i

TAX COMPLIANCE AND SURVIVAL OF SMALL AND MEDIUM

ENTERPRISES IN RWANDA

A CASE STUDY OF MEDIUM TAXPAYERS IN KIGALI CITY.

GATSINZI NTEGE GEOFFREY

MBA/3764/12

A Research Project Submitted in Partial Fulfillment for the Award of a

Degree in Master of Business Administration (Finance and Accounting

Option) of Mount Kenya University

NOVEMBER 2014

ii

DECLARATION

This research study is my original work and has not been submitted to any other

Institution. No part of this research should be reproduced without the author‟s consent or

that of Mount Kenya University.

Student Names: GATSINZI NTEGE Geoffrey

Registration Number: MBA/3764/12

Signature: ………………………………… Date: …………………………

Declaration by the Supervisor (s).

This research has been submitted with our approval as the Mount Kenya University

supervisor (s).

Names: Isaac Maragia, Ph. D

Signature: ………………………………. Date: ……………………………

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DEDICATION

This work is dedicated to my beloved wife Meble CYAKWERA, children (Gatsinzi Allen

Patience, Mugisha Brian, Manzi Bright and Mico Allan), and sister KAYESU Monicah.

We missed each other a lot during the course of my MBA.

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ACKNOWLEDGEMENTS

I really thank our almighty God for his wisdom, love, care, mercy, joy, protection, and

strength that guided me throughout the study hard times.

I am greatly indebted to my supervisor Dr. Maragia Isaac lecturer at Mount Kenya

University for his support and guidance throughout the research study and for his

courageous words that instilled in me a spirit of hard work towards the achievement of

this great height.

I would also like to acknowledge Dr. Mercyline KAMANDE‟s input towards my

understanding of research project. Your energy in class is duly acknowledged and the

result is this research proposal.

My sincere appreciation goes to my beloved wife and children, the hard time they went

through in my absence is this great step to our family. My sister MIREMBE Annet, the

completion of my MBA would not have been possible without your presence at home, the

parental care you gave to my children while I was away is duly acknowledged. The word

of wisdom and special consideration is accorded to all my classmates and friends at

MKU.

I also appreciate the effort of each and every one not mentioned here but did all it takes to

have this study done.

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ABSTRACT

This study was sought to establish how Tax Compliance influences the survival of Small

and Medium Enterprises in Rwanda-A case study of medium taxpayers in Kigali City.

However, establishing the level of tax compliance by SMEs from 2011 to 2013, analysing

the effects of non-tax compliance on SMEs in Rwanda, examining the extent to which tax

compliance depends on bookkeeping records was the specific objectives of the study. The

study aimed at helping the SMEs to take into account that keeping proper books of

accounts and financial records are the major factors of tax compliance. The study also

revealed the significance of sensitising taxpayers and SMEs in particular by the tax

administration on how to keep financial records and books of accounts would lead to self

tax assessment hence reducing costs incurred by tax administration on tax collections.

The researcher and academic community will use this study as a stepping stone for further

research as it is giving a basis for further academic investigation in this area, especially

regarding the factors affecting the tax compliance. Theoretically, having contributed to

literature and methodology of such future studies, it also prompts more researchers in this

area. This study was carried out on the basis of a case study where the researcher used a

descriptive research design. The total population of this study was composed of the

Medium Enterprise taxpayers (1,905) in Kigali City and 133 SMTO staff. However, the

researcher used lottery method of simple random sampling to select 43respondents.

Primary data was collected from the respondents and RRA through the use of

questionnaires and interviews respectively. Data was processed and analysed in line with

the research objectives in order to get quality information in line with the research

objectives. Tabulation was also used in summerising and analysing the answers given to

each question. It was evident that the level of SMEs‟ tax compliance is low. SMEs are

extremely diverse and their tax compliance costs are influenced by a range of factors. As

a result, the experience of both tax and non-tax compliance costs can vary significantly

from business to business. For some few businesses, tax compliance costs will dominate,

but for many others, non-tax compliance costs will be more significant. Some business

operators choose not to grow beyond a certain size so that they can avoid additional risk,

complexity and administrative burdens as a result of tax compliance costs. Some SMEs

may become confused about what tax compliance costs are. They do not always

distinguish between tax compliance costs and either the amount of tax they have to pay or

the general accounting and record keeping costs that are an essential part of running an

effective business. RRA, the tax profession association and PSF should improve on their

strategies of taxpayers‟ education through targeting the large number of taxpayers in the

community work mainly known as Umuganda. While charging penalties and fines to non

tax compliant has done little to avert the problem, tax auditors from RRA should put

much time to discuss with taxpayers on how to declare and pay taxes on time and the type

of penalties and fines they will have to pay if they failure to comply with tax laws. RRA

should work hand in hand with tax advisors as they are the ones meeting taxpayers on

daily basis.

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TABLE OF CONTENTS

DECLARATION................................................................................................................. i

DEDICATION...................................................................................................................iii

ACKNOWLEDGEMENTS ............................................................................................. iv

ABSTRACT ........................................................................................................................ v

TABLE OF CONTENTS ................................................................................................. vi

LIST OF TABLES ............................................................................................................. x

LIST OF FIGURES .......................................................................................................... xi

OPERATIONAL DEFINITION OF KEY TERMS ..................................................... xii

LIST OF ABBREAVIATIONS AND ACRONYMS ...................................................xiii

CHAPTER ONE: INTRODUCTION TO THE STUDY ............................................... 1

1.0. Introduction ................................................................................................................... 1

1.1.Background of the study ................................................................................................ 1

1.2.Statement of the problem ............................................................................................... 3

1.3.Objectives of the study................................................................................................... 4

1.3.1.General Objective ....................................................................................................... 4

1.3.2.Specific Objectives ..................................................................................................... 4

1.4.Research questions ......................................................................................................... 4

1.5.Significance of the study ................................................................................................ 5

1.6.Scope of the study .......................................................................................................... 5

1.7.Limitations of the study ................................................................................................. 6

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1.8 Organisation of the Study .............................................................................................. 6

CHAPTER TWO: REVIEW OF RELATED LITERATURE ...................................... 8

2.0.Introduction .................................................................................................................... 8

2.1. The overview of tax compliance ................................................................................... 8

2.1.1. The overview of taxation ......................................................................................... 10

2.1.2. Taxation background in Rwanda ............................................................................. 11

2.1.3. Tax Liability............................................................................................................. 12

2.1.4. Tax Policy and the Growth of SMEs ....................................................................... 12

2.1.5. Tax basis .................................................................................................................. 14

2.1.6. Temporary differences ............................................................................................. 14

2.1.7. Withholding tax on dividends .................................................................................. 15

2.1.8.Value Added Tax (VAT) .......................................................................................... 15

2.1.9.The Taxable Supplies and Time for Tax Imposition ................................................ 15

2.2.SMEs in Rwanda.......................................................................................................... 16

2.3.The overview of Bookkeeping ..................................................................................... 18

2.3.1.Accounting as an information system ....................................................................... 19

2.3.2. The users of bookkeeping/accounting information.................................................. 19

2.3.3.The importance of Bookkeeping ............................................................................... 21

2.4. The empirical literature review ................................................................................... 22

2.4.1.Research Gap ............................................................................................................ 23

2.5.The conceptual framework .......................................................................................... 23

2.6 Summary ...................................................................................................................... 25

CHAPTER THREE: RESEARCH METHODOLOGY .............................................. 26

viii

3.0.Introduction .................................................................................................................. 26

3.1.Study design ................................................................................................................. 26

3.2.Target population ......................................................................................................... 26

3.3.Sample design .............................................................................................................. 26

3.3.1.Sampling Techniques. ............................................................................................... 27

3.4.Data Collection Methods ............................................................................................. 28

3.4.1 Data collection instruments used .............................................................................. 28

3.4.2. Data Collection Instruments .................................................................................... 28

3.4.3 Validity and reliability of research instruments ........................................................ 29

3.5. Data analysis methods................................................................................................. 30

3.6 Ethical Consideration ................................................................................................... 30

CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION ........................... 31

4.0 Introduction .................................................................................................................. 31

4.1 Demographic Characteristics of Respondents ............................................................. 31

4.2 Presentation of Findings .............................................................................................. 33

4.2.1 Establishing the level of tax compliance by SMEs from 2011 to 2013 .................... 34

4.2.2 Analysing the effects of non-tax compliance on survival of SMEs in Rwanda ....... 36

4.2.3 Examining the extent to which tax compliance depends on bookkeeping records ... 38

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS . 41

5.0 Introduction .................................................................................................................. 41

5.1 Summary of Findings ................................................................................................... 41

5.1.1 Establishing the level of tax compliance by SMEs from 2011 to 2013 .................... 41

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5.1.2 Analysing the effects of non-tax compliance on survival of SMEs in Rwanda ....... 42

5.1.3 Examining the extent to which tax compliance depends on bookkeeping records ... 43

5.2 Conclusions .................................................................................................................. 44

5.3 Recommendations ........................................................................................................ 45

5.4 Suggestions for further study ....................................................................................... 46

REFERENCES ................................................................................................................. 47

APPENDICES .................................................................................................................. 52

Appendix 1: Authorisation Letter from School of Business and Public Management

Appendix 2: Request for Information from RRA

Appendix 3: Acceptance Letter from RRA

Appendix 4: Blank Questionnaires and Interview Guide

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LIST OF TABLES

Table 4.1: Demographic characteristics according to company ownership ...................... 32

Table 4.2: Demographic characteristics of staff according to the time spent working with

RRA ................................................................................................................................... 32

Table 4.3: Demographic Characteristics of staff according to Levels of Education ......... 33

Table 4.4: Execution of Daily Financial Operations of the Company ............................... 34

Table 4.5: The rating of Tax Compliance Level for Medium Taxpayers in Rwanda from

2011 to 2013. ..................................................................................................................... 34

Table 4.6: The need to increasing taxpayers‟ Education as way to Increase Tax

Compliance. ....................................................................................................................... 35

Table 4.7: Documentation of Source Documents and Financial Statements. .................... 36

Table 4.8: Audited Medium Enterprise Taxpayers from 2011 to 2013 ............................. 36

Table 4.9: Penalties and Fines Paid as a Result of Tax Audit Results............................... 37

Table 4.10: Major Factors of Non Tax Compliance in Medium Enterprises .................... 38

Table 4.11: Commencement of Tax Advisors and Annual Independent Auditors ............ 39

Table 4.12: Major Factors that Cause late Declaration and Payment of Taxes ................. 40

Table 5.13: Level of Tax Compliance ............................................................................... 42

Table 5.14: Costs incurred to comply or not comply with taxes ....................................... 43

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LIST OF FIGURES

Figure 2.1: Users and uses of accounting information. .....................................................20

Figure 2.2: Relationship between independent and dependent variables ..........................24

xii

OPERATIONAL DEFINITION OF KEY TERMS

Tax

A tax is fees without a direct exchange requested to the members of the community by the

state according to the law, to support financially the execution of the government tasks

and taking into account the contributive capacities of the taxpayer.

