TAX COMPLIANCE IN LOCAL GOVERNMENT

AUTHORITIES IN TANZANIA

A CASE STUDY OF SUMBAWANGA DISTRICT COUNCIL

TAX COMPLIANCE IN LOCAL GOVERNMENT

AUTHORITIES IN TANZANIA

A CASE STUDY OF SUMBAWANGA DISTRICT COUNCIL

By

Kerry Asumwisye Mwansele

A Research Report Submitted in Partial Fulfillment of the Requirements for

Award of Master of Science in Accounting and Finance Degree of Mzumbe

University

2014

i

CERTIFICATION

We, the undersigned, certify that we have read and here by recommend for the

acceptance by the Mzumbe University, a dissertation entitled Tax Compliance in

Local Authorities in Tanzania: The case study of Sumbawanga District Council,

in partial fulfillment of the requirements for the award of the degree of Master of

Science in Accounting and Finance Degree of Mzumbe University

Signature

___________________________

Prof. Jeremiah Kirway

Major Supervisor

Signature

___________________________

Internal Examiner

Signature

___________________________

External Examiner

Accepted for the Board of the School of Business

____________________________________________

CHAIRMAN, SCHOOL OF BUSINESS BOARD

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DECLARATION

I, Kerry Asumwisye Mwansele, declare that this dissertation is my own work and

that it has not been presented and will not be presented to any other university for a

similar or any other degree award. Where it is indebted to the work of others, due

acknowledgement has been made.

Signature……………………………

Date ……………………………

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COPYRIGHT

This dissertation is a copyright material protected under the Berne convention, the

copyright Act 1999 and other international and national enactments, in that behalf,

on intellectual property. It may not be reproduced by any means in full or in part,

except short extracts in fair dealings, for research or discourse with an

acknowledgement, without the written permission of Mzumbe University, on behalf

of the author.

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ACKNOWLEDGEMENT

The completion of this research is a result of both direct and indirect support of many

people to whom I owe acknowledgement. I owe great gratitude to my supervisor,

Professor Jeremiah Kirway for his constructive comments and guidance that made

the production of this dissertation possible.

Sincere appreciation to my wife Fika Kerry Mwansele and my whole family for their

outstanding sacrifices they made over time. I am very grateful to my friends for the

encouragement, moral support, motivation and love. Thank you for being such great

friends.

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DEDICATION

I dedicate this entire work to my late brother Fr. Deogratias Atupele Mwansele, we

miss you dearly.

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ACRONYMS

CMI Chr. Michelsen Institute

DT District Treasurer

DTO District Trade Officer

FY Financial Year

GDP Gross Domestic Product

LAAC Local Government Accounts Committee

LGA Local Government Authority

LGRP Local Government Reform Programme

MOF Ministry of Finance

MTEF Medium Term Expenditure Framework

NIBR Norwegian Institute for Urban and Regional research

OECD Organization for Economic Co-operation and Development

R/ACC Revenue Accountant

REPOA Research on Poverty Alleviation

SDC Sumbawanga District Council

SPSS Statistical Package for Social Sciences

URT United Republic of Tanzania

VEO Village Executive Officer

WEO Ward Executive Officer

WRC Ward Revenue Collector

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ABSTRACT

The study was carried out to assess factors that affect tax compliance in Local

Authorities in Tanzania with particular emphasis on Sumbawanga District Council.

The study was prompted by the persistent revenue collection shortfalls that have

made it difficult for Sumbawanga District Council to fully implement its budgets.

The study employed a descriptive study design on a sample size of 51 respondents,

who were selected using purposive sampling from Sumbawanga District Council

officials and revenue collecting agents, and simple random sampling from traders of

agricultural produce. Data from this source were supplemented by secondary data.

Data were gathered using a self-administered structured questionnaire.

The study found five major factors that affect tax compliance. These include:

inappropriate enforcement, complexity of the by-laws, behavioural attitude,

unsatisfactory return in form of service delivery, and absence of trustworthiness in

the local government. This result implies that the council is not doing well in tax

collection. In order to overcome the problem of non tax compliance, the following

were the major recommendations: improvement of service delivery such as roads,

health services, education, water etc.; enforcement of tax laws; provision of tax

education to tax payers and the citizens as a whole.

Basing on the findings of the study, it is recommended that officials at low levels

involved in tax collection be trained about taxation, citizens should be educated on

the importance and benefits of taxes, the collected tax revenues should be remitted to

head office within the month it has been collected. Furthermore, it is recommended

that tax collectors be motivated basing on good work incentives.

Similar study is recommended in other council because this research was a case

study therefore its findings cannot be generalized, and another area of research is to

establish reasons for failure of councils to collect tax

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TABLE CONTENTS

CERTIFICATION ......................................................................................................... i

DECLARATION .......................................................................................................... ii

COPYRIGHT............................................................................................................... iii

ACKNOWLEDGEMENT ........................................................................................... iv

DEDICATION.............................................................................................................. v

ACRONYMS............................................................................................................... vi

ABSTRACT................................................................................................................ vii

LIST OF TABLES....................................................................................................... xi

LIST OF FIGURES .................................................................................................... xii

LIST OF APPENDICES............................................................................................ xiii

CHAPTER ONE ......................................................................................................... 1

INTRODUCTION....................................................................................................... 1

1.1 Background to the Problem................................................................................ 1

1.2 Statement of the Problem................................................................................... 3

1.3 Objectives of the Study...................................................................................... 3

1.3.1 Specific Objectives ............................................................................................ 4

1.4 Research Questions ............................................................................................ 4

1.5 Significance of the Study ................................................................................... 4

1.6 Scope of the Study ............................................................................................. 5

1.7 Limitation of the study....................................................................................... 5

1.8 Organization of the study.................................................................................... 5

CHAPTER TWO ........................................................................................................ 6

LITERATURE REVIEW .......................................................................................... 6

2.0 Introduction........................................................................................................ 6

2.1 Definitions of Key Concepts.............................................................................. 6

2.1.1 Tax ..................................................................................................................... 6

2.1.2 Tax base ............................................................................................................. 6

2.1.3 Local taxes ......................................................................................................... 7

2.1.4 Tax evasion ........................................................................................................ 7

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2.1.5 Tax avoidance .................................................................................................... 8

2.1.6 Tax compliance .................................................................................................. 9

2.1.7 Voluntary compliance .................................................................................... 11

2.2 Causes of tax evasion.......................................................................................... 12

2.3 Reducing tax evasion ....................................................................................... 12

2.4 Factors affecting tax compliance ..................................................................... 13

2.5 Local Government Authorities ........................................................................ 16

2.6 Characteristics of good revenue sources .......................................................... 18

2.7 Local government revenue sources in Tanzania .............................................. 21

2.7.1 Methods of Local Government revenue collection in Tanzania ...................... 24

2.8 Empirical literature review............................................................................... 24

2.9 Conceptual Framework .................................................................................... 25

CHAPTER THREE .................................................................................................. 30

RESEARCH METHODOLOGY ............................................................................ 30

3.1 Introduction...................................................................................................... 30

3.2 Research Design............................................................................................... 30

3.3 Study Area ....................................................................................................... 30

3.4 Study Population .............................................................................................. 31

3.5 Sample Size and Sampling Techniques ........................................................... 31

3.6 Research Variables........................................................................................... 32

3.6.1 Independent Variable ....................................................................................... 32

3.6.2 Dependent Variable.......................................................................................... 32

3.6.3 Validity of Instruments .................................................................................... 33

3.7 Sources of Data ................................................................................................ 33

3.8 Data Collection Instruments ............................................................................ 33

3.8.1 Questionnaires.................................................................................................. 33

