
3.7 Sources of Data
The researcher used both primary and secondary data. Primary data were obtained
from responses administered through questionnaires to officials of SDC responsible
for local tax collection for which the following were included; District treasurer (DT)
and District trade officer (DTO) at the head office, where by 14 Ward executive
officers (WEOs) and 25 Village executive officers (VEOs) from low level were
interviewed.
Also 8 contracted revenue collecting agents were involved in the study together with
1 crop trader and 1 animal trader in the council. Secondary data were obtained from
Sumbawanga District Council documents such as audited and unaudited financial
reports, minutes of the planning and finance committee and the medium term
expenditure frame work (MTEF).
3.8 Data Collection Instruments
Questionnaires were used to collect data from respondents; some questionnaires were
left to those with busy schedules and were picked later after being filled. Where the
respondent could neither read nor write especially in English, the researcher read the
questions to the respondent with a number of probes. Before interviewing, the
researcher introduced himself, the title of the study, and clarified on the overall
objective, time to be taken and confidentiality assurance by the use of interview
guide. The researcher also attended the stock market at Muze. The interview guide
used is attached as Appendix 2.
3.8.1 Questionnaires
Questionnaires were issued to respondents, having both closed-ended and open-
ended questions. The closed-ended questions enabled the researcher have responses
in his own words, while the open-ended questions provided chances to interviewees
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to include more issues that were outside the knowledge and experience of the
researcher. The questionnaire used is attached as Appendix 1.
3.9 Data processing and Analysis
Data collected were carefully compiled, sorted, edited, classified, coded and checked
for accuracy and relevancy.
3.9.1 Data processing
Data from various documents including questionnaires were read carefully, edited for
completeness and accuracy. Data pertaining to local revenue collected over 5 years
was aggregated with the help of Exel spread sheet and SPSS programme.
3.9.2 Data analysis
Tables, graphs, figures and percentages were used to analyze and present the findings
of the study.
3.10 Limitations to the study
Like any other research, a number of problems were encountered during the study.
i. Lack of co-operation from respondents, as some of them thought they were
suspects of tax evasion and avoidance. Here the researcher was forced to give
more clarification and submit an introduction letter from the University that
tried to convince respondents to understand that, the study was for academic
purpose and their responses would be kept confidential in order to give them
confidence and thereafter, they were able to respond positively.
ii. Communication was a problem as most of the respondents were not able to
read and write in English, in this case, questionnaires had to be translated
during the interview and others were allowed to write their responses in
Swahili language.
iii. The study was affected by non-response from some expected respondents that
included one WEO, Revenue accountant and two agricultural products
traders.
iv. Financial constraints did not permit for in-depth investigation, as some
respondents required money before they could respond.
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v. Busy schedules of some potential respondent rendered the researcher difficult
to interview them, especially for respondents dealing with a business of
buying and selling animals in different markets, as evidenced at Muze market
where by after buying they immediately rushed to other animal markets.
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CHAPTER FOUR
PRESENTATION AND DISCUSSION OF FINDINGS
4.0 Introduction
This chapter contains the results, discussions and the interpretation of the responses
from the study. The chapter starts by presenting the profile of respondents being
either village executive officers (VEOs), ward executive officers (WEOs), private
revenue collecting agents, traders and head office officials directly involved in tax
affairs guided by study objectives. The findings and presentation included: First, the
characteristics of respondents by title and experiences, characteristics of respondents
by age and sex, level of education and causes of tax evasion and tax avoidance.
Moreover, the same chapter discusses on formal knowledge in taxation, reasons for
non-tax compliance, accountability for the collected tax and procedures used to
collect tax in local governments.
4.1 Profile of the Respondents
The study was able to collect data from different respondent as shown in Table 4.1.
Out of 51 respondents who participated in the study, about 25 (49%) were Village
Executive Officer (VEOs). About 14 (27.5%) respondents were ward Executive
Officer (WEO), while 8 (15.7%) were agents and two of them equal to (4%) were
officials at the district council head office, involving District Treasurer and the
District trade officer.