Tax Compliance

Tax compliance refers to fulfilling all tax obligations as specified by the law freely and

completely by the taxpayer.

Small and Medium Enterprises

While a broad generic definition can be taken for SMEs, note that some countries have a

very specific definition for what types of enterprises can be called an "SME". For

example, the Rwandan government defines an SME as "An enterprise which employs less

than 100 people, has an annual turnover of less than Rwf400m and/or balance sheet assets

of less than Rwf430m, and has no more than 25% of its capital or voting rights owned by

a larger firm or public body".

SMEs are defined by three keywords - small, single and local:

Small - SMEs are small in nature - either in terms of number of (a) employees - 10

persons for 'small' to 200 persons for 'medium', depending on the country's laws, (b)

capital and assets - limited working capital and assets and (c) turnover - the overall

turnover of the enterprise is small, compared to larger businesses.

Single - Most SMEs have a single owner who could also be the sole employee. The

'single' also refers to single products produced or service provided.

Local - SMEs are essentially local in nature - their market is usually localized to the area

where they are located (same city, district or state); or may be 'local' in the sense that

they operate from a place of residence - also called SOHO [Small Office Home Office]

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LIST OF ABBREAVIATIONS AND ACRONYMS

GoR: Government of Rwanda

IFRS: International Financial Reporting Standards

MINCOFIN: Ministry of Finance and Economic Planning

MINICOM: Ministry of Commerce, Tourism and Trade

MKU: Mount Kenya University

OECD: Organisation for Economic Co-operation and Development

PAYE: Pay As You Earn

PSF: Private Sector Federation

RCA: Rwanda Cooperative Agency

RDB: Rwanda Development Board

RRA: Rwanda Revenue Authority

SME: Small and Medium Enterprise

SMTO: Small and Medium Taxpayers‟ Office

VAT: Value Added Tax

1

CHAPTER ONE: INTRODUCTION TO THE STUDY

1.0. Introduction

This chapter sets out the information about the background of the study, statement of the

problem, objectives of the study, research questions, significance of the study, scope of

the study and the limitations anticipated to be encountered by the researcher.

1.1.Background of the study

Small and Medium Enterprises collectively form the larger sector of the economy and

constitute an important component of the Service and Manufacturing sectors of Rwanda.

There are many forms of businesses, for instance the private companies, public

corporations, not for profit organisations, etc. In Rwanda, the number of SMEs ranges

from grocery trading, mineral water production, dress making, hairdressing, provision

shops, small loan financial Institutions and many others which dominates the Rwandan

economy (MINICOM, 2010).

Growth of the SME sector also has the potential to lower Rwanda‟s trade deficit, owing to

the low export potential mainly driven by traditional crops (coffee and tea) and minerals.

Rwanda‟s vision is to address this trade imbalance by increasing export earnings through

value addition.

Several initiatives to support SME development have been undertaken by various actors

including the government, development partners, and development finance institutions.

The Government of Rwanda (GoR) designed the Small and Medium Enterprise (SME)

Policy framework aimed at guiding the implementation of a coherent and coordinated

policy to create an enabling environment for the growth of the SME sector.

It is envisaged that the growth of the SME sector will increase non-farm employment,

develop business and technical skills in the Rwandan workforce, support targeted value-

added clusters, grow the tax base, and spur industrial growth (RDB, 2009).

2

As there are a range of factors that affect the compliance costs of small businesses, there

are no simple, ready-made solutions that will easily alleviate their tax compliance

concerns. Reductions in compliance costs are likely to be gained gradually over time

through concerted effort by all stakeholders in the small business tax system

SMEs are required to keep proper records of financial data concerning all receipts and

payments, all sales and purchases of goods and services and all assets and liabilities from

which financial statements are prepared (Glautier, Underdown and Clark, 1985).

The financial transactions recorded must be objective, sufficient, relevant and reliable to

make informed decisions and judgments by interest groups (Sutton, 2004).

A number of Small and Medium Enterprises have not given much attention to book

keeping in relation to their business transactions, despite its importance in the success of

businesses and Tax compliance. This could be lack of sound knowledge in bookkeeping

practices by owners or respective managers. More information pertaining to the issues of

bookkeeping by small enterprises will be dealt with in the literature review.

Tax revenue is the source of funds used for development projects such as provision of

infrastructure like good roads, stable power supply, stable water supply etc. All of which

combine to create an enabling environment for businesses and in turn the economy at

large to grow. Small and Medium Enterprises taxpayers being profit generating

establishments are also expected to pay their dues. The important question however is

“how much tax should they be levied”. Small and medium enterprises are volatile

establishments that need special treatment. Putting their nature into consideration, every

little resource at their disposal can make a world of difference. For this reason, a number

of Rwandan SMEs choose to remain in the informal sector because they feel the cost of

tax compliance is too high. And a considerable number of those who pay taxes only do so

because they are coerced by the authorities.

Rwanda inherited a rudimentary tax legislative and institutional structure at

independence. The first tax legislation included the Ordinance of August 1912, which

established graduated tax and tax on real property. In November 1925, there was another

Ordinance adopting one issued in Belgian Congo in June 1925, to establish a profit tax.

After independence, taxes were formally introduced in Rwanda by a law of June 1964

3

concerning profit tax. Customs and excise duties were introduced later by law in July

1968. Apparently, there were minimal improvements until the time of the RPF regime, in

1994 (ADB, 2010).

Kigali City is made up of three districts (Nyarugenge, Kicukiro and Gasabo) with 35

sectors and it has a population of approximately 1million people. Kigali City is 70%

urban with significant part being rural. The population is relatively young with the youth

making up about 60%, with women making slightly above 50% (RDB, 2009).

Kigali City has 1,905 medium taxpayers and 60,264 small taxpayers. However, some of

those SMEs do not keep proper books of accounts. Due to the fact that keeping proper

books of accounts remained a big issue in most of SMEs, non tax compliance (tax evasion

and tax avoidance) have become a major concern by Rwanda Revenue Authority and

Rwanda Private Sector Federation (RRA, 2013).

1.2.Statement of the problem

A critical look at the Small and Medium Enterprises (SMEs) evolution in Rwanda as

provided by PSF reveals that, proper book keeping and inventory taking, management

control expenses, access to credit, improved financial reporting, increasing market share,

Tax declaration and Payment, etc are imperative to gain advantage and also to ensure

continuous survival in the long-run. The long term adverse effect of poor book keeping

and for that matter non-maintenance of proper financial transactions and records has led

to non tax compliance of many businesses in Rwanda hence the major factor to collapse.

This arises from the fact that, business owners are not able to prepare financial statements

for each financial period that give a true and fair view of the state of affairs of the

company as at the end of the financial period and of its profit or loss. Business owners

doesn‟t also ensure that their companies keep proper accounting records that disclose,

with reasonable accuracy, the financial position of the company that can be presented to

Rwanda Revenue Authority for tax purposes hence misrepresentation of accurate taxes

paid and this leads to nontax compliance.

4

Tax compliance has been a topic of great interest to Revenue authorities especially in the

developed countries. Hostility towards tax compliance is an age old problem. Taxes are

considered a problem by everyone. Not surprising, taxation problems date back to the

earliest recorded history. Developing countries, perhaps due to their frequent budget

deficits have not been able to conduct comprehensive research on the behavior of

taxpayer in relation to tax compliance. Hostility between the taxpayers and tax collectors

on issue relating to tax compliance is evidenced by frequent tax evasion reports in our

local newspapers (The New times, 2013 may, 9) and outward resistance from taxpayers

for example the recent protest by taxpayers over the implementation of Electronic Billing

Machine (EBM).

There is no doubt that costs (payment of fines and penalties, failure to get some tax

incentives and hesitation by the financial institutions to give them credit facilities)

incurred as a result of non tax compliance will negatively affect the survival and growth

of SMEs. The investigated problem in this study therefore, was Tax Compliance and the

survival of SMEs in Rwanda with special reference to Medium Taxpayers‟ in Kigali City.

1.3.Objectives of the study

1.3.1.General Objective

The general objective of this study sought to establish how Tax Compliance influences

the survival of Small and Medium Enterprises in Rwanda.

1.3.2.Specific Objectives

The specific objectives of the study are;

i. To establish the level of tax compliance by SMEs from 2011 to 2013

ii. To analyse the effects of non-tax compliance on survival of SMEs in Rwanda.

iii. To examine the extent to which tax compliance depends on bookkeeping records.

1.4.Research questions

To achieve objectives, specific questions helped the researcher to understand the

significance of tax compliance on the SMEs‟ survival and growth. This research,

therefore, attempted to answer the following specific questions;

5

i. What is the significance of tax compliance on SMEs‟ survival and growth?

ii. What is the level of SMEs‟ tax compliance and what are the effects of non tax

compliance on growth of SMEs?

iii. To what extent is tax compliance linked to bookkeeping?

1.5.Significance of the study

Various parties will benefit from the findings of this research;

The study aimed at helping the SMEs to take into account that keeping proper books of

accounts and financial records are the major factors of tax compliance. This study aimed

to bring out how the effects of improper or inadequate book keeping could affect the

progress and survival of their businesses as a result of paying fines and penalties and

interest due to late declarations and payments or understatement of taxes.

The study also reveals the significance of sensitising taxpayers and SMEs in particular by

the tax administration on how to keep financial records and books of accounts as this

would lead to self tax assessment hence reducing costs incurred by tax administration on

tax collections.

Researchers and other academic community will use this study as a stepping stone for

further research as it is giving a basis for further academic investigation in this area,

especially regarding the factors affecting the tax compliance. Theoretically, having

contributed to literature and methodology of such future studies, the study also prompts

more researchers in this area.

1.6.Scope of the study

The scope of this study focused on the effects of tax compliance on Small and Medium

Enterprises with special reference on small and medium taxpayers as categorized by

RRA. Financial records and the books of accounts was the main focus as these are the

major sources of information in regard to the tax structure. The study used secondary data

which was sourced electronically and from text books and the primary data from

respondents. The study covered the period from 2011 to 2013.

6

1.7.Limitations of the study

This study did not cover everything written on bookkeeping and taxes in respect to Small

and Medium Enterprises in the literature review. Again, the researcher experienced

difficulties from respondents who did not want to reveal their bookkeeping status and tax

returns despite of the efforts by the researcher to explain the objectives of this research.