3.9 Data processing and Analysis .......................................................................... 34

3.9.1 Data processing................................................................................................ 34

3.9.2 Data analysis .................................................................................................... 34

3.10 Limitations to the study ................................................................................... 34

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CHAPTER FOUR..................................................................................................... 36

PRESENTATION AND DISCUSSION OF FINDINGS ....................................... 36

4.0 Introduction....................................................................................................... 36

4.1 Profile of the Respondents ............................................................................... 36

4.2 Causes of tax evasion and avoidance in Sumbawanga District Council ......... 39

4.3 Accounting for Collected Taxes ...................................................................... 43

4.4 Procedures used to collect taxes in Sumbawanga District Council ................. 44

4.4.1 Council Head Office ....................................................................................... 44

4.4.2 Ward Executive Officers’ Office ..................................................................... 44

4.4.3 Village Executive Officers’ Office .................................................................. 45

4.4.4 Tax Collecting Agents .................................................................................... 46

4.5 Tax Evasion and Avoidance Practices ............................................................. 46

4.6 Summary of the Findings................................................................................. 50

4.6.1 Causes of tax evasion and avoidance in Sumbawanga District Council ......... 50

4.6.2 Accounting for Collected Taxes ...................................................................... 51

4.6.3 Procedures used to collect taxes in Sumbawanga District Council ................. 51

4.6.4 Tax Evasion and Avoidance Practices ............................................................. 52

CHAPTER FIVE ...................................................................................................... 53

CONCLUSION AND RECOMMENDATIONS .................................................... 53

5.1 Conclusions...................................................................................................... 53

5.2 Recommendations............................................................................................ 54

5.3 Area for Further Research................................................................................ 54

REFERENCES.......................................................................................................... 55

APPENDICES ........................................................................................................... 59

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LIST OF TABLES

Table 2.1: Closed List of Revenue Sources for Local Governments (2005) ............. 23

Table 3.1: Samples drawn from different population categories ............................... 31

Table 4.1: Title of Surveyed Respondents ................................................................. 36

Table 4.2: Characteristics of Respondents by Title and Experience.......................... 37

Table 4.3: Characteristics of Respondents by Age and Sex ...................................... 38

Table 4.4: Reasons driving people not to pay tax ...................................................... 41

Table 4.5: Measures to Encourage People Pay Tax.................................................. 42

Table 4.6: Remittances and accountability of collected tax...................................... 43

Table 4.7: Tax Collection Procedures by Ward Executive Officers’ Office ............. 45

Table 4. 8: Tax Collection Procedures by Village Executive Officers’ Office ......... 45

Table 4.9: Tax Collection Procedures by Agents ...................................................... 46

Table 4.10: Practices of Tax Evasion and Tax Avoidance ....................................... 48

Table 4.11: Measures of Intervention to control Tax Evasion.................................. 50

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LIST OF FIGURES

Figure 2.1: Conceptual Framework ........................................................................... 29

Figure 4.1: Sex of the Respondents ........................................................................... 38

Figure 4.2: Level of Education of the Respondents................................................... 39

Figure 4.3: Formal Knowledge in Taxation............................................................... 40

xiii

LIST OF APPENDICES

Appendix 1: Questionnaires to the respondents.......................................................... 59

Appendix 2: Interview guide....................................................................................... 63

1

CHAPTER ONE

INTRODUCTION

1.1 Background to the Problem

Local Governments in Tanzania have been given the mandate to raise their own

revenue to finance their activities (URT, Local Government Finances Act. 1982). A

large portion of this revenue is from taxes and according to (Wilkinson 1984), taxes

play a much larger role in the society and the general economy than mere raising

revenue. However, a good number of councils failed to raise substantial funds from

taxes due to a number of limiting factors, among of them being non tax compliance

of tax payer. A tax is confined to compulsory and inequitable payment to the general

government.

The system of local taxation in Tanzania was significantly reformed in 2003 (and

further modified in 2004) by proclamation of the Minister of Finance (MOF) during

the Budget speech. The reform effort known as the ‘rationalization and

harmonization’ of local revenue sources which eliminated the Development levy,

abolished eight fees (for bicycle, culture, healthy facility registration, health

inspection, business premises inspection, water connection, land, hides and skin);

eliminated two types of license fees (for application of licenses on intoxicating liquor

and local liquor, and abolished the local brew cess and livestock cess (MOF, 2006).

The Local Government Finance Act, 1982 as reformed in 2003 and 2004 provided

Local Government Authorities (LGAs) with a list of taxes, levies and fees that local

governments are allowed to collect. LGAs are mostly assigned with low-yielding tax

bases making them so harder to have substantial revenue source of their own, thus

compliance is another sort of enhancing local revenue.

No one likes taxes people do not like to pay them. Governments do not want to

impose them. But taxes are necessary to both to finance desired public spending in a

non-inflationary way and also to ensure that the burden of paying for such spending

is fairy distributed. While necessary, taxes impose real costs on society. Good tax

policy seeks to minimize those costs (Richard and Bird, 2003).

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As (Bird and Zolt, 2003) correctly stated that tax design (i.e. tax policy) in

developing countries is strongly influenced by economic structure. For example,

developing countries often have large traditional agricultural sectors that are difficult

to tax. Many developing countries have a significant informal economy that also is

largely outside the formal tax structure. This presents its own unique challenges in

the design of tax policy and to the tax administration. Given that the potential tax

base is a relatively small portion of total economic activity, this may pressure

governments to increase tax rates, which creates further incentives for tax evasion.

Tax evasion is one form of tax noncompliance which refers to the failure to pay taxes

that are legally due and is a criminal offense (Allingham and Sandmo, 1972). Tax

evasion is a common problem in most countries, particularly in developing countries

including Tanzania where the information systems are weak. Tax evasion is

contrasted to tax avoidance which refers to changing behavior in such a way as to

reduce tax liability (Chipeta, 2002) hence tax avoidance is legal while tax evasion is

illegal and may result from deliberate actions, carelessness, errors, misunderstanding

of the law and regulations and requirements relating to recordkeeping and filing tax

returns.

Tolerance for tax evasion breeds more evasion and also provides further breeding

ground for corruption. A high level of evasion puts pressure on otherwise “law-

abiding citizens” who have to compensate for the additional burden resulting from

large scale tax evasion. This is likely to create a tendency of tax evasion among at

least some of these honest tax payers (Mikesell and Birskyte, 2003).

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1.2 Statement of the Problem

The Central Government funds Local Government Authorities with most of its

salaries, recurrent grants for Agricultural extensions, education, health, water, roads

and administration, and other grants for development expenditures.

Local government authorities also have the mandate to raise certain revenues through

taxes, levies, fees and grants from donors within the limits provided by the Central

Government. Local Government Authorities retain all of such revenues and use it as

part of their budgets, although the collected funds by LGAs are running short of the

estimated amount due some factors that limits the collectability of those taxes.

Funds granted by Central Government for implementation of certain programs are

usually for centrally determined priorities of which may not necessarily meet local

felt needs. Moreover grants from central government are sometimes not released on

time or not released as budgeted or not released at all. To respond to the challenges

of the locally felt needs, untimely and under release of funds, local government

authorities have been trying to find ways to enhance local revenues to support the

implementation of specific and locally felt programs in this respect. However, low

tax compliance is a matter of serious concern in many LGAs, limiting the capacity of

local government authorities to raise enough local revenues to facilitate both

recurrent and developmental purposes.

It is commonly acknowledged that many factors contribute to the weakness of tax

compliance; hence the study intended to assess contributing factors to non tax

compliance in Sumbawanga District Council (SDC).