Table 4.1: Title of Surveyed Respondents
Title Frequency PercentWEO 14 27.5Agent 8 15.7Traders 2 3.9District Trade officer 1 2.0District treasurer 1 2.0VEO 25 49.0
Total 51 100.0
Source: Research primary data, 2014
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Majority of the respondents (76%) were ward and village executive officers whose
functions include revenue collection, monitoring, supervision and custody of revenue
at their levels before the collected revenue is remitted to Council head office for
banking and accounting procedures. The study was furthermore interested to know
for how long the respondents have been in those positions. Responding to this
question, majority of the respondents 19 (37.3%) had experience of more than 10
years (Table 4.2). About 18 (35.3%) respondents had experience of 5 to 10 years;
others had an experience less than 5 years. The findings indicate that, data collected
is of worth as most of respondents had enough experiences in relation to issues
pertaining to local tax collection and its compliance.
Table 4.2: Characteristics of Respondents by Title and Experience
Title < 2 years 2 - 5 years5 - 10years 10+ years Total
WEO2
(3.9%)2
(3.9%)2
(3.9%)8
(15.7%)14
(27.5%)
Agent1
(2.00%)3
(5.9%)4
(7.8%)0
(0.0%)8
(15.7%)
Traders0
(0.00%)0
(0.0%)2
(3.9%)0
(0.0%)2
(3.9%)
District Trade officer0
(0.00%)0
(0.0%)1
(2.0%)0
(0.0%)1
(2.0%)
District treasurer0
(0.00%)1
(2.0%)0
(0.0%)0
(0.0%)1
(2.0%)
VEO4
(7.8%)1
(2.0%)9
(17.6%)11
(21.6%)25
(49.0%)
Total7
(13.7%)7
(13.7%)18
(35.3%)19
(37.3%)51
(100.0%)
Source: Research primary data, 2014
Concerning their sex, the study was able to capture data from 46 male who constitute
90% of the respondents while female were 5 (10%) as seen in Figure 4.1. Majority of
the respondents were male because in the council the majority of VEOs and WEOs
are male.
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Figure 4.1: Sex of the Respondents
Characteristics of respondents by age are as per Table 4.3. From the Table it has been
revealed that, many respondents 22(43.1%) were aged between 31 and 40 years of
age. Actually 48 (94.1%) of the respondents were 31 and above years of age. This
indicates that, the study collected data from matured people who were able to
provide reliable information about tax compliance and practices used to evade and
avoid tax.
Table 4.3: Characteristics of Respondents by Age and Sex
Age groupSex Total
Male Female
18 – 302
(3.9%)1
(2.0%)3
(5.9%)
31 - 4020
(39.2%)2
(3.9%)22
(43.1%)
41 - 5017
(33.3%)2
(3.9%)19
(37.3%)
51 - 607
(13.7%)0
(0.0%)7
(13.7%)Total 46
(90.2%)5
(9.8%)51
(100.0%)
Source: Research primary data, 2014
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Among the surveyed respondents, about 29(56.9%) had secondary education,
8(15.7%) had primary education, 6(11.8%) had certificate, 2(3.9%) had degree and
above while 6(11.8%) had diploma or advanced diploma education. More
information is revealed in Figure 4.2. The majority of respondents in this aspect had
secondary education, showing that trainings especially in tax expertise is needed to
enhance tax revenues to Sumbawanga District Council.
Figure 4.2: Level of Education of the Respondents
0
10
20
30
40
50
60
Primary Secondary Certificate Diploma or Adv.Diploma
Degree andabove
15.7
56.9
11.8 11.8
3.9
%
Education
4.2 Causes of tax evasion and avoidance in Sumbawanga District Council
In finding reasons for why there is tax evasion and avoidance in the council, the
study started by asking respondents if they have at all heard about people evading
tax. All of the respondents in the study said that they have heard about tax evasion.
This signifies that, there is a problem of tax evasion in Sumbawanga District
Council. More important is that the government officials who represent the District
Executive Director of the council also have information about tax evasion and tax
avoidance.
Figure 4.3 presents results of response on formal knowledge in taxation from the
respondents. It has been revealed that, neither VEOs nor WEOs had formal education
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in taxation. Only three respondents other than VEOs and WEOs had knowledge
about taxation that includes one agent, district trade officer and the district treasurer.
Despite that the majority of the respondents had no formal education about taxation,
but they were aware with the tax system of Tanzania at different levels: 39 (76.5%)
respondents understand the system a little while 12 (23.5%) respondents understand
the system very well. Regarding to awareness of tax by-laws and its guideline of
Sumbawanga District Council, all respondents were aware of it. These results
suggest that, knowledge, awareness and practice of taxation in the council is
satisfactory because most of the council officers were at work for many years.