The researcher also encountered a language barrier. Due to the fact that, the language

used in this research was English, whereas, most of respondents were speaking

Kinyarwanda and French, the researcher spent much of his time in interpretation to avoid

losing some information.

There was also a problem of some respondents expecting some monetary return for the

information provided as it is done in some business researches. Therefore, the researcher

spent time to explain that this was purely an academic research which intended to add to

knowledge and improving taxpayers‟ tax compliance.

1.8 Organisation of the Study

This research is organized in five chapters;

The first chapter is the general introduction and it presents the background of the study,

the problem statement, objectives of the study, research questions, significance of the

study, scope of the study and the organisation of the study.

Chapter two is the review of related literature. It is concerned with the definition of key

concepts and terms used in the study consulting all the literature reviews in relation to the

topic and other documents related to the research topic.

Chapter three deals with research methodology and it focuses on the research design,

target population, sample design, sample size, sampling techniques, data collection

methods, data analysis procedures and lastly, the ethical consideration.

In this study, chapter four is research findings and discussion. It discusses the

demographic characteristics of respondents and the presentation of findings by taking into

account the objectives of the study.

7

The last chapter is summary, conclusion and recommendations. This chapter presents the

summary of findings in relation to research objectives, the recommendations and lastly,

the suggestions for further studies.

8

CHAPTER TWO: REVIEW OF RELATED

LITERATURE

2.0.Introduction

This chapter is mainly concerned with the review of theoretical and academic literature

regarding the key concepts in this study. Several key concepts in Bookkeeping, Small and

Medium taxpayers in Kigali City, Types and principles of taxes and Tax compliance will

also be dealt in this chapter.

2.1. The overview of tax compliance

Tax compliance has been a topic of great interest to Revenue authorities especially in the

developing countries. Hostility towards tax compliance is an age old problem. Taxes are

considered a problem by everyone. Not surprising, taxation problems date back to the

earliest recorded history (IMF, 1998).

Developing countries, perhaps due to their frequent budget deficits have not been able to

conduct comprehensive research on the role of bookkeeping in relation to tax compliance

by Small and Medium Enterprises. Hostility between the taxpayers and Rwanda Revenue

Authority (RRA) on issues relating to tax compliance are evidenced by frequent tax

evasion reports in our local newspaper (The New Times, 9th

May 2011) and outward

resistance from taxpayers for example the recent protest by taxpayers in Nyarugenge

district Kigali City over the implementation of Electronic Billing System.

Hostility towards tax compliance by SMEs could be explained in terms of the deterrence

theory which implies that taxpayers make calculations of the economic consequences of

different compliant alternative, such as whether or not to evade tax; the probability of

detection and consequences thereof, and choose the alternative which maximizes their

expected after tax-return/profit possibly after adjustment for the desired level of risk

(Trivedi, Shehata & Lynn, 2005).

Hostile taxpayer‟s behavior implies that given a chance taxpayers would not comply with

tax laws. Hostility towards tax compliance could also be explained by the expected utility

theory which is an economic analysis that frames the decision to pay as a rational attempt

to maximize „profits‟. The basic assumption is that people are free riders: no one will

9

voluntarily contribute tax unless the threat of punishment makes it sensible. Thus,

traditionally, tax evasion has been understood in terms of the benefits of successful

evasion weighed against the risk of detection and punishment (Bolnick, 2004).

According to Marti (2010) tax compliance is a complex term to define. Simply put, tax

compliance refers to fulfilling all tax obligations as specified by the law freely and

completely.

It has been found that regulatory burdens fall disproportionately on small and medium

enterprises internationally (Pope & Abdul-Jabbar, 2008). He also believes that high

compliance costs can result in tax avoidance, tax fraud, and inhibit investment by way of

diminishing competitiveness of the country in terms of taxation attractiveness.

Non tax compliance may be in one of many forms; it could either be failure to submit a

tax return within the stipulated period or non submission, understatement of income,

overstatement of deductions, failure to pay assessed taxes by due date and in some cases

non tax compliance may mean an outright failure to pay levied taxes (Kasipillai & Jabbar,

2006).

One of the most common complaints by business and their organisations is the amount

and complexity of the various regulatory and administrative obligations that have to be

observed by enterprises. SMEs suffer disproportionately from the regulatory burden

compared to larger companies, since the smaller enterprises often do not have sufficient

financial and human resources to manage their obligations in the most efficient way. Tax

obligations (which comprise not only the actual payment of taxes, but also activities such

as registration, documentation, reporting and recording) constitute some of the most

important obligations enterprises have to comply with. For the various tax compliance

procedures, enterprises require either internal resources and/or need to call in external

resources, e.g. tax consultants and accountants. Thus, tax compliance represents an

important cost factor that must not be underestimated. The regulatory and administrative

burden in general and tax compliance in particular represent a significant cost element in

relation to the turnover of enterprises and also the taxes they pay, especially for SMEs

(OECD, 2004).

10

2.1.1. The overview of taxation

A tax is fees without a direct exchange requested to the members of the community by the

state according to the law, to support financially the execution of the government tasks

and taking into account the contributive capacities of the taxpayer (RRA, 2013).

The fundamental purpose of taxation is to raise revenue effectively, through measures

that suit each country‟s circumstances and administrative capacity. In fulfilling the

revenue function, a well designed tax system should be efficient in minimizing the

distortionary impact on resource allocation, and equitable in its impact on different

groups in society (Bolnick, 2004).

It is important that the country‟s situation is properly analyzed before employing any tax

policy in order to have a proper working tax system because according to Slemrod. (n. d)

Many of the difficulties with the tax authorities are the consequence of poorly conceived

tax policies and a lack of certainty regarding future policy changes.

Fiscal policy is one of the main components of macroeconomic policy and its tasks have

been considered in a double context: first, the core of fiscal policy, and second, the

consistency with the monetary policy. In general terms, the choice of tax policy to employ

depends on the use of one or both two groups of instruments; the first one being the use of

special tax preferences and the other incentives to support start-up and growth of small

companies. The incentives include the lowering of corporate income tax rates, special tax

exemptions and relieves for small businesses (IMF, 1998).

The objective of a tax policy should be to achieve collection cost savings while

minimizing the revenue loss, disruption to the economy, and the inequity and

capriciousness of the tax burden. For an economy such as Rwanda that is still in the

throes of a recession, the tax regime must be versatile enough to encourage savings,

stimulate investment and reward social responsibility and research funding. To widen the

tax net, policy makers must never forget the urgency to provide infrastructure; create jobs

and reduce unemployment; expand the productive sectors of the economy; stimulate

exports, and substantially raise public revenues. Hence, tax policies should aim at

bringing all taxable adults into the tax net with a graduated rate that should ensure that the

11

well-off pay their own share while the low income earners are given savings-enhancing

incentives (Holban, 2007).

An effective and efficient tax administration system is integral to any country‟s well

being, it is as a result of this that Baurer (2005) believes that the tax administration must

provide an even playing field for business by ensuring that all taxpayers meet their tax

filing and paying requirements. The tax administration must balance its educational and

assistance role with its enforcement role.

The rationale behind the whole system of tax is consistent with two of the three major

theories of tax namely; the Ability-to-Pay Principle and the Equal Distribution Principle.

These two principles stress equality and fairness. While the Ability-to-Pay talks pushes

that individuals should be levied taxes based on their ability to pay, the Equal distribution

Principle suggests that income, wealth, and transaction should be taxed at a fixed

percentage; that is, people who earn more and buy more should pay more taxes, but will

not pay a higher rate of taxes(Gabay, Remotin, & Uy, 2007)

2.1.2. Taxation background in Rwanda

Taxation in Rwanda dates way back in 1912, when property tax was introduced. After

independence, taxes were formally introduced in Rwanda by the law of the 2nd

June 1964

concerning profit tax. Customs and Exercise duties were also introduced by the law of

17th

July 1968. Tax administration was done by the Central Government through the

Ministry of Finance under two departments of Tax and Customs (ADB, 2010).

The following laws were being enacted and amended as time went on;

Law No.8 of 26th

June, 1997 on profit tax, Law No.9 of 26th

June, 1997 on tax

procedures, In 2001 VAT laws introduced requiring taxpayers to start paying VAT, and

The East African Community Customs Management Act.

There are taxes collected by RRA in favor the State treasury and those collected by the

Local Administration in the framework of giving them some sources of revenue to

facilitate administrative decentralization (RRA, 2013).

12

2.1.3. Tax Liability

An entity shall recognise a current tax liability for tax payable on taxable profit for the

current and past periods. If the amount paid for the current and past periods exceeds the

amount payable for those periods, the entity shall recognise the excess as a current tax

asset. An entity shall recognise a current tax asset for the benefit of a tax loss that can be

carried back to recover tax paid in a previous period. An entity shall measure a current tax

liability/asset at the amount it expects to pay/recover using the tax rates and laws that

have been enacted or substantively enacted by the reporting date. An entity shall regard

tax rates as substantively enacted when future events required by enactment process

historically have not affected the outcome and are unlikely to do so (IASB, 2009).

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 manner that will sustain confidence in the

tax system and its administration. The actions of taxpayers whether due to ignorance,

carelessness, recklessness, or deliberate evasion as well as weaknesses in a tax

administration mean that instances of failure to comply with the 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 (OECD, 2004).

2.1.4. Tax Policy and the Growth of SMEs

According to Tomlin (2008), economists argue that the resources smaller companies

direct towards tax compliance are resources that could otherwise be used for reinvestment

and facilitating future growth. Hence, there is a belief that taxes and a complex tax system

put disproportionate pressure on smaller businesses. Small taxpayers under the regular

system of taxation are

Discriminated against, since the compliance requirements, cost of compliance and tax rate

are the same for both small and large enterprises.

Reducing compliance costs and tax rate will increase the small enterprises profit margin.

It also increases the Government‟s tax revenue, since the simplified provisions for a

micro enterprise historically reduce the size of the shadow economy and the number of

non-complying registered taxpayers (Vasak, 2008).

13

Furthermore, SMEs usually have to operate in an overbearing regulatory environment

with the plethora of regulatory agencies, multiple taxes, cumbersome importation

procedure and high port charges that constantly exert serious burden on their operations.

Many SMEs have to deal with myriad of agencies at great cost. As stated earlier they are

heterogeneous and these differences in size and structure may in turn carry differing

obligations for record-keeping that affect the costs to the enterprises of complying with

(and to the revenue authorities of administering) alternative possible tax obligations.