1.3 Objectives of the Study

The overall objective of the study was to assess factors that affect tax compliance in

Local Government Authorities (LGAs), with specific reference to Sumbawanga

District Council.

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1.3.1 Specific Objectives

(i) To establish why tax payers avoid paying taxes in Sumbawanga District

Council.

(ii) To examine how the collected tax is accounted for in Sumbawanga District

Council.

(iii) To find out how the imposed taxes are collected.

1.4 Research Questions

(i) What are the causes of tax evasion and avoidance in Sumbawanga District

Council?

(ii) How are the collected taxes accounted for in Sumbawanga District Council?

(iii) What are the procedures used to collect taxes in Sumbawanga District

Council?

1.5 Significance of the Study

The study will generate knowledge to policy makers, administrators, collectors and

to the ministry of local government about the general factors that affect local tax

compliance. The study is further expected to show ways used by tax payers to evade

and avoid local taxes. It will also show on procedures used to collect local taxes in

the council, and its accountability and then suggest solutions to the persistent

financial problems of Sumbawanga District Council.

The research findings will provide LGAs’ officials with the necessary knowledge,

abilities and skills to curb tax evasion and avoidance by instituting proper education

and enforcement on the available tax by – laws in order to enhance local revenues.

The study is expected to increase on the existing literature on local tax evasion,

avoidance and compliance costs in relation to local tax compliance in Tanzania,

hence creating more knowledge and information to future researchers and

academicians.

The research work can become a role model in conducting similar researches in other

communities of Tanzania and other countries.

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1.6 Scope of the Study

The study was limited to Sumbawanga District Council. The findings of the study

may thus not be generalized to councils not visited by this study.

1.7 Limitation of the study

The study focused on the factors affecting tax compliance, tax evasion and avoidance

and tax compliance in Sumbawanga District Council. Factors for tax compliance

were determined using attributes that influence tax payer’s decision to pay or not to

pay taxes, these factors include ; service delivery, behavioral attitude, complexity of

tax laws, enforcement and trust worthiness of the government. Tax evasion and tax

avoidance were studied in terms of practices used to evade or avoid taxes such as

declaration of less income or overstating deductions and tax laws weaknesses. Under

tax compliance in Sumbawanga District Council, the study looked at correct

reporting, timely filing and timely tax payment.

1.8 Organization of the study

This report is organized in five chapters. Chapter one introduced the study by giving

the background to the study, statement of the problem, objectives of the study,

research questions and significance of the study. Scope of the study and the

limitation has been also included in this chapter.

The remaining chapters of this study have been structured as follows: chapter two

discusses the literature review, while the methodology adopted and applied in the

study is provided in chapter three. The findings on objectives of this study have been

given in chapter four, while the conclusions, recommendations arising from the

findings and areas for further research are in chapter five.

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

The first part of this chapter provides definitions of key concepts, while the second

section of the chapter explains causes of tax evasion. The third part discusses ways of

reducing tax evasion while the fourth section explains factors affecting tax

compliance. The fifth part provides local government authorities in Tanzania and the

sixth section explains characteristics of good revenue sources. The seventh part

provides local government revenue sources in Tanzania, while the eighth section is

about empirical literature review and the last part provides the conceptual

framework.

2.1 Definitions of Key Concepts

2.1.1 Tax

Tax is an involuntary fee levied on corporations or individuals that is enforced by a

level of government in order to finance government activities. Tax according to

(Mannesh 2000) is paid without corresponding returns in terms of goods and services

from the government to particular taxpayers. The World Bank (2000) reiterated that

taxes are compulsory transfers of resources to the government from the rest of the

economy. Adeyeye (2004) described tax as liability on account of tax payers as

contribution in some quantum measure to the fund available for use by the

government in providing necessary infrastructure for her citizens. Taxes are

compulsory levy by the tax subject (government) through her designated agent on the

tax subject (the tax payers).

2.1.2 Tax base

Tax base is a sum of taxable activities, collective value of real estates and assets

subject to tax within a community. According to Lubega (1999), the tax base is the

object on which a tax is based, for example income tax is based on income.

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2.1.3 Local taxes

Local taxes are taxes that are due in addition to state and federal taxes. They are

broad source of revenue that is not linked to any particular service provided by local

government. Local taxes vary from country to country but typically include property

tax and sometimes one or more business taxes and consumption taxes. A sound local

tax should establish a link between the jurisdiction in which a tax is levied and the

area in which the benefits are received from the local services funded with that

revenue sources. Thus, the tax base should be readily identifiable with the local

authority area. Local taxation should be clearly perceived by local residents. That is,

local taxpayers should be aware they are paying the tax, of its amount, and to whom

it is payable and for what purpose. This enables local residents to evaluate the

efficiency of local government services as to how much value they get for the money

they pay (Bird, 1999)

2.1.4 Tax evasion

Tax evasion is an attempt to escape tax liability (wholly or partially) by breaking the

tax law and it is a criminal act since it is achieved principally by making false

declarations such as under-reporting income or over-reporting relieves and

allowances.

Tax evasion is one form of tax noncompliance which refers to the failure to pay taxes

which are legally due and therefore is a criminal offence if one is discovered could

lead to imposition of criminal proceedings against the tax payer (Allingham and

Sandmo, 1972). Soyode and Kajola (2006), defined tax evasion as a deliberate and

willful practice of not disclosing full taxable income so as to pay less tax and as a

contravention of tax law where by a taxable person neglects to pay tax due or reduces

tax liability by making fraudulent or untrue claims on the income tax form.

Tax evasion is a universal phenomenon which has been in existence for a long time

and still continues to impose growing challenges on tax authorities and governments.

(Whiteman and Wheat Craft, 1965) defined tax evasion as a reduction of tax liability

by omitting certain items from returns.

8

WallSchutzky (1983) asserts that tax evasion is mainly as a result of the exchange

relationship which considers the benefits from the government, the social orientation

and administration officers may influence tax payer’s response. To further the

argument, (Glasser and Denhardt, 2000) asserts that citizens are increasingly

reluctant to pay taxes based on the perception that they are getting a poor return on

tax dollars invested. Wentwoth et al (1985) also asserts that, causes of tax evasion

are the exchange, social class and chances available for evasion. Evaders in that

study reported that they were not getting value for their money, tax rates were too

high and that government did not spend tax payer’s money wisely, that the burden of

taxes fell on low income and salary earners. However, on the issue of tax rate,

(YitZhaki and Etzioni, 1986) argue that evasion is basically independent of the tax

rate. Tax evasion according to Kay (1980), takes place when facts of transaction are

admitted but having been arranged or presented in such a way that the resulting tax

treatment differs from that intended by the relevant legislation. Tax evasion usually

entails tax payers deliberate misrepresenting or concealing the true state of their

affairs to the tax authorities to reduce liability. It also includes; dishonest tax

reporting such as declaring less income, profits or gain than actually earned; or

overstating deductions (Alm and Martinez, 2001).

2.1.5 Tax avoidance

Tax avoidance is the practice and technique where by one so arranges his business

affairs such that he pays little or no tax at all but without contravention of the tax

laws. Tax avoidance takes advantage of any loopholes and weaknesses, deficiencies

and loose or vague clauses in tax legislations to minimize or eliminate tax liability

altogether. Tax avoidance is not punishable in law. Where the tax authorities detect

the practice, the only solution is to amend the law in order to plug the loopholes and

the weaknesses in the laws that allow the possibility of tax avoidance.