Figure 4.3: Formal Knowledge in Taxation
In Table 4.4, causes of tax evasion and avoidance in Sumbawanga District Council
have been presented. About ten reasons have been mentioned. Out of these, five
reasons have been pointed out many times by respondents. These are: inappropriate
enforcement by the council 44 (86.3%); complexity of the by-laws of the council 40
(78.4%); behavioural attitude 40 (78.4%); unsatisfactory return in form of service
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delivery 39 (76.5%); and absence of trustworthiness in the local government 38
(74.5%).
Table 4.4: Reasons driving people not to pay tax
ReasonResponses Percent of
Casesn PercentAbsence of trustworthiness in the local government 38 16.2 74.5Unsatisfactory return in form of service delivery 39 16.6 76.5Inappropriate enforcement by the council 44 18.7 86.3Complexity of the by-laws of the council 40 17.0 78.4Behavioural attitude 40 17.0 78.4Lack of tax knowledge 19 8.1 37.3Corruption 3 1.3 5.9Remoteness of some areas 3 1.3 5.9Politics 1 0.4 2.0High tax rate 8 3.4 15.7Total 235 100.0 460.8
Source: Research primary data, 2014
Inappropriate enforcement by the council is the most pointed out cause of tax evasion
and avoidance. This implies that, the council has not demonstrated readiness to
secure compliance from non compliant by taking appropriate measures against tax
evaders. Enforcement requires that, evaders are sufficiently penalized in order to
increase the cost of evasion, as no law can reshape behaviour without a back up of an
effective enforcement.
Complexity of the Council’s tax by-laws, like unsatisfactory return in form of
service delivery also has significant scores. Traders in agricultural products sees the
tax by-laws of Sumbawanga District Council a complex on the fact that, the by-laws
require packaging of 100kgs per sack while the same council has no weighing
facilities and its citizen commonly use “Debe” as unit of measurement of their crops,
due to differences in unit of measurements, traders are being charged with over
packaging as a means of tax evasion and avoidance. Therefore, a translation of
100kgs into equivalent local units of measurement by the Council is important.
Citizens trusts the Government only to the extent that they believe will act in their
interests and perceive that its procedures are fair and reasonable. Hence willingness
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to pay tax voluntarily depends on the local government’s capacity to provide
services, as return for their tax paid.
Dishonest officials and lack of transparency in local government revenue collections
and its expenditures impaired credibility of Sumbawanga District Council as
evidenced in Table 4.4 above. People fear that, the tax paid is not fully reaching the
appropriate office and those monies remitted to head office are not used properly or
are misappropriated by local government officials.
To overcome the problem of tax evasion and tax avoidance, the respondents were
asked to suggest measures of interventions which its results have been presented in
table 4.5. Enforcement of tax by-laws was the most pin-pointed measure for solving
the problem of tax evasion and avoidance, 36 respondents equivalent to 75 percent of
cases pointed at it. Education on the importance of tax payment ranked second as a
solution to tax evasion in order to enhance tax compliance. Education to tax payers,
potential tax payers and the public in general can promote voluntary tax payment and
enhance sound local tax revenues to SDC. 31respondents equivalent to (64.6%) of
cases, viewed education on the importance of tax payment is of paramount.
Table 4.5: Measures to Encourage People Pay Tax
Measure Responses Percent ofCasesn Percent
Improve services e.g. road, hospital etc. 24 17.0 50.0Enforce law to tax evaders 36 25.5 75.0Law making according to environment/area 6 4.3 12.5Education on tax payment to the citizens 31 22.0 64.6Citizen be given information about tax uses 1 0.7 2.1Availability of weighing machine/scale to crops stations 10 7.1 20.8District council give back required percent to village on time 2 1.4 4.2Customer care/use of good language 4 2.8 8.3Transparency in revenue and expenditure 15 10.6 31.3Trustworthy of tax collectors and supervisors 7 5.0 14.6Law conflicting 1 0.7 2.1Tax rates be reasonable 3 2.1 6.3Avoid tax exemption 1 0.7 2.1Total 141 100.0 293.8
Source: Research primary data, 2014
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4.3 Accounting for Collected Taxes
In order to determine the way collected tax is accounted for, respondents were asked
to state where they pay tax and if they were acknowledged with appropriate
Council’s receipts. Tax revenue collected by VEOs is remitted to WEOs who also
take the same monies to the cashier of the council, contracted agents for revenue
collection, they pay agreed monthly installments sometimes directly through the
bank and bring the bank pay in slip to the council cashier for acknowledgement
receipt, depending on the circumstance these agents sometimes paid their installment
to the cashier of the council. Table 4.6 reveals that, 25 respondents equivalent to 49%
paid tax to WEOs , 19 respondents equivalent to 37.3% made Payment to cashier of
the council while only 7 (13.7%) said that the tax is normally paid to agents. All the
payments made to either of the officials were normally and appropriately
acknowledged.