Public corporations, for example, commonly have stronger accounting requirements than

do sole proprietorships, and enterprises with employees may be subject to the full panoply

of requirements associated with withholding labour income taxes and social contributions

(International Tax Dialogue 2007).

An overly complex regulatory system and tax regime or one opaque in its administration

and enforcement makes tax compliance unduly burdensome and often have a

distortionary effect on the development of SMEs as they are tempted to morph into forms

that offer a lower tax burden or no tax burden at all (Masato, 2009) and this results in a

tax system that imposes high expenses on the society. A poorly executed tax system also

leads to low efficiency, high collection charges, waste of time for taxpayers and the staff,

and the low amounts of received taxes and the deviation of optimum allocation of

resources (Farzbod, 2000). Existing empirical evidence clearly indicates that small and

medium sized businesses are affected disproportionately by these costs: when scaled by

sales or assets, the compliance costs of SMEs are higher than for large businesses

(Weichenrieder, 2007). Among the factors militating against SME tax compliance with

are: high tax rates, Low efficiency, high collection charges, waste of time for taxpayers

and the staff, and the low amounts of received taxes and the deviation of optimum

allocation of resources (Farzbod, 2000).

Others according to Yaobin, (2007) are double taxation, no professional tax consultancy,

weak tax planning, high taxation cost.

14

2.1.5. Tax basis

An entity shall determine the tax basis of an asset, liability or other item in accordance

with enacted or substantively enacted law. If the entity files a consolidated tax return or if

it files separate tax returns for different operations, the tax basis is determined by the tax

laws governing each tax return. The tax basis determines the amounts that will be

included in taxable profit on recovery or settlement of the carrying amount of an asset or

liability (Farzbod, 2000).

The tax basis of an asset equals the amount that would have been deductible in arriving at

taxable profit if the carrying of the asset had been recovered through sale at the end of the

reporting period. If the recovery of the asset through solders not increased taxable profit,

the tax basis shall be deemed to be equal to the carrying amount (IASB, 2009).

The tax basis of liability equals its carrying amount less any amounts deductible in

determining taxable profit(or plus any amount included in taxable profit) that would have

arisen if the liability had been settlement for its carrying amount at the end of the

reporting period. In the case or deferred revenue, the tax base of the resulting liability is

its carrying amount, less any amount of revenue that will not be taxable in future periods.

Some items have a tax basis but are not recognised as assets and liabilities. For example,

research costs are recognised as an expense when they incurred but may not be permitted

as a deduction in determining taxable profit until future period. Thus, the carrying amount

of the research costs is nil and the tax basis is the amount that will be deducted in future

periods. An equity instrument issued by the entity may also give rise to deductions in a

future period. There is no asset or liability in the statement of financial position, but the

tax basis is the amount of the future deductions (OECD, 2004).

2.1.6. Temporary differences

An entity shall not recognize a deferred tax asset or liability for temporary differences

associated with unremitted earnings from foreign subsidiaries, branches, associates and

joint ventures to the extent that the investment is essentially permanent in duration, unless

it is apparent that the temporary difference will reverse in foreseeable future (RRA,

2010).

15

Tax law should be simplified continuously, mainly for three reasons, namely to lower

both compliance costs and administrative costs, to reduce uncertainty faced by taxpayers,

and to improve the levels of voluntary tax compliance (Kasipillai, & Jabbar, 2006). Pro-

business (and Pro-SME) Tax regimes and enforcement should be simple, consistent and

predictable.

An entity shall not recognise a deferred tax liability for a temporary difference associated

with the initial recognition of goodwill. An entity shall also recognise changes in a

deferred tax liability or deferred tax asset as tax expense in profit or loss, except that a

change attributable to an item of income or expense recognised under this IFRS as other

comprehensive income shall also be recognised in other comprehensive income (IASB,

2009).

2.1.7. Withholding tax on dividends

When an entity pays dividends to its shareholders, it may be required to pay a portion of

the dividends to taxation authorities on behalf of shareholders. Such an amount paid or

payable to taxation authorities is changed to equity as a part of the dividend (IMF, 1998).

2.1.8.Value Added Tax (VAT)

Despite of its name, the VAT is not generally intended to be a tax on value added as such;

rather it is usually as a tax on consumption. Its essence is that it is charged at all stages of

production, but with the provision of some mechanism enabling firms to offset the tax

they have paid on their own purchases of goods and services against the tax they charged

on their sales of goods and services. Although this characteristic feature is very clear cut,

VATs observed in practice show considerable diversity as regards, among other things,

the range of inputs for which tax offsetting is available and the range of economic activity

to which the tax applies (that is, the base of the tax) (Liam, Keen, Bodin, and Summers,

2001).

2.1.9.The Taxable Supplies and Time for Tax Imposition

Goods or services shall be deemed as taxable supplies when the supply of the same is

made by a taxable person, a partner or agent, for consideration, under the conditions set

forth in VAT law. Where a person ceases to be a taxable person, any goods then forming

16

part of the assets of a business carried on by him shall be deemed to be supplied by him

in the course of or furtherance of his business immediately before he ceases to be a

taxable person, unless the business is transferred as a going concern to another taxable

person (RRA, 2010).

The tax is due and payable at the time when goods or services are regarded as supplied.

The time for imposition shall be whichever is the earliest of the following: If the goods

are not to be removed, at the time when they are made available to the person to whom

they are supplied.

In the case of services, a supply shall be treated as taking place at the time when the

services are performed; Where services are supplied for a continuous period under any

enactment or agreement which provides for periodic payments, the services are treated as

successively supplied for successive parts of the period as determined by the enactment

or agreement and each successive supply shall be deemed to take place (RRA, 2001).

At the time an invoice or a VAT invoice in respect of that supply is issued by the

supplier; At the time payment for the supply is received by the supplier, whichever is the

earlier. If, before the time applicable is as mentioned above, the person making the

supply issues a tax invoice or receives a payment in respect of it, the supply, to the extent

covered by the invoice or payment, shall be treated as taking place at the time the invoice

is issued or payment is received (RRA, 2010).

2.2.SMEs in Rwanda

Rwanda‟s Vision2020 identifies six priority pillars and three cross-cutting areas, the

development of which is crucial for making the necessary long-term transformations in

the Rwandan society.

One of the pillars is the development of an efficient private sector spearheaded by

competitiveness and entrepreneurship. SMEs comprise 98% of all the establishments;

micro-sized establishments - those employing between 1 and 3 people - account for

92.6% of all establishments while enterprises with only one worker account for 72% of

all establishments.

This indicates that growth in the SME sector could be of strategic importance in

17

addressing the challenge of unemployment in general and youth unemployment in

particular. Growth of the SME sector also has the potential to lower Rwanda‟s trade

deficit, owing to the low export potential mainly driven by traditional crops (coffee and

tea) and minerals (MINICOM, 2010).

Rwanda‟s vision is to address this trade imbalance by increasing export earnings through

value addition. Several initiatives to support SME development have been undertaken by

various actors including the government, development partners, and development

finance institutions.

The Government of Rwanda (GoR) designed the Small and Medium Enterprise (SME)

Policy framework aimed at guiding the implementation of a coherent and coordinated

policy to create an enabling environment for the growth of the SME sector. It is

envisaged that the growth of the SME sector will increase non-farm employment,

develop business and technical skills in the Rwandan workforce, support targeted value-

added clusters, grow the tax base, and spur industrial growth. The SME policy therefore,

among others, attempts to bridge the gap between previous policies which are cross-

cutting in nature and targeted to large companies, thereby filling the void of policies

specifically targeted to SMEs with a particular focus on facilitating investment finance

(RDB, 2009).

The policy environment was oriented towards large companies. The Government has

acted by developing an SME development policy under the Ministry of Trade and

Industry and the 2011/12 SME Development Action Plan in addition to initiatives to

improve the ICT infrastructure in the country.

The vision of the policy is to create a critical mass of viable and dynamic SMEs,

significantly contributing to the national economic development and the mission is to

stimulate growth of sustainable SMEs through enhanced business support service

provision, access to finance and the creation of a conducive legal and institutional

framework. The objective is to foster job creation and an increase in the tax and export

base through the promotion of competitive new and existing SMEs.

The Government has prioritized cluster development so as to spur value-addition sectors,

18

increase Rwanda‟s international competitiveness, create more employment and business

opportunities, expand the supply of skilled people and technology, expand the local

supplier base, increase efficiency and productivity and foster innovation. The SME

policy in particular supports the development of SME clusters in a particular field

especially where backward and forward linkages can be exploited for instance via

improving productivity and efficiency, stimulating and enabling innovation, facilitating

commercialization and new business formation (MINICOM, 2010).

Improvements in competiveness including, addressing binding infrastructure constraints

in transport and energy also remain a core objective of the Government. For instance, in

2010, Cabinet approved the Strategic Investments Programme which comprises six key

investment projects aimed at expediting the realization of the Vision 2020 and EDPRS

objectives.

These projects, which prioritize investments in infrastructure including ICT, are expected

to improve overall competitiveness, catalyze private sector and SME development, spur

job creation, and facilitate export diversification thereby contributing to poverty

reduction and inclusive growth.

Specific agencies have also been created to support the development of Rwandan

cooperatives, whose business activities are similar to SMEs. The Rwanda Cooperative

Agency (RCA) works to train and regulate cooperatives in tandem with the Rural

Small/Micro Enterprises Promotion Project Phase II (PPPMER-II), a project in

MINICOM, mandated to provide marketing and other support to cooperatives and SMEs

in rural areas (IGIHE, 05th

February, 2014).

2.3.The overview of Bookkeeping

Accounting has evolved, as have medicine, law, and most other fields of human activity,

in response to the social and economic needs of society. As business and society have

become more complex over the years, accounting has developed new concepts and

techniques to meet the ever increasing needs for the financial information. Without such

information, many complex economic developments and social programs might never

have undertaken.

19

Accounting plays an important role in our economic and social system. Sound decisions

made by individuals, business, governments, and other entities are essential for the

efficient distribution and use of the nation‟s scarce resources. To make such decisions,

these groups must have reliable information provided by the accounting system. The

objective of accounting, therefore, is to record, summarize, report, and interpret economic

data for use by many groups within our economic and social system (Carl, Reeve & Fess,

2001).

2.3.1.Accounting as an information system

Accounting is often called the language of business. This language can be viewed as an

information system that provides essential information about the financial activities of an

entity to various individuals or groups for their use in making informed judgments and

decisions. As such, accounting information is composed principally of financial data

about business transactions, expressed in monetary terms. The recording of transaction

data may take various forms, such as pen, or pencil markings made by hand, printing by

mechanical and electronic devices, or magnetic impressions on tape or disks (Glautier,

Underdown & Clark, 1985).