Soyode and Kajola (2006), defined tax avoidance as the arrangement of tax payers

affairs using tax shelters in the tax laws, and avoiding tax traps in the tax laws, so as

to pay less tax than ought to be paid, hence the person pays less by taking the

advantage of the loopholes in the tax laws. Sayode and Kajola (2006) again asserted

9

that, if you over do tax avoidance, you will eventually enter into tax evasion, tax

evasion begins where tax avoidance ends. Abdulrazaq (2001) gave this example to

differentiate between tax evasion and tax avoidance. If two people marry in order to

reduce their tax liabilities, they are involved in tax avoidance, but when they tell the

tax authority that they are married when they are not, they are quite of tax evasion,

and would be prosecuted. Even though tax evaders and tax avoiders have a similar

end (i.e. reduction of tax liability) their means to that end differs.

2.1.6 Tax compliance

Tax compliance is a process of following the country’s tax system. Every country

has its own taxing system, which is regulated and managed by the government. The

system is based on the country’s economics and its inner political situation and

international politics. From the personal consequence perspective tax compliance is

viewed as an income maximizing decision, balancing the net gain of under reporting

income or over claiming against the added risk of detection and penalization

(McGraw and Scholz, 1991).

Taxation theories indicate that collecting more tax revenue requires revenue

authorities to fix lower marginal tax rates, high penalty rate and intensify tax

inspections or audits. From theories and practices, raising tax compliance requires

more inspections (Fjelstard, 2004). Moreover, through inspection or audits, tax

payers will be able to get clarification on tax laws, practices and clear mistakes and

confusions in tax calculations and quickly note any defaults in tax collections and

non compliance. Conducting optimal tax audits and inspections also requires having

optimal amount of staff.

Bird (2003) correctly states that; “Abundant experience around the world has made it

clear that the single most important ingredient for effective tax administration is clear

recognition at the highest levels of politics of the importance of the tax and the

willingness to support good administrative practices even if political friends are hurt

(Bird and Casanegra de Jantscher,1992). Unfortunately very few developing

countries have so far proved able to leap this initial hurdle.

10

According to Cuccia (1991) tax payer compliance has been primarily viewed from

three theoretical perspective; the general deterrence theory, economic deterrence

models and fiscal psychology. Deterrence theory is concerned with the effects of

sanctioned threats on criminal and undesirable behavior, however this had problems

of identifying sanctions, determining how much effect and specifying the mechanism

by which the effect occurs. On the other hand, the economic deterrence model

smoothened out the problems of deterrence theory for instance by use of utilitarian

approach to measure sanction threats.

Tax compliance is a complex term to define. According to Brown and Mazur (2003),

tax compliance is multi-faceted and theoretically it can be defined by considering

three distinct types of compliance that is payment compliance, filing compliance and

reporting compliance. Organization for Economic Cooperation and Development

(2001), advocates, dividing compliance into categories in considering definitions of

tax compliance.

These categories are administrative compliance and technical compliance where the

former refers to complying with administrative rules of lodging and paying otherwise

referred to as reporting compliance, procedural compliance or regulatory compliance

and the latter refer to complying with technical requirements of tax laws in

calculating taxes or provisions of the tax laws in paying the share of tax.

Theoretically, views of the tax payers and tax collectors are that tax compliance

means adhering to the tax laws, which are different from one country to another.

Discouraging non-compliance is only one aspect of improving compliance (Bird,

2003). Treating tax payer in a professional manner, in another words, more like

customers rather than like suspects or thieves, may do much more to promote and

improve compliance (Bird, 2003; Mikesell and Birskyte, 2007; Wang, 2010).

Providing tax payers with various payment options (e.g. Banks, supermarkets,

internet, ward offices), easy filing and assistance (e.g. On-line or at shopping malls

and sports stadiums) not only reduces actual compliance costs, but can reduce

unintentional non-compliance. The revenue authorities in a number of African

11

countries have already been successful in this regard and improved service levels

through training and knowledge exchanges should result in further gains in future.

2.1.7 Voluntary compliance

Silvan and Baer (1997:11) “define voluntary compliance” as “the timely filing and

reporting of required tax information, the correct self-assessment of taxes owed, and

timely payment of those taxes without enforcement action”. The goal of tax

administration is to foster voluntary tax compliance (Silvani, 1992) and hence reduce

tax gap (difference between taxes paid and owed for all taxes and tax payers).

Compliance can be motivated by the presence of government expenditures,

individuals may pay tax because they value the goods provided by the government,

recognizing that their payments are necessary both to help finance the goods and

services and to make others contribute (Andreoni et al.1998; Cowell and Gordon

1988). Hence, a tax payer may be seen as exchanging purchasing power in the

market in return for government services. Fiscal exchange, however, requires trade-

off gains that may be seen as prerequisites of voluntary compliance (Levi 1988:56).

The existence of positive benefits measured according to quantitative and qualitative

criteria, may therefore increase the probability that tax payers will comply

voluntarily, without direct coercion. Plumley (1996) also asserts that, voluntary

compliance is explained by dimensions like timely filing of any required return,

accurate reporting of income and tax liability and timely payment of tax obligations.

In developing countries the tax compliance has been constrained by the significant

number of changes to the tax laws, that they are now so complex and only a handful

of tax experts can understand them. This creates additional problems for compliance

by tax payers who do not have access to sophisticated tax specialists (Oberholzer,

2008).

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2.2 Causes of tax evasion

According to Nzotta (1995), a number of factors are responsible for tax evasion and

these includes;

(i) The high level of corruption by the government officials at all levels and lack of

fiscal transparency this affects the willingness of tax payers to pay tax in the

sense that they believe part of it will go to top government officials private

pockets.

(ii) Corrupt practices of some tax officials encourage tax evasion who sometimes

collude with tax defaulters

(iii) Complexity of tax laws and by-laws contribute to tax evasion. There have been

instances of multiple taxes by two –tier at the same time. This gives room for

tax evasion.

(iv) Absence of strong deterrent punishments and willingness to prosecute tax

offenders whether mighty or poor contribute to rampant tax evasion.

(v) Nature of administration by many Inland Revenue Service offices hampers the

task of assessment, investigation and administration of taxes. There has been

poor database and inadequate information system for effective tax planning.

(vi) Detoriating standard of living with reduction in level of income contributes

largely to tax evasion.

(vii) Lack of adequate information and improper education of the citizens on their

obligations to the state about taxes; affect the willingness to pay taxes.

(viii) Low level of patriotism among the citizen affects the attitude to taxes and

willingness to pay taxes.

2.3 Reducing tax evasion

The primary goal of a revenue authority is to collect taxes and duties payable in

accordance with the law and to do this in such a manner that will sustain confidence

in the tax system and its administration. The action of tax payers, whether due to

ignorance, carelessness, recklessness, or deliberate evasion as well as weakness in a

tax administration mean that, instances of failure to comply with law are inevitable.

Therefore, tax administration should have in place strategies and structures to ensure

that non-compliance with tax law is kept to a minimum.

13

A high degree of tax evasion has unpleasant repercussions on resources, it affects

wealth redistribution and economic growth, creates artificial biases in macro-

economic indicators. No matter how fair a tax system appears to be on paper, it will

lack the standards of equity if there is high incidence of tax evasion or artificial tax

avoidance. Sayode and Kajola (2006), was of opinion that, where there are

manipulations of various kinds which have the effect of reducing considerably the

revenue that is due to the government, such practices should be prevented. Tax

evasion and tax avoidance present one of the fundamental problems of tax

administration in developing countries. All forms of tax in developing countries are

to some extent avoidable and evaded largely because the administrative machinery

that ensures effectiveness is weak. Tax evasion and uncontrollable tax avoidance

must be viewed seriously. It leads to loss of revenue for the government, causes even

honest tax payers to lost faith in tax system and tempted to join the leagues of tax

dodgers if it is too wide spread and unchecked.