Table 4.6: Remittances and accountability of collected tax
Official Frequency Percent
Cashier of the Council 19 37.3
WEOs 25 49.0
Agent 7 13.7
Total 51 100.0
Source: Research primary data, 2014
The collected tax revenue by VEOs takes 25 up to 3o days before is remitted to
WEOs who also stays with the same funds for 3 up to 5 days and again is remitted to
the main cashier of the council and immediately is deposited into the bank account of
the Sumbawanga District Council. Contracted agents for revenue collection pay their
instalments in accordance with the requirements of the contract, the contract require
the agents to deposit the instalments with the bank or to the council cashier before
seventh of each next month.
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4.4 Procedures used to collect taxes in Sumbawanga District Council
This section presents findings on how the imposed taxes are collected within the
council.
4.4.1 Council Head Office
The results of the study found that, tax collection procedures within the council is
simply by receiving all bank pay in slips from agents for monies deposited through
the banker of Sumbawanga District Council through a given bank account number,
while other tax revenue is collected from WEOs in form of cash and the cashier takes
the same money to the bank immediately. Some tax payers pay their obligations to
the main cashier at head office of the council depending on the circumstances,
council officials especially the Revenue Accountant makes follow ups and irregular
patrols on low level revenue collectors and tax payers respectively, so as to prevent
them from dishonest acts and tax evasion, if in so doing collects any amount of
revenue the same is promptly remitted to the main cashier by Revenue Accountant.
4.4.2 Ward Executive Officers’ Office
Tax collection procedures in WEOs office is done in five different ways as presented
in Table 4.7. One of the procedures is to collect direct from tax payers premises if he
himself declared to have agricultural products or other materials that are chargeable
to local tax, sometimes WEOs goes to tax payers premises after getting information
from other sources especially when the crops trader is about to transport. This kind of
collection procedures was 6 times mentioned by respondents and constitutes 40
percent of cases.
Another procedure is collection of tax revenue from VEOs, VEOs remits the
collected tax revenue to WEOs office every month between 25th and 30th each month,
in case of delay, and WEOs make follow ups and collect tax revenue at VEOs offices
this practice is eventually a sign of non compliance as regard to time and voluntary
remittance. This again was 6 times mentioned. Apart from the above two procedures,
sometimes tax payers voluntarily went to WEOs office and make payment for
declared taxable amounts which eventually required the WEO or his representative to
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attend the premises where those products were stored for verification of amount and
types as every type of cereal crop has different tax rate.
In some situations there is cheating of tax payers so WEOs offices have established
farm gates in some strategic areas to capture tax evaders. In these farm gates vehicles
that transport cereal crops are inspected to ascertain if crops transported have been
properly taxed.
Table 4.7: Tax Collection Procedures by Ward Executive Officers’ OfficeProcedure Responses Percent of Cases
n PercentTo collect from tax payers premises 6 26.1 40.0From VEOs Office 6 26.1 40.0They pay in the office 6 26.1 40.0Through gates 4 17.4 26.7Inspect vehicles 1 4.3 6.7Total 23 100.0 153.3
Source: Research primary data, 2014
4.4.3 Village Executive Officers’ Office
For the case of VEOs office, there are several procedures that are used to collect tax
as presented in Table 4.8. The common practice of tax collection is for VEOs going
to tax payer’s premises or stores for verification and tax collection, since only few
tax payers voluntarily goes to him to pay tax. This accounted for 92.3 percent of
cases from 24 respondents. Voluntary tax payments in the office were revealed by 14
respondents, equivalent to (53.8%).
Table 4. 8: Tax Collection Procedures by Village Executive Officers’ OfficeProcedure Responses Percent of
Casesn PercentTo observe when buying crops 1 2.4 3.8Inspect stores and levy tax 1 2.4 3.8To go to tax payers 24 58.5 92.3Pay in the office 14 34.3 53.8Through gates and support of police 1 2.4 3.8Total 41 100.0 157.5
Source: Research primary data, 2014
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4.4.4 Tax Collecting Agents
Table 4.9 presents tax collection procedures by private revenue collecting agents.