The mere records of transactions are of title use in making informed judgments and

decisions. The recorded data must be sorted and summerised and then presented in

significant reports. The usefulness of the reports is often improved by various kinds of

percentage and trend analyses (Sutton, 2004).

2.3.2. The users of bookkeeping/accounting information

Financial Information generated by bookkeeping process is used by many diverse parties.

Business owners use it primarily in evaluating the return they are receiving on their

investment, while management‟s interest is in determining the financial strengths and

weaknesses of the business so that performance may be improved.

Potential investors and their advisors may be concerned with whether the business

represents a sound avenue for investment, while creditors use financial information to

determine the business‟s financial capacity to meet its obligations when they become due.

The Internal revenue service is interested in determining tax revenues based on entity‟s

profitability, while customers are concerned with the business‟s continuing ability to

20

supply their needs, and the employees need to evaluate the business‟s financial ability to

meet wage demands (Shim & Siegel, 1999).

The process of using accounting to provide information to users is illustrated in the figure

2.1.

Figure 2.1: Users and uses of accounting information.

Source: (Carl, Reeve & Fess, 2001).

First, user groups are identified and their information needs determined. These needs

determine which economic data are gathered and processed by the accounting system.

Finally, the accounting system generates reports that communicate essential information

to users. For example, government agencies (Rwanda Revenue Authority) need

information on financial performance of the enterprise to assess the profitability in order

to determine tax liability.

User Information needs

Identification of Users

Economic data Accounting system Reports User decisions

1. Investors

2. Bankers

3. Suppliers

4. Government

agencies

5. Employees

6. Management

-Financial statements

-Special reports

-Tax returns

-Regulatory reports

-Management reports

-Investing

-Approving loans

-Assessing taxes

-Negotiating contract

-Establishing budgets

21

2.3.3.The importance of Bookkeeping

In broad terms, bookkeeping which is a tool for financial control enable managers to

know the financial positions of their businesses and to take certain control measures to

improve corporate performance. It provides a wealth of information that is used by

managers, investors, leaders, customers, suppliers, and regulators. An analysis of its

statements can highlight a company‟s strengths and shortcomings, and managers use this

information to help improve performance (Lerner, 2004).

If management is to maximize a company‟s value, it must take advantage of the

company‟s strengths and correct its weaknesses. This is done through the analysis of the

financial statements. Financial statement analysis which can be obtained through

bookkeeping involves comparing the company‟s performance with that of other

companies in the same industry and evaluating trends in the company‟s financial position

over time. These studies help managers identify deficiencies and then take corrective

actions to improve situation. From the manager‟s standpoint, financial statements analysis

is useful both to help anticipate future conditions and, more important, as a starting point

for planning actions that will improve the company‟s future performance (Sutton, 2004).

Bookkeeping convey substantial information about the financial strength and current

performance of an enterprise. Although they are prepared primarily for users outside the

organisation such as the banks and non-banking institutions, managers also find their

organisation‟s financial statements useful in making decisions. As managers develop

operating plans, they think about how those plans will affect the performance of the

organisation, as conveyed by the financial statements.

From the bookkeeping, financial statements such as the Balance sheet, Income statement,

Retained earnings statement and Statement of cash flows are obtained (Saleemi, 2008).

The balance sheet is the statement that shows the assets, liabilities and equity of an

organization at a point in time. Thus, the balance sheet of an organization portrays the

financial position of that company at a point in time.

22

The income statement reports the income for the period between two balance sheet dates.

The retained earnings statement shows how income and dividends for the period have

changed the organization‟s retained earnings. The statement of cash flows shows how

cash was obtained during the period and how it was used. All these statements help in the

decision making process of the company or organization (Williams, et al. 2008).

2.4. The empirical literature review

Although it has been more common to investigate the financial performance of Small and

Medium Enterprises, there are no direct studies that have explored the relationship

between tax compliance and the survival/growth of SMEs.

Fagbemi, Uadile & Noah (2010) found that non tax compliance is prevalent in developing

countries and it hinders development thereby leading to economic stagnation and other

socio-economic problems. They identified tax rates as one of the causes of tax evasion.

He pointed out that a higher tax rate increases taxpayers‟ burden and reduces their

disposable income therefore, the probability of evading tax is higher.

Owusu & Dwomo (2012), studying the “Challenges of bookkeeping on Small and

Medium Enterprises” found out that, some form of book keeping in SMEs are not

accurate, adequate and fall below standard. There are no effective internal control systems

in the SMEs. Most SMEs initially employ incompetent personnel to take charge of their

accounts and finances. Most managers/Owners have no knowledge in book keeping.

However, their study did not explore how non tax compliance contributes to the general

problem for the failures of Small and Medium Enterprises.

Ojochogwu & Ojeka (2012) in their study “Factors That Affect Tax Compliance among

Small and Medium Enterprises (SMEs) in North Central Nigeria” found out that high tax

rates are the primary problem of entrepreneurs. They went on to say that, despite the fact

that they face other tax related issues, it is the problem of high tax rate that mostly

promotes non-compliance and pushes most SMEs to remain in the informal sector.

Hence, SMEs are deprived of the benefits that arise if the government had enough tax

revenue to embark on some development projects provision of amenities such as

electricity and good roads which are tools that create an enabling environment for SMEs

to thrive. Their study only took into account the tax policies and tax rates, however, their

23

attempts lead to mostly inconclusive findings due to the fact that tax base was never

talked about in their whole study.

Jackie, Richard & Loeprick (2007) “Small Business Taxation as Key to Formalization”,

revealed that Small Medium Enterprise tax systems need to be designed in such a way as

to minimize compliance cost and maximize accessibility. Reform of SME tax systems

designed would then need to require compliance commensurate to capacity. It is clear that

such a system is unlikely to be cost-effective from an administration standpoint, but

perhaps, if the aim of the tax system were broadened to reduce informality (i.e.; widen the

culture of compliance by widening the tax net), the net cost to the economy be offset by

the well-known benefits of formalization. This study did not investigate how proper

bookkeeping would contribute to tax compliance as well as promoting the culture of

keeping financial records for further references by any party that would be interested in

the financial performance of the company.

2.4.1.Research Gap

Given the fact that most of the previous authors (above) did not investigate the linkages

between tax compliance and survival of SMEs, it is therefore, imperative to critically

investigate the effect of tax compliance on the survival of SMEs with specific reference to

Medium taxpayers in Kigali City.

2.5.The conceptual framework

A conceptual framework is a scheme of concepts with an illustration that attempts to

show the flow of information between relevant variables of the study (Willis & Onen,

2009). However, based on the fact that this research is about examining the effects of tax

compliance on survival of SMEs in Rwanda, the conceptual framework below will serve

as a guiding concept in this study. The independent variable is tax compliance, whereas

the dependent variable on the other hand is the survival of SMEs.

24

Figure 2.2: Relationship between independent and dependent variables

Independent Variable Dependent Variable

Intervening variable

Source: Researcher, June 2014

From the figure 2.2 above, The survival of SMEs which are the dependent variable in this

research as indicated by true and fair self assessment, employment of competent staff and

Payment of right tax at the right time is more influenced by Tax compliance which is the

independent variable in this research as indicated by keeping proper books of accounts,

keeping all financial records and employment of competent staff. This is, however,

intervened by the Ministry of Finance and Economic planning and the parliament, which

are both responsible of drafting and enacting the tax laws on one hand and the RRA on

the other hand which is vested with tax administration and tax collection and taxpayers‟

education.

Survival of SMEs

-True and fair self assessment

of tax

-Employment of competent

staff

-Payment of right tax at the

right time

TAX COMPLIANCE

-Keeping all documents

-Keeping proper and accurate

books of accounts

-Taxpayer Registration

RRA, Parliament & MINCOFIN

-Simplified tax laws

-Best service delivery

-Taxpayers‟ education

25

Survival and growth of SMEs depends on various factors like tax compliance, internal

and external political stability, easy accessibility to external financing, economic factors,

geographic factors and so on. However, this study aimed at exploring how tax compliance

influences the survival of SMEs.

2.6 Summary

This chapter highlighted key theories in tax compliance, global taxation, taxation

background in Rwanda, SMEs in Rwanda, the over view of bookkeeping and the users of

its information. The empirical literature review together with research gap was also

discussed in this chapter. The chapter ends with the presentation of conceptual framework

which was concerned with discussing the relationship between the study variables.

26

CHAPTER THREE: RESEARCH METHODOLOGY

3.0.Introduction

This chapter deals with the methodology and approaches used to conduct this research. In

this chapter, the researcher presented the research design, study population, sample size,

sampling techniques and it portrays the on data collection instruments, and data analysis

techniques.

3.1.Study design

This study was carried out on the basis of a case study where the researcher used a

descriptive research design, while qualitative and quantitative approach was applied in

conducting the research. Research/study design is the arrangement of conditions for

collection and analysis of data in a manner that aims to combine relevance to the research

purpose (Nsubuga and Katamba, 2013).

3.2.Target population

Saleemi, (2011) defines study population as the total number of items/people in specified

field of inquiry. Population refers to all items that have been chosen for the study or target

group to be studied. The total population of this study was composed of the 1905 Medium

Enterprise taxpayers and 133staff from the department of small and medium taxpayers‟

office in RRA (RRA, 2013).

3.3.Sample design

Sampling is the process of selecting elements from the total population. The sample

should be a representative of the total population whereby most characteristics of the

population are represented in the sample selected (Nsubuga & Katamba, 2013). He

further, stated that sample size is the number of people or objects in the selected sample.

It is also recommended that researcher use the largest sample possible because statistics

calculated from large sample are more accurate. The sample size of this study was

43medium taxpayers and 3staff from the department of small and medium taxpayers in

RRa. The total sample size of this study was 46respondents calculated on the basis of

27

Solvin‟s formula. The level of confidence was set at 85% while the margin of error was

15% as shown below;

n = N / (1 + Ne2)

Where;

n = Number of sample size,

N = Total population

e = Error tolerance

N= 1,905

e = 0.15

n = 1,905/ (1+1,905*(0.15)2

n = 43

The selection of 43 respondents from medium taxpayers was done based on simple

random sampling, whereas 3 respondents from staff was determined purposively due the

information the researcher required.

3.3.1.Sampling Techniques.

Simple random sampling is a sample selected from a population in such a manner that all

members of the population have equal chance of being selected. Often a population

contains various distinct groups or strata that differ on the attribute that is being

researched.