The important task of tax administration is to reduce tax evasion, in other words

dealing with those tax payers who act dishonestly. To be able to understand the scope

of the problem of evasion, tax authorities require estimates of the extent and nature

of the potential tax base, for example, by estimating what is sometimes called the

“tax gap” (Bird and Zolt, 2003). The penalty structure should be such “that those

who should register do so, that those who should file do so, and that those who under

report their tax bases are sufficiently penalized to increase the costs of evading tax”

(Bird and Zolt, 2003).

2.4 Factors affecting tax compliance

Several writers have come up to suggest what really affects the tax payer’s

compliance leading to evasion of taxes.

Chin and Reinikka (1999) argue that people engage in tax evasion when the expected

benefits (low taxes) are equal to the expected costs (bribes and punishments). In the

standard economic model of tax payer behavior, the perceived quality of government

does not influence the level of taxes remitted. The basic behavioral assumption is

that people are free-riders; no one will voluntarily contribute to the government

14

unless the threat of punishment makes it sensible (Allingham and Sandmo, 1972).

But an increasing amount of evidence from experimental studies and survey data

reveals that the rate of contribution to a public good is affected by factors such as

citizens’ trust in others and perceptions of trustworthiness of the government

(Slemrod, 2003).

As Scholz (1998:137) pointed out, without trust there is little basis for social co-

operation and voluntary compliance with laws and regulations that could potentially

benefit everyone. Thus, without trust coercion provides a reasonable guide for

governance. The temptation not to comply even if others do comply defines the free-

riding problem that is endemic in collective action situation in private as well as in

public institution (Hardin, 1982). Why should the tax payer not take the advantage of

the opportunity for a free-riding? In this perspective, Levi (1998) argues that citizens

are likely to trust the government only to the extent that they believe that it will act in

their interests, that its procedures are fair and reasonable, and that their trust of the

state and others is reciprocated. She stresses that government trustworthiness, plus

the perception that others are doing their share, can induce people to become

‘contingent consenters’ who co-operate even when their short-term interest would

make free-riding the individuals best option. Accordingly, citizens’ willingness to

pay taxes voluntarily rests on the local government’s capacity to provide services and

its demonstrated readiness to secure the compliance of the otherwise non-compliant.

Following the analytical approach suggested by Levi (1998, 1997) the relationship

between a taxpayer and the local government includes at least three elements. First,

there is an element of fiscal exchange, as payment of taxes and the provision of

services may be interpreted as a contractual relationship between the tax payer and

the local government. A citizens’ decision to pay derives from his /her perception

that the local government is trustworthy. Second, there is an element of coercion, as

represented by enforcement activities of tax collectors and the penalties imposed on

those detected for non-payment. The credibility or trustworthiness of the revenue

administration’s sanctions against defaulters is important in this context. A third

element is the impact of social influences and norms on the taxpayer’s compliance

15

behavior. For example, attitude toward the government may affect the tax payer’s

normative commitment to comply with the law. An individual’s perceptions, in

combination with her opportunities, may thus determine her current choice of

whether or not to be a tax evader.

Trust and coercion are closely linked in the new perceptive on compliance and

governance (Scholz, 1998: 163). The government is sometimes crucial in

establishing levels of trust among citizens that make possible a whole range of social,

political and economic transactions that would otherwise not be possible (Levi,

2002:20). Critical to this task is its use of coercion to ensure that non-compliers are

punished. As argued by Scholz (1998), no law can reshape behavior without the

backing of an effective enforcement agency. On the other hand, an effective

enforcement agency does not deter each citizen from breaking the law but instead

tries to provide a basis for trust buy ensuring that non-compliers will be made to

obey the law.

Enforcing a tax system is neither an easy nor a static task. It is especially difficult in

the dynamic environments prevailing in developing countries. Unless this task is

approached professionally and with consistency, even a well-designed tax system

will fail to produce good results (Bird and Zolt, 2003). This is especially evident at

local government level where tax collectors seldom use the available enforcement

mechanisms provided by law, or where they do enforce, inappropriate mechanisms

are sometimes used.

Bird (2003) states that, “due attention must be given to the extent to which revenue is

attributable to ‘enforcement’ (the active intervention of the administration) rather

than ‘compliance’ (the relatively passive role of the administration as the recipient of

revenues generated by other features of the system)”. However, distinguishing

between enforcement and harassment seems to be an issue in some jurisdictions.

Wang (2010) concludes that, tax payers’ confidence is largely dependent on; the

efficiency and efficacy of government services, i.e. whether the services provided is

cost-efficient (i.e. perceived to represent “value for money”) and whether the revenue

16

is appropriately spent in a transparent and accountable manner: and the perceived

level of fraud and corruption in the government, and whether the government is

serious in combating fraud and corruption.

In an environment where tax payers generally trust the government, voluntary tax

compliance is more apparent. With references to the local government in Tanzania

Fjeldstad (2006:24) states that “tax payers’ unwillingness to pay is not perceived to

be the main problem in revenue collection. The survey data point at misuse of tax

revenues by council staff (particularly by tax collectors) and councilors as a major

problem. Hence, strong punishment of council staff and councilors whose

mismanagement is detected is perceived to be a key measure for improving the

present system.

Mikelsell and Birskyte (2007), states that, complexity can also frustrate tax payers in

their efforts to comply with the tax laws and create a sense of unfairness. Technical

complexity and the demand for legal completeness produce significant alienation of

tax payers leading to lower tax morale and consequently evasion. In developing

countries the compliance has been constrained by the significant number of changes

to the tax laws, that they are now so complex and only a handful of tax experts can

understand them. This creates additional problems for compliance by tax payers who

do not have access to sophisticated tax specialists (Oberhoizer, 2008).

2.5 Local Government Authorities

Local government in Tanzania is established under Article 145 (1) of the United

Republic of Tanzania (URT) Constitution of 1977 which provided that; “There shall

be established Local Government Authorities in each region district, urban areas, and

village in the United Republic of Tanzania which shall be of such types and

designation as shall be prescribed by legislation enacted by the National Assembly or

the House of Representatives of Zanzibar”.

It is usual in local government for people to elect their representatives to their local

council. But the freedom to one’s representatives also imposes responsibilities upon

the citizens to pay taxes in order to finance many of the services for their wellbeing

17

in their jurisdiction. Local Authorities have legal obligation in fulfilling their mission

to the public. It is the role of local authorities to make by laws that empower it to

impose and collect revenues for financing local public services. Both rural and urban

Authorities in the United Republic of Tanzania were abolished in 1972 and the

decentralization introduced in 1973 under the control of central Government.

According to Haonga (2003), after Local Authorities were abolished urban councils

were merged with neighboring rural areas. The government focus was on rural areas

and this led to rapid deterioration of condition in urban areas, schools had no desks,

textbooks, buildings and roads remained un- maintained, dispensaries lacked drugs.

An outbreak of cholera in many urban areas in 1976 prompted the government to

create an investigation team to recommend on the future administration of urban

areas. The report that was submitted recommended the reintroduction of urban local

government in the year 1982 a legislation was enacted to establish Local Authorities

at a level in accordance with provision of the law.

According to Klaus (1998), the Local Government Authorities have many functions,

but among those functions are;

1. Effective collection and proper utilization of revenues of Local Government

Authorities.

2. The consideration, regulation and coordination of development and

mobilization of productive forces to combat poverty, diseases and

ignorance, and to control and improve agriculture, trade, commerce and

industry.