Two methods of tax collection were mentioned: sometimes they collected tax, direct
from tax payers when they are about to transport and through farm gates when they
are transporting to the identified markets, they pay tax directly to the agents to avoid
disturbances when taking their products to the market, however, the issue of
compliance remain questionable as their declarations bear some cheatings in order to
reduce tax liabilities. The two collection procedures revealed above, have been
disclosed by other tax collectors such as Ward Executive Officers and the Village
Executive Officers.
Table 4.9: Tax Collection Procedures by Agents
Responses Percent of Casesn Percent
Collect direct from tax payers 3 60.0 100.0In the gate 2 40.0 66.7Total 5 100.0 166.7
Source: Research primary data, 2014
4.5 Tax Evasion and Avoidance Practices
The study was also interested to know practices used to evade and avoid tax
payments in the council. The practices have been presented in Table 4.10. The most
mentioned practice of tax evasion was transportation of cereal crops in small
quantities using donkeys and bicycles to mention a few and thereafter the previous
small quantities are mixed into quantities that would have been taxable at farm gates.
The practise was disclosed by 34 respondent equivalents to (66%), this practice is
typical kind of tax avoidance hence the loophole need to be plugged in the by-laws of
SDC to allow appropriate tax estimations for quantities than falls below the required
and common packaging.
From the Table, the second practice of tax evasion is transportation of crops over mid
night as revealed by 29 respondent equivalents to (58%). As we have seen earlier
that, LGAs established farm gates to overcome tax evasion and avoidance, tax payers
on the other hand transport farm products over mid night, this practice may require
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the council to keep a person at each farm gate over night, and hence more cost of tax
collection can be incurred. Third technique used by tax payer to evade taxes, is
through various cheatings where by 20 respondents equal to (40%) of cases
disclosed.
The fourth practice of tax evasion, is bribing tax collectors, 18 respondent
equivalents to (36%) revealed this, the study results indicate that corruption exists in
the council. With corruption, tax payers can pay lesser and lesser than the required
amounts of tax or pay no tax at all in lien of small amounts of money given to tax
collectors which is not accounted for in the books of accounts of the council.
Corruption impairs Trustworthiness of the council, as those engaged in are officials
of the council entrusted with the duty of tax collection, compliant tax payers can be
tempted to start evading tax especially when the administration does not have proper
dealings with those tax payers and tax collectors who act dishonestly.
Over packaging is fifth in ranking, farm products are being packaged such that sacks
weigh more than 100kgs and the same sack considered as one sack of crops hence
being charged at the rate of a normal single sack and thus tax liability is so
minimized, although tax payers claim to do so in order to minimize transport costs,
but the same technique indeed affects local tax revenues of the Council. 12
respondent equal to (24%) asserted this.
Sixth technique used to escape tax as revealed by the study is mixing sacks of more
than one type of crops at the time of transportation where by sacks of crops with
higher tax rates are put under those with low tax rates, and tax payers tend to declare
a type of crop with lower tax rate arranged above that of higher tax rate in the
transporting vehicle as a kind of crop wholly transported in such vehicle, for this case
all types of crops are charged by one tax rate of the crop having lowest tax rate to
minimize tax obligation. This technique was disclosed by 8 respondent equivalents to
(16%) of total respondent cases, this cheating is a typical kind of tax evasion that
require tax collectors to exercise deep inspections and heavy penalties for those who
have been caught in this technique. The last upper ranked two practices includes;
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transportation of crops in piece meal and force from business men, these practices
were pointed out by 6 respondents equal to (12%) for each, transporting crops in
piece meal creates a possibility of tax payers to use the same receipt more than ones.
Also in some areas where local militia is absent and that the assistance of police is
not immediate, tax payer forcibly passed through farm gates as disclosed by 6
respondent equal to (12%).