Simple random sampling can be carried out in two ways- the lottery method and using

random numbers (Nsubuga & Katamba, 2013). However, in this research, the researcher

used lottery method which involved;

Transferring each taxpayer‟s name from the list and putting it on a piece of paper. Then, a

piece of paper was placed in a container and thoroughly mixed.

The required number was picked in a way of random from the container without looking

into it. Therefore, the first 43 names selected from the container was the sample size of

medium taxpayers. The 3 staff from SMTO department was purposively selected because

of the information expected from them and they included head of department (Deputy

Commissioner SMTO), head of Tax revenue division and head of Taxpayers‟ account

management division.

28

In this research, 43 questionnaires were distributed to the 43 Small and Medium

taxpayers, while three interview guides were used to collect information from 3staff in

SMTO department of RRA.

3.4.Data Collection Methods

3.4.1 Data collection instruments used

According to Kothari (2008) primary source of the data come straight from people, or

from the field works the researcher is researching on and hence direct and firsthand

information one can collect as regards the study. Therefore, the primary data was directly

collected by the researcher from their original source (respondents). The firsthand

information was collected from the field by the use of various methods such as, interview,

questionnaire and observation. The primary data was obtained from the Small and

Medium enterprise taxpayers in Kigali city through questionnaires and was also collected

from Rwanda Revenue Authority staff through interviews.

According to Kothari (2008) defines secondary data as data which have already been

collected by someone else and which have already been passed through the statistical

process in relation to research study. In this regard, the sources of secondary data were

obtained from electronic data, books from libraries of the college of Business and

Economics of University of Rwanda, MKU, Kigali Public Library and RRA.

3.4.2. Data Collection Instruments

In data collection, the following methods were frequently used in the entire process of

data collection.

Questionnaires are lists of questions to be answered by a group of people. Questionnaires

must be designed in such a way that the answers‟ accurately give the information needed.

In order to conceive a questionnaire, it is obviously necessary to know precisely what one

wants, to make sure that the questions are meaningful for each informant. One of the

objectives of a questionnaire is to verify the question under the form of the relationship

between two or more variables (Kothari, 2008).

Questionnaires were designed according to the information needed and what they needed

to serve in relation to the objectives and research questions. Questionnaires were also

29

designed according to the characteristics of the sample. It should be noted that the

questionnaires were prepared, targeting specific group of Medium enterprise taxpayers in

Kigali city.

The term interview refers to a meeting with somebody whose views are requested, in such

a meeting, the interviewer asks questions to the interviewee about the issues of interest.

To make enquiry is to interview a certain number of individuals for generalizing the

information (Kothari 2008). The use of interviews is advantageous compared to other

methods as Judith bell put it; a major “advantage of interview is its adaptability. A skilful

interviewer can follow up ideas, probe responses and investigate motives and feelings

which questionnaires can never do. The way in which a response is made (the tone of the

voice, facial expressions, hesitation, etc) can provide information that a written response

would conceal.‟‟

In this regard, the researcher interviewed three staff from small and medium taxpayers‟

department (SMTO) in RRA. However, only closed questions were asked with the need

to facilitate respondents give many responses within a short time since little time was

available for this task, this was done to fill the gaps that could be left by the use of

questionnaires.

3.4.3 Validity and reliability of research instruments

A pilot study was conducted in order to make sure that questionnaires are valid and

reliable. To establish the reliability of the questionnaire, the researcher distributed

questionnaires to 6 taxpayers and they were chosen purposively from the SMEs in Kigali

city but not target population (43 respondents). This helped the researcher to clear out

some ambiguous and inconsistencies that were detected. The questionnaire guide for final

data collection was different from the one that was used for pilot test.

The validity of instruments was measured using the content validity Index (CVI) the

researcher computed the validity coefficient. The content validity index is equal to the

total number of valid items divided by the total number of items. Thus, the content

validity index (CVI) =R/R+IR whereby R= relevant questions; IR= irrelevant questions.

The instrument certifies valid when its minimum content validity index is at least at 0.

30

3.5. Data analysis methods

After data collection, data was processed and analyzed in line with the research objectives

in order to get quality information; there was a need for standard so that the research ends

with realistic data which clearly reflects the depicted situation. Data processing was an

intermediary stage and it involved the following techniques:

In this study editing was referred to as the process of examining the collected raw data so

as to detect any errors and omissions and to correct them when possible. Editing was done

at the field work stage after collecting data. Both stages involved correction of spellings,

punctuations, capitalization, and checking to ensure completeness, accuracy and

uniformity.

Coding was applied in the research; the researcher differentiated answers given to

closed-ended questions and grouped them according to their importance of study

(research objectives). Coding was made for close-ended questions on questionnaires

where the answers were noted using descriptive form. Percentages were used and they

were very important for tabulation.

Lastly, tabulation was used and it was meant to summarizing and arranging data in

compact form for further analysis, tabulation refers to the orderly arrangement of data in

table summary format achieved by counting the frequency or responses to each question.

However, tables were used to summarise and interpret data.

3.6 Ethical Consideration

Respondent‟s participation was voluntary and they had the right to withdraw from the

study at any time they are not interested. Confidentiality was promised and ensured by

providing a self-addressed return envelope with each questionnaire and by requesting

respondents not to write their names on the questionnaire. In addition, an authorized letter

which explained the aim and objectives of the study accompanied each questionnaire.

31

CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION

4.0 Introduction

This chapter presents the analysis, presentation and interpretation of data obtained from

respondents in reference to research objectives and questions. The collected data was

compiled, organized and interpreted to enable the researcher reach on the conclusion and

give recommendations on the significance of tax compliance on the survival of SMEs.

The target population was 1,905 medium enterprise taxpayers in Kigali city and 133 staff

from SMTO in RRA. The researcher considered a sample size of 46 respondents as

presented in chapter three. This was in line with setting the level of confidence at 85%

while the margin of error at 15%. Data was collected from the field by use of various

methods stated in chapter three and the findings are analysed, presented and interpreted

using tables by use of frequency and percentages to describe the relationship between

variables.

Out of 43 questionnaires distributed to respondents, 38 were filled appropriately and

returned, constituting 88% return rate. Only two were not filled constituting 12% of

respondents and they were reluctant to participate in filling the questionnaires citing

confidentiality in spite of efforts made to explain the purpose of this research. The study

utilised both quantitative and qualitative analysis to get an in-depth understanding of the

findings of the study.

4.1 Demographic Characteristics of Respondents

In any scientific research it is logic always to start by asking the general questions which

intends to find out the demographic characteristics of the targeted respondents. Therefore,

question one and two of the interview guide addressed to staff and question one of the

questionnaire addressed to small and medium enterprise taxpayers covered demographic

characteristics such as; time spent with the employer and level of education and the

number of shareholders respectively.

32

Table 4.1: Demographic characteristics according to company ownership

Shareholders Frequency Percentage

1-3 36

95

4-6 2

5

7 and above 0

-

Total 38 100

Source: Primary data

Table 4.1 is intended to present and discuss the collected data related to the shareholdings

of the medium enterprise taxpayers (respondents).

Therefore, according to table 4.1, the demographic characteristics of the shareholding of

respondents with 1-3 shareholders is represented by 95%, while 5% is for respondents

with 4-6 shareholders. There is no medium enterprise with more than 7 shareholders.

Table 4.2: Demographic characteristics of staff according to the time spent working with

RRA

Period (years) Frequency Percentage

1-2 0

-

3-4 0

-

5 and above 3

100

Total 3 100

Source: Primary data

Table 4.2 provides information about the time spent by the interviewed staff while

working with RRA.

According to table 4.2, all 3 staff interviewed has spent more than 5 years working with

Rwanda Revenue Authority. Therefore, this shows that this staffs have adequate

information about medium enterprise taxpayers‟ tax compliance.

33

Table 4.3: Demographic Characteristics of staff according to Levels of Education

Level of Education Frequency Percentage

Masters Degree and above 1

33%

Bachelors Degree 2

67%

Diploma 0

-

Total 3 100

Source: Primary data

Table 4.3 provides information about the level of education for the interviewed staff

(respondents).

In reference to table 4.3, the level of education among the staff interviewed is quite good.

2 staff out of 3 interviewed holds bachelors‟ degree, while 1 staff is holding a masters

degree.

4.2 Presentation of Findings

There is general acknowledgement that tax compliance has a greater impact on small

businesses than on larger businesses and that this tax compliance burden has grown over

time. Governments, both in Rwanda and internationally, have introduced a range of

initiatives to try to reduce tax compliance costs.

Tax compliance costs represent the additional costs, in terms of time, effort and financial

expenses, that taxpayers must bear as part of meeting their taxation obligations, over and

above the cost of keeping records and accounts as a normal part of carrying on a business.

Small businesses need to acknowledge that running a business necessarily involves some

obligations beyond those of an employee. Some of these are essential to running the

business, such as accounting and record keeping requirements, and need to be clearly

distinguished from regulatory compliance costs.

When viewed against the above background and specifically the objectives stated in

chapter one, the results of this study are not very surprising. Indeed, they corroborate the

findings of similar studies elsewhere. The major contribution therefore, lies in further

confirmation of the already known influence of tax compliance on survival of SMEs in

Rwanda.

34

4.2.1 Establishing the level of tax compliance by SMEs from 2011 to 2013

Questions under this section were asked intending to establish SMEs‟ levels of tax

compliance from 2011 to 2013.

Table 4.4: Execution of Daily Financial Operations of the Company

Responses Frequency Percentage

Yes 22

58%

No 16

42%

Total 38 100

Source: Primary data

According to table 4.4, 58% of respondents responded that daily financial operations of

their companies are executed by the shareholders and these shareholders does not have

financial and accounting knowledge hence a hindrance to have true and fair financial

statements of their companies which at the end results into non tax compliance, while

42% responded that it‟s not managed by shareholders, meaning that they either have

employees or hire external consultants.

Table 4.5: The rating of Tax Compliance Level for Medium Taxpayers in Rwanda

from 2011 to 2013.

Rating Frequency Percentage

10% to 30% 3

100%

40% to 50% 0

-

60% to 70% 0 -

Total 3 100%

Source: Primary data

Table 4.5 provides information about how SMTO staff (respondents) rate medium

taxpayers‟ tax compliance.

Considering the responses from respondents as shown in table 4.5, the 3 staff interviewed

rated the tax compliance of small and medium taxpayers at 10% to 30%, which means

that SMEs are still being enforced to compliance with tax laws.

35

Table 4.6: The need to increasing taxpayers’ Education as way to Increase Tax

Compliance.

Responses Frequency Percentage

Strongly agree 3

100%

Agree 0

-

Disagree 0 -

Total 3 100%

Source: Primary data

Table 4.6 provides information about the perception of respondents (SMTO staff) to

increase taxpayers‟ education in order to increase taxpayers‟ tax compliance.