3. Other functions of local authorities can be performed depending on the

availability of resources, these include;- control of prescription of methods

of husbandry on agricultural land, the building , equipments and letting of

shops and dwelling houses, establishment, maintenance operations, control

of drainage and sewerage woks, and any other functions which may be

beneficial to the residents in their jurisdiction. The Local Government Act

of 1982 laid the foundation for the financial management and revenue

raising powers of local authorities. Section 13 and 15C of this Local

18

Government Act allowed Local authorities to impose flat rate property

taxes by enacting by-laws which were subject to central government

approval.

2.6 Characteristics of good revenue sources

Characteristics of good revenue sources are very intuitive and have been known for

many centuries. In 1776, Adam Smith, a classic economist, formulated some of these

principles in his seminal The Wealth of Nations. “The subject of every state ought to

contribute towards the support of the government, as nearly as possible, in proportion

to their respective abilities; that is, in proportion to the revenue which they

respectively enjoy under the protection of the state”.

This sentence carries the seeds of what is today known as the “ability to pay”

principle and the “benefit principle”. The first principle states that tax payers with

greater ability to pay should pay more. Today these two fundamental principles of

taxation are perceived by some as mutually exclusive. The range of services provided

by government might have indeed benefited the wealthier more. Also in the same

paragraph Smith asserts that, “The expense of government to the individuals of a

great nation is the expense of management to the joint tenants of a great state, who

are obliged to contribute in proportion to their respective interests in the state”.

Thus, by saying that citizens should be taxed “in proportion to the revenue which

they respectively enjoy under the protection of the state” Adam Smith probably

meant that to be in proportion to benefits from the government services.

“The tax which each individual is bound to pay ought to be certain, and not

arbitrary. The time of payment, the manner of payment, the quantity to be

paid, ought all to be clear and plain to the contributor to pay it. Every tax

ought to be contrived as both to take out and to keep out of the pockets of the

people as little as possible over and above what it brings into public treasury

of the state. In other words a good revenue source should minimize the costs

of compliance by tax payers as the latter represent a pure waste to the society

being a loss of time and efforts for the tax payer without any associated gains

19

for the state budget. In addition to the Smith canons, the modern public

literature generally recognizes a number of principles as commonly

acknowledged characteristics of a good revenue source, among them are;-

Adequate revenue yield: The revenue yielded by local taxes should be

adequate. Among others, revenue adequacy should be considered relative to

the funding needs of the local government level and relative the size of the

economic base of the local community.

Revenue buoyancy: Overall, revenue should change roughly in proportion to

the economic base. This does not mean that government revenue should

follow short-term economic fluctuations. Rather, as the long-term economic

development makes tax payers demand a wide range and a better quality of

services from the government, this trend should be matched by increasing

yield of the tax system applied to the growing economy.

Equity: Good revenue sources are “fair” or equitable. Economists consider

two dimensions to fairness in a fiscal system.

1. The notion of horizontal equity which suggests that tax payers in similar

circumstances should be treated similarly by the tax system. The tax

should be fair not only in terms of definition but also application. Thus,

tax assessment should be uniform and comprehensive. A perception of the

tax as being “fair” is believed to contribute to the probability of voluntary

compliance.

2. In addition to horizontal equity, the tax system should also displays

vertical equity, or fairness between tax payers at different rungs on the

income ladder. The determination of what is “fair” is subjective, but at a

minimum, most people believe that wealthier tax payers should pay more

in taxes. As noted earlier, this principle is known as the “ability to pay”

principle. The other notion of vertical equity often considered

(particularly at the local level) is the benefits principles. As discussed

20

above, the benefits principle suggests that tax payers should pay tax in

(approximate) proportion to the benefits received from public services.

Efficiency: An efficient tax revenue source minimizes administration and

compliance cost, and in particular generates an amount of revenues well

above these costs. Good tax policy should not give tax payers incentives to

change their behaviors and discourage productive activities in the economy.

Good taxes should be difficult to avoid and evade.

Politically acceptable: A good revenue source is politically acceptable and

sensitive to the historical and institutional framework in a country.

Correspondence: A local tax base should establish a link between the

jurisdiction in which a tax is levied and the area in which the benefits are

received from the local services funded with that revenue source.

Smith also argued that local revenue sources should have an immobile base, so that

local tax payers are not able to move to avoid the local tax. However, in reality this is

only a requirement if the local tax system fails to satisfy some of the principles for

sound local revenue. For instance, if the benefit principle is preserved in assigning

local taxes, the potential mobility of taxpayers would not necessarily bring about

economic distortions, since tax payers would be receiving local benefits in

accordance with local taxes paid. Meanwhile, the potential mobility of tax payers and

tax bases can actually increase efficiency in the delivery of substantial government

services by forcing local officials to provide a balanced basket of substantial services

and substantial taxes. However, if non-benefit taxes are applied to mobile tax bases,

inefficiencies can arise from tax avoidance costs, as tax payers could try to reduce

their substantial tax liability by moving between substantial jurisdictions without

affecting the benefits received from publicly provided goods and services. Equally

distorting, and therefore to be avoided, are local taxes that can be “exported” to tax

payers in other jurisdictions. Such local “tax exporting” is practice that violates the

correspondence principle.

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2.7 Local government revenue sources in Tanzania

Although Local Government Authorities get most of their money, around 90% from

grants and transfers from central government, they also collect their own local tax

revenues (often referred to as “own source revenues”).own source revenues, on

average make up 10% of a Local Authority’s revenue. Local revenues are important

for two reasons. First, unlike many of the intergovernmental grant mechanisms, they

are not tied to any particular sector or type of expenditure, which gives LGAs some

freedom to respond to local needs and priorities. Second, because these sources are

raised from the local population it can be argued that they strengthen the

accountability of local governments to the local community (William, 2007).

Until 2003, Tanzania followed a “permissive” approach to local government

taxation, meaning that LGAs were essentially allowed to come up with their own

local tax structure, this open approach to local revenue was a major contributing

factor to a highly fragmented local tax system. It was felt by many that the

fragmented local tax structure imposed an excessively high burden on local tax

payers (through high cumulative rates and administration costs) and caused an

environment not conducive to economic growth. The system of local taxation in

Tanzania was significantly reformed in 2003 (and further modified in 2004) by

proclamation of the Minister of Finance during the budget speech. The reform effort

known as “rationalization and harmonization” of local revenue sources eliminated

taxes that are considered nuisance.

Fiscal decentralization is not a new theme in policy agenda of the Government of

Tanzania. Since the reintroduction of democratically elected local government in

1984, the government has been systematically expanding the roles and financial

responsibilities of Local Government Authorities in a well-structured and considered

manner.

As noted in the Local Government Fiscal Review (2004), local governments are an

important and an integral part of public sector finances of Mainland Tanzania today,

as local governments have significant responsibility in the delivery of key

government services. While local government authorities collect roughly 3-5 percent

of all public sector revenues, they are responsible for over 20 percent of public sector

22

spending. As such, a sound framework for local government finances is a key factor

in assuring that the public sector delivers quality public services; provides an

enabling environment for economic growth; and pursues an aggressive agenda of

poverty reduction.

The Government’s vision of the, country’s local government system is clearly set

forth in its policy paper on Local Government Reform (MRALG, 1998), which was

developed in a deliberative and Consultative process. The vision is based on the

principle of “decentralization and devolution” by which autonomous local

governments are empowered with political and administrative control and provided

with the financial resources to assure the effective delivery of services to the public.

While the policy paper provides the broad outlines for the system of local

government finances, the document falls short from defining a comprehensive

strategic framework for local government finances. In 2004, the Government of

Tanzania determined that it would be useful to undertake a comprehensive review of

the policy framework underpinning the structure of the financing of local

government, in a light of a number of ongoing reform initiatives impacting local

government finance. Based on a thorough review of the existing approach to local

government finance in Tanzania, sound principles of fiscal policy, and international

best practices, this documents set forth the Government’s strategic framework for

financing local government authorities, including the assignment of expenditure

responsibilities, the collection of own local revenues, the role of intergovernmental

transfer schemes, as well as local government borrowing.