Table 4.10: Practices of Tax Evasion and Tax Avoidance
Practice Responses Percent ofCasesn Percent
Transportation in piecemeal 6 4.4 12.0Transportation over mid nights 29 21.2 58.0Over-packaging 12 8.8 24.0Cheating 20 14.6 40.0Threat and stubbornness of businessman 6 4.4 12.0Bribes to tax collectors 18 13.1 36.0Mixing sacks of different crops with different tax rates 8 5.8 16.0Using different transportation e.g. donkey, buses, 34 24.8 66.0Selling crops at home 1 0.7 2.0Using receipt more than once 3 2.2 6.0Total 137 100.0 274.0
Source: Research primary data, 2014
In order to deal with the problem of tax evasion, the study asked the respondents to
suggest measures of intervention. As presented in Table 4.11. Seven major measures
were suggested that include: appropriate enforcement of tax law, where by 25
respondent equal to (19.8%) of the respondents found it as an intervention that could
help non complaints to comply with tax laws if they are appropriately penalized and
even taking them to court, the second ranking intervention is frequent follow ups
and inspections by both head office and lower level officials, this intervention was
suggested by 16 equal to (12.7%) of respondents, follow up ensures prompt
assistance to tax collectors while in the field. Thirdly, 15(11.9%) required the
Sumbawanga District Council to introduce weighing machine facilities to overcome
the problem of packaging ambiguities, while the fourth intervention was pointed out
by 12 respondent equal to (9.5%) of respondents which involved the introduction of
farm gates or barriers in areas that seem to be strategically of value so as to capture
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tax payers intending to flee untaxed farm products. The suggestions to transport farm
products during day time and education to potential tax payers and the public in
general on the importance of paying tax both interventions were pointed out by 8
respondents equal to (6.3%), if crops are transported during day time can help to
control cheatings among tax payers because such cheatings can be discovered easily,
furthermore the costs of keeping persons in farm gates will be minimized. Regarding
to the education to tax payers and the public in general, is also imperative because it
will create awareness on the importance and benefits of paying taxes. Also there
were 7 respondents (5.6%) who suggested trustworthiness among council officials at
both head office and lower levels as an intervention measure that can arrest the
problem of non compliance of tax in the council, to build trust; information to the
public is crucial. Citizens’ access to and right to information is often seen as a
necessary condition to achieve accountable, transparent and participatory governance
and people centered development. However, public information of tax revenue
collected and financial allocations are scarce. Transparent and accountable tax
administration that is service oriented always have positive impact on public trust, if
revenue is properly spent in terms of a budget which the tax payers find agreeable,
compliance to tax laws can be obvious.
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Table 4.11: Measures of Intervention to control Tax Evasion
MeasureResponses Percent
of CasesN PercentTo introduce farm gates 12 9.5 24.0Education on the importance of tax payment 8 6.3 16.0Reduction of tax rate 4 3.2 8.0Establishment of weighing facilities 15 11.9 30.0Similar tax rates on the same tax base for nearby councils 2 1.6 4.0Enforcement of tax law 25 19.8 0.0Frequent follow ups and inspection of crop luggage 16 12.7 32.0To consider crops transported in small quantities 4 3.2 8.0Transportation of crops be during day time only 8 6.3 16.0Tax collectors be trustworthy 7 5.6 14.0Tax be collected conveniently, when crops have been sold 3 2.4 6.0Availability of working facilities to tax collectors 1 0.8 2.0There should be night patrols 6 4.8 12.0Inspected receipt be stamped 1 0.8 2.0Prohibit mix of different types of crops 1 0.8 2.0Crops transported in Piecemeal be taxed 2 1.6 4.0Improve infrastructure 1 0.8 2.0Review of tax laws and their regulations 1 0.8 2.0Introduction of open market 1 0.8 2.0Close to business activity 2 1.6 4.0Reshuffle of tax collectors 1 0.8 2.0Establishment of businessman list 1 0.8 2.0Making law to force crops be sold in the market 1 0.8 2.0Availability of security/guard 2 1.6 4.0WEO and VEO be fully involved 1 0.8 2.0Total 126 100.0 252.0
Source: Research data, 2014
4.6 Summary of the Findings
4.6.1 Causes of tax evasion and avoidance in Sumbawanga District Council
The study found out that, it shows that local government officials are aware that there
are chances available for tax evasion and tax avoidance in the district council,
implying that non tax compliance was obvious, despite this, VEOs and WEOs being
main actors of tax revenue collection field, the majority had no formal education in
taxation. About five factors influencing tax evasion and avoidance have been
revealed. These are;
51
(i) Inappropriate enforcement by the council.