Considering the responses from respondents as shown in table 4.6, the 3 staff interviewed

strongly recommends taxpayers‟ education as way to increase their tax compliance. This

means that the current situation of taxpayers‟ tax education should be improved.

In order to establish the level of tax compliance, it was paramount for the researcher to

consider these factors; personnel vested with handling company‟s financial operations

and reporting, how tax administration rates taxpayers‟ compliance and the need for

taxpayers‟ education in relation to the consequences from non tax compliance.

In reference to the above factors, the research findings revealed that tax compliance is

still at low levels hence a negative influence to the survival and growth of SMEs and the

few (SMEs) that are trying to comply with tax laws incur high financial and non financial

costs. Employing incompetent staff or not employing any finance staff at all will always

result into low levels of tax compliance hence a burden to SMEs in terms of non tax

compliance (Penalties and Fines). However, employing competent finance personnel to

manage financial operations and taxes (Tax compliance) is also a burden in terms of

paying their salaries. Small and Medium Enterprises may become confused about what

tax compliance costs are. They do not always distinguish between tax compliance costs

and either the amount of tax they have to pay or the general accounting and record

keeping costs that are an essential part of running an effective business. These factors

justify the reasons why most of SMEs are still non tax compliant.

36

4.2.2 Analysing the effects of non-tax compliance on survival of SMEs in Rwanda

In order to analysing the effects of non-tax compliance on survival of SMEs in Rwanda

questions 3, 6 and 7 of the questionnaire addressed to medium taxpayers were asked and

their results are shown in tables 4.7-4.10.

4.2.2.1 Keeping Purchase Invoices and other Invoices/Receipts of Company

Expenses.

Source documents are paramount in regard to the accountability of the cash out flows and

in flows of any sort of business. Therefore, SMEs are required to keep their supporting

documents (invoices and receipts) as this is the only means of justifying their incomes

and expenses.

Table 4.7: Documentation of Source Documents and Financial Statements.

Responses Frequency Percentage

Yes 17

45%

No 21

55%

Total 38 100

Source: Primary data

Majority of respondents (55%) do not normally keep their Source documents, while 45%

of the respondents keep it as shown in table 4.7. Despite of the fact that this proves that

taxpayers are non tax compliant, they are also far from knowing the profitability of their

businesses, hence a negative effect on their survival and growth.

Table 4.8: Audited Medium Enterprise Taxpayers from 2011 to 2013

Responses Frequency Percentage

Yes 28

74%

No 10

26%

Total 38 100

Source: Primary data

Table 4.8 presents the information about the tax audited respondents from 2011 to 2013.

37

Therefore, as shown in table 4.8, 74% of the respondents have been audited by Rwanda

Revenue Authority, whereas, 26% were not yet audited as at the end of 2013. The effect

of this tax audit is presented in table 4.9.

Table 4.9: Penalties and Fines Paid as a Result of Tax Audit Results

Responses Frequency Percentage

Yes 28

74%

No 10

26%

Total 38 100

Source: Primary data

Table 4.9 presents the information about the payment of penalties and fines as a result of

tax audit results from respondents for the period 2011 to 2013.

As per the information presented in tables 4.8 and 4.9, it is evident that all the audited

respondents (74%) paid fines and penalties as a result of the audit findings. However, the

26% of respondents that have not paid fines and penalties is due to the fact that they have

not been audited. Fines and Penalties paid have had a negative impact on the survival of

those businesses like; financial Institutions hesitating to give them credit facilities, 5%

withholding taxes paid in customs on imported goods, and many other privileges they

can‟t get from RRA due to their failure to comply with tax laws.

The effect of Tax Compliance can be both financial and non-financial. In some cases,

non-financial tax compliance costs, such as stress and time lost can be just as significant,

if not more so, than the financial compliance costs. Few SMEs choose to replace stress

and time costs with financial costs by paying tax advisors and bookkeepers to assist in

meeting their tax compliance obligations but all in all, these costs will affect their

profitability and survival. Fines and Penalties are also the other factors that influence their

survival if they have not either declared or paid the right tax at the right time. Table 5.15

summarizes both costs incurred to hire competent personnel to keep proper books of

accounts and costs incurred as a result of paying fines and penalties due to non tax

compliance. SMEs may not always be fully aware of the tax and non-tax compliance cost

implications of establishing their own business and changing from simple to more

complex business structures such as a limited company or unlimited company.

38

Employment of staff imposes significant regulatory compliance costs, many of which are

not tax related.

Some business operators choose not to grow beyond a certain size so that they can avoid

additional risk, complexity and administrative burdens and this is the reason as to why

55% of the respondents do not keep proper books of accounts. The skills, attitudes,

efficiency and confidence of the SMEs‟ proprietor are significant determinants of whether

they are likely to be concerned about tax compliance obligations. It is from this point that

100% of respondents who were audited paid fines and penalties.

4.2.3 Examining the extent to which tax compliance depends on bookkeeping

records

This section examines the extent to which tax compliance depends on bookkeeping

records. Therefore, the researcher formulated questions 4 and 5 of the questionnaire

addressed to small and medium taxpayers and questions 4 and 6 of the interview guide

addressed to SMTO staff to address objective number three of this study.

Table 4.10: Major Factors of Non Tax Compliance in Medium Enterprises

Responses Frequency Percentage

Inaccurate books of accounts 3

100%

High Tax rate 0

-

Complicated tax filing procedures 0 -

Total 3 100%

Source: Primary data

This table 4.10 presents information about the major factors of non tax compliance in

medium enterprises as perceived by the respondents from SMTO in RRA.

All the 3 staff interviewed, were of the view that inaccurate books of accounts is the

major cause of non tax compliance by the SMEs in Rwanda hence an effect on their

survival and growth.

39

Table 4.11: Commencement of Tax Advisors and Annual Independent Auditors

Responses Frequency Percentage

Strongly agree 0

-

Agree 3

100%

Disagree 0 -

Total 3 100%

Source: Primary data

Table 4.11 presents information about the perception of respondents from SMTO on the

Commencement of Tax Advisors and Annual Independent Auditors in order to increase

tax compliance.

All the 3 staff interviewed agreed that the Commencement of Tax Advisors and Annual

Independent Auditors brought some improvement in keeping source documents and fair

books of accounts, but they went on to say that some tax advisors help taxpayers to evade

taxes which are a serious problem that is coming up.

Table 4.12: Keeping Financial Records and Preparing Accurate Financial

Statements as a means of Increasing Tax Compliance

Responses Frequency Percentage

Strongly agree 8

21%

Agree 30

79%

Disagree 0 -

Total 38 100%

Source: Primary data

Table 4.12 presents information about the perception of respondents (Medium Taxpayers)

about the importance of keeping financial records and preparing accurate financial

statements as a means of increasing tax compliance.

The results in table 4.12 indicates that 79% of the respondents agree that keeping

financial records and preparing accurate financial statements is a means of increasing tax

compliance whereas 21% strongly agree. Generally, tax compliance is not possible

without keeping financial records and proper books of accounts.

40

Table 4.13: Major Factors that Cause late Declaration and Payment of Taxes

Responses Frequency Percentage

Inaccurate books of accounts 38

100%

High tax rates 0

-

Complicated tax filing procedures 0 -

Total 38 100%

Source: Primary data

The information presented in table 4.13, describes the respondents‟ perception about what

causes late declaration and payment of taxes.

All 38 respondents who responded appropriately to the questionnaires are of the view that

inaccurate books of accounts are the major causes of late declaration and payment of

taxes.

Daily sales records disclosing all the information related to the taxpayer‟s sales must be

properly kept as well as the daily purchases records. All records for cash and bank

transactions must be properly documented as this will be the only source of information

concerning cash in and out flow within the business.

It is from the above records that the business will be able to come up with accurate books

of accounts and financial statements that give a true and fair state of affairs of the

business. Those financial statements will disclose Value Added Tax receivable/payable

and corporate tax receivable/payable for the business.

The other important records are the payrolls. Payrolls prepared by the business will help

to provide the information about the number and status of the business‟s employees.

Payroll reveals also the information about the employees‟ statutory deductions (Pay As

You Earn and Social Security Contributions), hence a means of declaring and paying

taxes.

41

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS

5.0 Introduction

This chapter presents the summary of major findings in reference to the objectives of the

study. Conclusions will follow hence taking into account all findings and observations

portrayed in chapter four. Lastly, a section of Recommendations will be given in

reference to the survival and growth of SMEs without ignoring how they comply with tax

laws.

5.1 Summary of Findings

In reference to the general objective of this study, which is sought to establish how Tax

Compliance influences the survival of Small and Medium Enterprises in Rwanda, it

would be justified to assert that SMEs are extremely diverse and their tax compliance

costs are influenced by a range of factors. As a result, the experience of both tax and non-

tax compliance can vary significantly from business to business hence a major effect on

their growth and survival. For some businesses, tax compliance costs will dominate, but

for others, non-tax compliance costs will be more significant.

Size, turnover and business structure influences the compliance costs of SMEs and they

can vary over the life cycle of the business. Choices that businesses make in these areas,

such as incorporating and employing staff can impact on compliance costs. SMEs need to

be aware of the compliance cost implications of the choices that they make. In addition,

the skills, attitude, efficiency and confidence of the SMEs‟ owner influence their

perceptions of compliance costs on their growth and survival.

5.1.1 Establishing the level of tax compliance by SMEs from 2011 to 2013

In order to establish the level of tax compliance, it was paramount for the researcher to

consider these factors; personnel vested with handling company‟s financial operations

and reporting, how tax administration rates taxpayers‟ compliance and the need for

taxpayers‟ education in relation to the consequences from non tax compliance.

42

In reference to the above factors, the research findings revealed that tax compliance is

still at low levels hence a negative influence to the survival and growth of SMEs and the

few (SMEs) that are trying to comply with tax laws incur high financial and non financial

costs. The percentages of responses from respondents are shown in table 5.14

Table 5.12: Level of Tax Compliance

Factors Considered

Number of

Respondents Responses Percentage

Incompetence of

Personnel 38 22 58%

Rating of tax

compliance at 10%-

30% 3 3 100%

Need for more tax

education 3 3 100%

Source: Primary data

Employing incompetent staff or not employing any finance staff at all will always result

into low levels of tax compliance hence a burden to SMEs in terms of non tax compliance

(Penalties and Fines). However, employing competent finance personnel to manage

financial operations and taxes (Tax compliance) is also a burden in terms of paying their

salaries. Small and Medium Enterprises may become confused about what tax compliance

costs are. They do not always distinguish between tax compliance costs and either the

amount of tax they have to pay or the general accounting and record keeping costs that

are an essential part of running an effective business. These factors justify the reasons

why most of SMEs are still non tax compliant.