The Local Government Finances Act 1982, as reformed in 2003 and 2004 provides

LGAs with a list of taxes, levies and fees that local governments are allowed to

collect as in table 2.1. In contrast to the permissive approach to local taxation that

prevailed before 2003, this current list is a so-called “closed list” local governments

are not allowed to levy any taxes, levies or fees which are not on this list. Thus local

governments are now required to set their own revenue policy within the limits set by

the central government. In principle revenue sources in Tanzania are administered by

the local government and they are fully retained by them. The rates applicable to

these local levies and fees are in many cases determined by the local governments

23

although practically there is a maximum rate determined by the central government.

It is unclear to what degree local governments strictly adhere to the new “closed list”

and the maximum rates. In practice, it appears that local governments tend to focus

their revenue efforts on a few local tax instruments to maximize yield relative to

collection efforts. As a result, LGAs do not pursue all the taxes assigned to the local

government level with equal effort. The tax rates applied to many smaller local

revenue sources (or revenue sources that are considered a “nuisance” locally) tends

to be lower than the maximum.

Table 2.1: Closed List of Revenue Sources for Local Governments (2005)

Tax on property Property tax

Turnover taxes Service levy

Taxes on goods and services Crop cess (maximum 5% of farm gate price) Forest produce cess

Taxes on specific services Guest house levy

Motor vehicles, other equipments and ferry licenses Vehicle license fees Fishing vessel license fees

Administrative fees and charges Market stalls/ slabs dues Magulio fees Auction mart fees Meat inspection charges Land survey service fee Building permit service fee Permit fees for billboards, posters or hoarding Tender fees Abattoir slaughter service fee Artificial insemination service fee Livestock dipping service feeOther taxes on the of Goods, permission to use Goods Forest produce license fees Building materials extraction license fee Hunting license fee Muzzle loading guns license fees Scaffolding/ Hoarding permit feesEntrepreneurial and property income Dividends Other domestic property income Interest Land rentFines, Penalties and Forfeitures Stray animals penalty Share of fines imposed by magistrates court Other fines and penalties

Livestock market fee Fish landing facilities fee Fish auction fee Health facility user charges Clean water service fee Refuse collection service fee Cesspit emptying service fee Clearing of blocked drains service fee Commercial fishing service fee Intoxicating liquor license fee Private health facility license fee Taxi license fee Plying (transportation) permit fees Other business license fees Revenue from the sale of building plans Building valuation service fee Central bus stand fees Sale of seedlings Insurance commission service fee Revenue from renting of houses Revenue from renting assets Packing fees

Source: Ministry of Finance, 2005

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2.7.1 Methods of Local Government revenue collection in Tanzania

According to joint report (2005) between NIBR/CMI/REPOA on Local governance,

finances and service delivery in Tanzania conducted on six case councils: Local

government tax collection is the responsibility of the council staff and is completely

separated from the central government. In district councils it is organized around

three levels, namely the council headquarters, the wards and the villages. At the

council headquarters the responsibility for tax collection rests with the council

treasury, headed by the District treasurer (DT). At the ward level, the responsibility

rests with the office of the Ward Executive Officer (WEO). In wards with greater

revenue potentials there will be a ward revenue collector (WRC) to support the

WEO. At the village level, the responsibility rests with the office of the village

executive officer (VEO).

In practice, the organization of tax collection varies between councils, for instance in

some councils the village level has been excluded from collection, and the task is

taken over by the ward level. This is due to incentive problems connected with tax

collection at the village level. Most case councils have introduced new methods to

increase revenues from existing sources by outsourcing some of the revenue

collection to private collectors.

2.8 Empirical literature review

Tax compliance, according to Cobham (2005) is a problem to many countries as

measured by tax to GDP ratio although it has been improving for many countries.

For example, its one-third of GDP in rich countries; Latin America and the

Caribbean- 17% of GDP and low income countries (in Sub Saharan Africa) showed

less than 15% to GDP (the recommended rate). It remains a big challenge to low

income countries. This has promoted radical tax reforms in countries like Bolivia,

Uruguay, Colombia, Jamaica and Spain with notable success (Bird & De Jantscher,

1992).

Due to low income levels and rampant tax evasion in most developing countries

including Tanzania, governments have been facing difficulties to expand their tax

base to meet the revenue needed to finance service delivery. This has encouraged the

25

governments to resort to increasing the same type of taxes every year in order to cope

with the yearly increased budgetary demand for service delivery in the country. Lack

of proper information has also denied the government of Tanzania to raise substantial

revenue from non- tax sources such as on properties taxes, user fees and other non-

tax sources whereas in developed countries this has been contributing to more than

30% of the government revenue (Chipeta, 2002). For instance in FY 2012/2013 the

domestic tax revenue collected in Tanzania is project to amount to 53% of total

budget and non-tax revenue contributes to only around 0.7% of total government

revenue while the deficit amounting to around 39% is to be financed by foreign and

domestic loans and grants that will contribute to around 40% of the total budget.

2.9 Conceptual Framework

The Conceptual framework is an assemblage set of research concepts cum variables

together with their logical relationships often represented in the form of: diagrams,

charts, graphs, pictographs, flow-charts, organ gram, or mathematical equations

(Ndunguru, 2007). The study describes a casual model that shows factors for tax

compliance affecting tax compliance in the Sumbawanga District Council. The

independent variable of this study is Factors for tax compliance while the dependent

variable is the Tax compliance. Between the two variables, there are intervening

variables used to achieve tax payer’s decision to comply or not to comply, these

intervening variables are tax evasion and tax avoidance.

The term Factors for tax compliance refer to attributes that influence tax payer’s

decision to pay or not to pay tax hence affecting tax revenue collection, these

attributes include; satisfaction of the people on service delivery by the government,

behavioral attitudes of tax payers, complexity of tax laws, tax law enforcement and

trust worth of the government. In the literature review Levi (1998:1997) similarly

pointed out on service delivery as a factor for tax compliance, by arguing that, the

relationship between a tax payer and the local government includes three elements;

among them is the element of fiscal exchange relating to payment of tax and the

provision of services.

26

With regard to enforcement factor: Allingham and Sendmo (1972) reveals that

enforcement is among factors which can induce tax payer’s decision to comply or not

to comply, by arguing that no one will voluntarily contribute to the government

unless the threat of punishment makes it sensible. Scholz (1998) similarly argues

that, no law can reshape behavior without the backing of an effective enforcement

agency. Bird and Zolt (2003) also states that enforcing a tax system is neither an easy

nor a static task. It is especially difficult in the dynamic environments prevailing in

developing countries.

Mikelsell and Birskyte (2007) revealed complexity of tax laws also as a factor to tax

compliance, by stating that complexity can frustrate tax payers in their efforts to

comply with the tax laws and create a sense of unfairness. Technical complexity and

the demand for legal completeness produce significant alienation of tax payers

leading to lower tax morale and consequently evasion.

Slemrod (2003) reveals “trust” is another factor for tax compliance by arguing that,

the rate of contribution to the public good is affected by factors such as citizens’ trust

in others and perceptions of trustworthiness of the government. Similarly Scholz

(1998:137) pointed out that, without trust there is little basis for social co-operation

and voluntary compliance with laws and regulations that could potentially benefit

everyone. Levi (1998) argues that, citizens are likely to trust the government only to

the extent that they believe it will act in their interests.