(ii) Complexity of the by-laws of the council
(iii) Behavioural attitude
(iv) Unsatisfactory return in form of service delivery
(v) Absence of trustworthiness in the local government
In order to deal with the problem of tax evasion and avoidance, the following major
suggestions were outlined: improvement of service delivery such as water, health,
transport (roads), education etc.; enforcement of tax law and other related laws leads
increased compliance due to threats of detection and punishment to tax evaders;
education on the importance and benefits of tax payment to tax payers and to the
public in general about; introduction of weighing facilities to; and transparency in the
expenditures of council revenues.
4.6.2 Accounting for Collected Taxes
The study found that tax collected in Sumbawanga District Council is remitted to the
cashier of the Council and the same revenues are properly acknowledged by issuing
receipts to tax payers and thereafter entered in the books of accounts of the council.
The collected tax revenue takes more than 30 days to be deposited into the bank
account of the Sumbawanga District Council, since VEOs stay with the money for
25 up to 30 days in a month, before the same money is remitted to WEOs who also
stays with it for 3 to 5 days before remitting to the main cashier of the council.
Agents remit the money through banks or direct to the cashier since the contract
requires them to deposit the money on 7th of the next month.
4.6.3 Procedures used to collect taxes in Sumbawanga District Council
The study revealed that, basically there are four tax collection procedures within the
council. These includes: collection of tax at tax payer’s premises; tax payers going to
government offices to pay; collection through farm gates; and during inspection of
stores and transporting vehicles.
52
4.6.4 Tax Evasion and Avoidance Practices
The study found that there are four major practices used by tax payers within the
council to evade tax. These includes: transportation of goods over mid night;
cheating; bribing tax collectors; transportation of cereal crops in small quantities by
using donkeys, bicycles, buses etc.
In order to overcome tax evasion and avoidance the study found seven major
suggested measures. These involves; appropriate enforcement of tax law; frequent
follow ups; establishment of farm gates or barriers in all potential areas of the
council; education on the importance of paying tax; establishment of weighing
machine facilities in order to control the problem of over-packaging; transportation
of crops during the day time only; and night patrol.
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CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.1 Conclusions
Generally, this study investigated on factors that affect tax compliance in the
Sumbawanga District Council, way of accounting for the collected tax and
procedures of collecting the imposed taxes.
The study revealed that, factors for non tax compliance includes; inappropriate
enforcement of tax law by penalizing tax evaders accordingly as such punishments
limits potential evaders, complexity of the by-laws of the council as evidenced by the
said over-packaging against 100kgs unit of measurement by the council, behavioural
attitude, unsatisfactory return in form of service delivery, and absence of
trustworthiness in the local government. This implies that the council has to address
above factors first if it really need to enjoy the potentials of its tax base.
Also the study found that, the Sumbawanga District Council tax collections are
accounted for appropriately since tax payers, VEOs, WEOs and Contracted
collecting Agents are properly acknowledged with receipts for their payments and
remittances. However, the researcher found that a stay of more than 30 days with
council monies in hands of tax collectors can complicate the exercise of assessing
monthly performance and in determination annual trend, because revenues collected
in a month are remitted and banked in next month.
Furthermore, the study found that most of tax revenue of the council is mostly
collected at tax payers’ premises, farm gates, during follow ups and inspection of
stores and sometimes at government offices. This implies that, voluntary compliance
is doubtful. There is a need for the council to curb this situation since it increases the
cost of collection in respect of time and other resources.
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5.2 Recommendations
Basing on the findings, of the study the researcher recommends the following;
Because VEOs and WEOs had no formal education about taxation, this study
recommends that these officials should be trained taking into account that
they are key persons in making local taxation in the council a successful.
The Sumbawanga District Council should educate its citizen in order to create
public awareness on the importance and benefits of paying tax.
Tax collectors should be motivated accordingly because this is a tempting
job, good work incentives and welfare can reduce the level of corruption to
tax collectors.
The council should make sure that all collected tax revenues are remitted to
the head office within the month it has been collected in order to facilitate
trend analysis between months in the year.
The existing chances for tax evasion and tax avoidance should be clearly
addressed by the council by the use of laws at its disposal to prevent it and
enhance its local revenue collection, bearing in mind that a lot of revenue is
lost through tax evasion and tax avoidance.
The Sumbawanga District Council should provide its citizens with
appropriate translations of its by-laws that fit the local environment,
especially in aspects of unit of measurements for packaging agricultural
products.
5.3 Area for Further Research
Because this was a case study and the findings cannot be generalized, there is a need
of conducting similar studies in different councils in Tanzania to know exactly the
factors for tax evasion and avoidance. Furthermore, one of the areas which need
further researches is to establish reasons for failure of councils to collect taxes.