5.1.2 Analysing the effects of non-tax compliance on survival of SMEs in Rwanda

The effect of Tax Compliance can be both financial and non-financial. In some cases,

non-financial tax compliance costs, such as stress and time lost can be just as significant,

if not more so, than the financial compliance costs. Few SMEs choose to replace stress

and time costs with financial costs by paying tax advisors and bookkeepers to assist in

meeting their tax compliance obligations but all in all, these costs will affect their

profitability and survival. Fines and Penalties are also the other factors that influence their

survival if they have not either declared or paid the right tax at the right time. Table 5.15

summarizes both costs incurred to hire competent personnel to keep proper books of

43

accounts and costs incurred as a result of paying fines and penalties due to non tax

compliance.

Table 5.13: Costs incurred to comply or not comply with taxes

Factors

Considered

Number of

Respondents Responses Percentage

Not Keeping

Proper books of

Accounts 38 21 55%

Fines & Penalties 28 28 100%

Source: Primary data

SMEs may not always be fully aware of the tax and non-tax compliance cost implications

of establishing their own business and changing from simple to more complex business

structures such as a limited company or unlimited company. Employment of staff

imposes significant regulatory compliance costs, many of which are not tax related.

Some business operators choose not to grow beyond a certain size so that they can avoid

additional risk, complexity and administrative burdens and this is the reason as to why

55% of the respondents do not keep proper books of accounts. The skills, attitudes,

efficiency and confidence of the SMEs‟ proprietor are significant determinants of whether

they are likely to be concerned about tax compliance obligations. It is from this point that

100% of respondents who were audited paid fines and penalties.

5.1.3 Examining the extent to which tax compliance depends on bookkeeping

records

The threshold for not being obliged to keep books of accounts by the taxpayers is

Rwf1,200,000 and below annually, while taxpayers with annual turnover of

Rwf400,000,000 and above are obliged to have annual external auditors (RRA, 2013).

Daily sales records disclosing all the information related to the taxpayer‟s sales must be

properly kept as well as the daily purchases records. All records for cash and bank

transactions must be properly documented as this will be the only source of information

concerning cash in and out flow within the business.

44

It is from the above records that the business will be able to come up with accurate books

of accounts and financial statements that give a true and fair state of affairs of the

business. Those financial statements will disclose Value Added Tax receivable/payable

and corporate tax receivable/payable for the business.

The other important records are the payrolls. Payrolls prepared by the business will help

to provide the information about the number and status of the business‟s employees.

Payroll reveals also the information about the employees‟ statutory deductions (Pay As

You Earn and Social Security Contributions), hence a means of declaring and paying

taxes.

5.2 Conclusions

The research findings were concluded on how tax compliance influences the survival of

Small and medium Enterprises in Rwanda based on research questions of the study. The

research aimed at drawing conclusions on how the survival of SMEs depends on tax

compliance.

The level of SMEs‟ tax compliance is low. SMEs are extremely diverse and their tax

compliance costs are influenced by a range of factors. As a result, the experience of both

tax and non-tax compliance costs can vary significantly from business to business. For

some few businesses, tax compliance costs will dominate, but for many others, non-tax

compliance costs will be more significant. Some business operators choose not to grow

beyond a certain size so that they can avoid additional risk, complexity and administrative

burdens as a result of tax compliance costs. The skills, attitudes, efficiency and

confidence of the SMEs‟ proprietor are significant determinants of whether they are likely

to be concerned about tax compliance obligations. SMEs may become confused about

what tax compliance costs are. They do not always distinguish between tax compliance

costs and either the amount of tax they have to pay or the general accounting and record

keeping costs that are an essential part of running an effective business.

Bookkeeping is closely interlinked with tax compliance due to the fact that businesses

determine their taxes due or refunds from books of accounts. All tax computations depend

on financial records and bookkeeping. If we take an example of medium businesses with

annual turnover of Rwf400,000,000 and above to have their annual tax declarations and

45

financial statements certified by qualified professionals, this exercise will be done basing

on the completion of accurate books of accounts.

Tax compliance may provide benefits to businesses by imposing a discipline that allows

them to better monitor and understand their business dealings and cash flows. Many small

and medium businesses choose to replace stress and time costs with financial costs by

paying tax advisors and bookkeepers to assist in meeting their tax compliance obligations

hence significance to their businesses.

5.3 Recommendations

This study has provided a good forum in presenting the findings by discussing how tax

compliance significantly influences the survival of SMEs in Rwanda. It was found that

inappropriate books of accounts play a major role in non tax compliance.

It is recommended, therefore that Education of taxpayers and tax advisors can assist in

reducing tax compliance costs. Rwanda Revenue Authority, the tax profession association

and private sector federation should improve on their strategies of taxpayers‟ education

through targeting the large number of taxpayers in the community work mainly known as

Umuganda.

Taxpayers‟ education should emphasise on educating taxpayers on the importance of

keeping financial records as this is the main source of preparing the accounts that give a

true and fair financial position of the business.

While charging penalties and fines to non tax compliant has done little to avert the

problem, tax auditors from Rwanda Revenue Authority should put much time to discuss

with taxpayers on how to declare and pay taxes on time and the type of penalties and

fines they will have to pay if they failure to comply with tax laws.

SMEs should employ tax advisors/bookkeepers as this would help them to keep their

proper books of accounts and improve their tax compliance. Therefore, SMEs should

keep in mind that the tax defaulted will be paid together with extra fines and penalties

hence a burden to survival and growth.

46

Again, SMEs should form some clusters which would help them to employ one

bookkeeper and then they would share s/he‟s salary hence reducing the extra burden of

salary on top of taxes they pay.

Lastly, Rwanda Revenue Authority should work hand in hand with tax advisors as they

are the ones meeting taxpayers on daily basis. Tax advisors can help to increase the

knowledge of taxpayers. On addition to this point, RRA should work hand in hand with

Rwanda Development board (RDB) during business registration process and they

sensitise the proprietors on how to comply with taxes.

5.4 Suggestions for further study

The findings for this research set a ground for further research for the following areas;

The study was conducted in Kigali City because the targeted population (Medium

Enterprise Taxpayers) is only found in Kigali. It is necessary to conduct a similar study

targeting Micro and Small Enterprises which are found in other provinces of Rwanda

were the results could be compared to strengthen and affirm the findings of this study.

A more specific study should be conducted on Large Enterprises to analysis how tax

compliance influences their survival and growth. Great effort has gone into this research

to contribute to knowledge in the area of SMEs‟ tax compliance and survival. However,

the researcher appreciates and recognises information gaps, unanswered questions that

another scholar should keenly address in further research. These include;

The role of taxes in the development of Rwanda

The effect of high tax rates on the survival of taxpayers in Rwanda

47

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52

APPENDICES

53

Appendix 1: Authorisation Letter from School of Business and Public

Management

54

Appendix 2: Request for Information from RRA

55

Appendix 3: Acceptance Letter from RRA

56

Appendix 4: Blank Questionnaires and Interview Guide

Interview guide addressed to RRA employees from Domestic Taxes Department &

Planning and Research Department.

Dear Respondent,

I am an MBA student at Mount Kenya University (Finance and Accounting option) and

I am conducting research on “Tax compliance and SMEs -A case study of Medium

taxpayers in Kigali City” in partial fulfillment of my postgraduate studies. It is in this

respect that I kindly request your attention to answer the questions below. This

information is solely for academic purposes and it will be treated with strict

confidentiality.

I am taking this opportunity to thank you for your good cooperation and I am looking

forward to receiving your positive response.

GATSINZI NTEGE Geoffrey

Reg. No: MBA/3764/12

Note: 1. Put a tick in brackets close to the right answer

2. Provide brief answers where necessary

Questions

1. How long have you been working in RRA?

i. 1-2 years ( )

ii. 3-4 Years ( )

iii. 5 years and above ( )

2. What is the level of your education?

i. Masters Degree and above ( )

ii. Bachelors Degree ( )

iii. Diploma ( )

57

3. How would you rate the tax compliance level of medium taxpayers in Rwanda from

2011 to 2013?

i. 10% to 30% ( )

ii. 40% to 50% ( )

iii. 60% to 70% ( )

iv. 80% and above ( )

4. Which of the following factors is the major factor of non tax compliance in medium

taxpayers?

i. Inaccurate books of accounts ( )

ii. High tax rates ( )

iii. Complicated tax filling procedures ( )

5. Do you think RRA needs an increase of taxpayers‟ education to increase their tax

compliance?

i. Strongly agree ( )

ii. Agree ( )

iii. Disagree ( )

6. Is the introduction of taxpayers‟ annual external independent audit and tax consultants

increasing the level of tax compliance?

i. Strongly agree ( )

ii. Agree ( )

iii. Disagree ( )

THE END

Thank you for your time and effort

58

Questionnaire addressed to Medium Taxpayers.

Dear Respondent,

I am an MBA student at Mount Kenya University (Finance and Accounting option) and

I am conducting research on “Tax compliance and SMEs -A case study of Medium

taxpayers in Kigali City” in partial fulfillment of my postgraduate studies. It is in this

respect that I kindly request your attention to answer the questions below. This

information is solely for academic purposes and it will be treated with strict

confidentiality.

I am taking this opportunity to thank you for your good cooperation and I am looking

forward to receiving your positive response.

GATSINZI NTEGE Geoffrey

Reg. No: MBA/3764/12

Note: 1. Put a tick in brackets close to the right answer

2. Provide brief answers where necessary

Questions

1. How many shareholders do you have in your Company?

i. 1-3 ( )

ii. 4-6 ( )

iii. 7 and above ( )

2. Are the daily financial operations of the company done by shareholders?

i. Yes ( )

ii. No ( )

3. Do you normally keep purchase invoices and other invoices/receipts of expenses

for the company?

i. Yes ( )

ii. No ( )

4. Do you think that keeping your financial records and preparing accurate financial

statements would increase your tax compliance?

59

i. Strongly agree ( )

ii. Agree ( )

iii. Disagree ( )

5. Which of the following factors would be your major cause of late declaration and

payment?

i. Inaccurate books of accounts ( )

ii. High tax rates ( )

iii. Complicated tax filling procedures ( )

6. Have you ever been audited by RRA?

i. Yes ( )

ii. No ( )

7. Did the tax audit findings reveal some penalties and fines to be paid?

i. Yes ( )

ii. No ( )

THE END

Thank you for your time and effort