55
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APPENDICES
APPENDIX 1: QUESTIONNAIRES TO THE RESPONDENTS
Dear Respondent
The researcher is a student at Mzumbe University pursuing Master of Science in
Accounting and Finance, is carrying out a study on Tax compliance in Sumbawanca
District Council, Rukwa region. The case study can help the Council management
and tax collectors on how to minimize tax evasion and tax avoidance to enhance
local revenue. You are therefore kindly requested to complete this questionnaire by
ticking against the appropriate answer and by filling in the space provided. Your
responses will be used only for research purposes and shall be confidentially
handled.
Thank you for participating and making this research a success.
PART A: GENERAL INFORMATION
1. Name of theunit/department/ward etc
2. Position or title3. How long have you
been in thatposition?
1. < 2yrs 2. 2 – 5 yrs 3. 5 – 10 yrs 4. 10+ yrs
4. Gender of therespondent
1. Male 2. Female
5. Age 1. 18 – 30 2. 31 – 40 3. 41 – 50 4. 51 – 60 5.60+
6. Highest EducationQualification
1. Primary 2. Secondary 3. Certificate 4.Diplomaor AdvDiploma
5. Degreeandabove
PART B: TAX COMPLIANCE
1. Do you have a formal knowledge in taxation? YES { } No. { }
2. Do you understand the tax system of Tanzania?
1. Not at all 2. A little 3. Yes I understand well
4. Are you aware of the tax by-laws and their guidelines of the SumbawangaDistrict Council?
60
5. What do you think are the reasons that drive people not to pay tax to theSumbawanga District Council?
i. Absence of trustworthiness in the local government (SDC) { }
ii. Un satisfactory return in form of service delivery { }
iii. Inappropriate enforcement by the Council { }
iv. Complexity of the by-laws of the Council { }
v. Behavioral attitude { }
vi. Others (other than the above)
…………………………………………………………………………………………………………………………………………………………..…………………………………………………………………………………………………………………………………………………………
6. What measures are you suggesting to solve the problem in (5) above?
a) …………………………………………………………………………
b) …………………………………………………………………………
c) ……………………………………………………………………
d) …………………………………………………………………………
e) …………………………………………………………………………
PART C: TAX EVASION AND AVOIDANCE PRACTICES
1. Have you ever heard about people evading or avoiding tax in the
Sumbawanga District Council?. YES { } NO { }
2. What do you think are the practices used to achieve this?
a) …………………………………………………………………………
b) ……………………………………………………………………
c) …………………………………………………………………………
d) ……………………………………………………………………
e) …………………………………………………………………………
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3. What measures of intervention are you suggesting?
a) …………………………………………………………………………
b) …………………………………………………………………………
c) …………………………………………………………………………
d) …………………………………………………………………………
…………………………………………………………………………………
PART D: ACCOUNTING FOR THE COLLECTED TAXES
1. To whom, among the following officials taxes are paid?
Cashier of the Council { }
WEOs { }
VEOs { }
Others (mention)
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………….
2. Are the taxes paid acknowledged by appropriate officials? YES { }
NO { }
3. For how long does it take the collected tax revenue to be deposited into Bank
Account of the Sumbawanga District Council
Cashier of the Council ……………………………………………………
WEOs …………………………………………………………………….
VEOs …………………………………………………………………….
Others
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………….
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PART: E. TAX COLLECTION PROCEDURES
1. Council head office
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
2. Ward Executive officers’ office
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………….
3. Village Executive officers’ office
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
4. Tax collection agents
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………….
5. Others
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
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APPENDIX 2: INTERVIEW GUIDE
I want to thank you for taking the time to meet with me today.
My name is ………………………………………………….. , and I would like to
talk to you about tax compliance in the Sumbawanga District Council particularly on
crop cess and livestock market fees. Our overall objective is to assess factors that
affect tax compliance in order to capture means that can be used in future
interventions.
The interview will take less than twenty minutes and I will be taking some notes
during the session.
All responses will be kept confidential. This means that your interview responses
will only be shared with the researchers and we will ensure that any information we
include in our report does not identify you as the respondent.
Are there any questions about what I have just explained?
Are you willing to participate in this interview?
…………………………. …………………… ..............................
Interviewee Witness Date
………………………………………………………………………………………….
Legal guardian (If interviewee is under 18)