Tax evasion and tax avoidance are intervening variables used to reduce or avoid tax

obligation. Tax evasion refers to failure to pay taxes which are legally due and

therefore is a criminal offence, the variable involves practices like: deliberate

nonpayment of taxes due, declaration of less income, profits or gains in the returns

and overstating deductions in the financial returns produce for tax purpose in order to

achieve noncompliance. From the existing literature review, Allingham and Sandmo

(1972) similarly explained tax evasion by referring to the failure to pay taxes which

are fairly due. Soyode and Kajola (2006), explained tax evasion in terms of

deliberate and willful practice of not disclosing full taxable income, or reduce tax

liability or by making untrue claims on the income tax form. Whiteman and Wheat

27

Craft (1965) explained the same tax evasion in terms of reduction of tax liability by

omitting certain items from returns.

Tax avoidance is an act of taking advantage of any loopholes and weaknesses,

deficiencies and loose or vague clauses in the tax legislations to minimize or

eliminate tax altogether if the tax authority detect this, the only thing is to amend the

tax laws that allow the possibility of tax avoidance. Soyode and Kajola (2006) also

explained tax avoidance by observing dimensions like loopholes in the tax laws,

from which the tax payer takes the advantages to avid tax traps so as to pay less tax

than ought to be paid.

The term Tax compliance refer to voluntary payment of correct amounts of tax

revenue to the tax authorities, tax compliance enhances local revenues to the LGAs

and can be explained by dimensions like; correct reporting (i.e. accurate declared

taxable income and the tax amount), timely filing (producing tax returns as required),

and timely payment (payment of assessed tax liability before or on due date).

According to Plumley (1996) tax compliance is explained by dimensions like timely

filing of any required return, accurate reporting of income and tax liability and timely

payment of tax obligation. Similarly Brown and Mazur (2003) explained the same by

considering three distinct types of compliance, that is, payment compliance, filing

compliance and reporting compliance.

Several theories of tax compliance exists in the literature, all intended at describing

factors related to influences on the changing behavior of taxpayers’ decision to pay

or not to pay tax. According to the Conceptual framework model in Figure: 2.1, it

constitutes three distinct variables that include: factors for tax compliance, tax

evasion and tax avoidance each having either direct or indirect influence on tax

compliance.

Factors for tax compliance: refers to attributes or reasons that influence taxpayers’

decision to engage in tax evasion or tax avoidance. These factors which influence tax

compliance include; satisfaction in service delivery, behavioral attitude, complexity

of tax laws, enforcement of tax laws and trustworthiness. According to the literature

28

these factors have the most influence on tax compliance and if one or more of these

factors is conceived by tax payers, the same tax payers take a chance to engage in

practices that reduces tax liability or wholly exempt him from tax obligations.

Tax evasion: tax evasion is an attempt to escape tax liability (wholly or partially) by

breaking the tax law and it is a criminal act since it is achieved principally by

making false declarations such as under-reporting income or over-reporting relieves

and allowances. Tax evasion is a variable used to achieve taxpayer’s decision of non-

compliance, hence it starts where either of the factors that affect tax compliance ends

as illustrated in Figure: 2.1. Tax evasion mostly constitute of: deliberate non -

payment of tax obligations; declaring less income, profits or gains and overstating

deductions in order to reduce taxable and tax amounts.

Tax avoidance: Tax avoidance is the practice and technique where by one so

arranges his business affairs such that he pays little or no tax at all but without

contravention of the tax laws. Tax avoidance is used to achieve taxpayer’s decision

of non-compliance by taking advantage of any loopholes and weaknesses,

deficiencies and loose or vague clauses in tax legislations to minimize or eliminate

tax liability altogether. Tax avoidance is not punishable in law like it’s for tax

evasion. Though tax evasion and tax avoidance differs on the means to end, but have

similar end of reducing tax liability. Sayode and Kajola (2006) asserted that, if you

over do tax avoidance, you will eventually enter into tax evasion, tax evasion begins

where tax avoidance ends, this relationship has been shown in Figure 2.1

accordingly.

Tax compliance: Tax compliance is a process of following the country’s tax system.

Every country has its own taxing system, which is regulated and managed by the

government. The system is based on the country’s economics and its inner political

situation and international politics. According to the literature, tax compliance is the

dependent variable which its change is impacted by independent variables, the

logical relationship shown in Figure: 2.1 revealed that, all of the effects of

independent variables ends there, regardless of whether they are positive or negative.

29

Figure 2.1: Conceptual Framework

Source: Author’s Own Construct, 2014

Tax evasion Deliberate non payment Declaring less income, profits or

gains Overstating deductions

Tax compliance Correct reporting Timely filing Timely tax payment

Tax avoidance Tax law loopholes Tax law weaknesses

Factors for tax compliance Service delivery Attitude Complexity Enforcement Trust worth of the government

30

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

The first part of the chapter explains the research design used while the second part

provides the area of the study. Section three of the chapter discusses the study

population and the fourth part gives the sample size and the sampling techniques

used. Research variables and units of measurement are explained in part five, part six

of the chapter covers research instruments, while part seven presents the validity of

the instruments. Part eight is concerned with sources of data. Data collection

methods are presented in part nine, part ten discusses how the collected data were

processed and analyzed and the last part presents the limitations to the study.

3.2 Research Design

The research design was a case study. The case study enabled the researcher to cope

with time and financial constraints allocated for the purpose. However, this design

enabled the researcher to use effectively and efficiently the scarce financial and time

resources endowed for the study. A case study research design creates an enabling

environment for combining a variety of tools such as interviews, documentations and

observations to conduct a thorough inquiry in the phenomenon. A case study design

enabled the researcher to study the factors for tax compliance, procedures of tax

collection, practices used in achieving tax evasion and avoidance and ways collected

taxes are accounted for in Local Government Authority in Tanzania.

3.3 Study Area

The study was conducted at Sumbawanga District Council. The researcher selected

Sumbawanga District Council because of his familiarity and awareness of this Local

Government. The Sumbawanga District Council is among the Local Government

Authorities in Tanzania that is challenged with tax compliance to enhance local

revenue.

31

3.4 Study Population

Population refers to larger group from which the sample is taken (Kombo and

Tromp, 2006) In this study the researcher targeted officials of the Sumbawanga

District Council responsible for tax collection, tax payers (crop and animal traders)

and agents for tax collection. The population comprised of both male and female,

targeted personnel for the study were District Treasurer (DT), District Trade officer

(DTO), Revenue Accountant (RA/CC), Ward Executive Officers (WEOs), Village

Executive Officers (VEOs) and Ward Revenue Collectors (WRCs), collecting agents

and business men in agricultural produce. The researcher interviewed the above

population in order to get more clarification about factors that affect tax compliance

and the nature of tax evasion and tax avoidance in Local Government Authority.

3.5 Sample Size and Sampling Techniques

The sample of 51 was considered appropriate for the study; respondents from

different population categories as indicated in Table 3.1 were selected and

interviewed.

Table 3.1: Samples drawn from different population categories

Population category Sample SampleSize

Percentage ofthe Sample

Employees of SumbawangaDistrict Council

Head of Units (DT, DTO, RA/CC) 2 4Ward Executive Officers (WEOs) 14 27Village Executive Officers (VEOs) 25 49

Revenue Collectors Revenue Collecting Agents (RCA) 8 16

Traders/ Business persons Crops (Cereals) 1 2Animals (cows, goats and sheep) 1 2

Total 51 100

Source: Research primary data, 2014

The sample included forty one (41) respondents from the local government authority

which represents eighty percent (80%) of the total sample. Eight (8) revenue

collecting agents represents about sixteen percent (16%) of the total sample, and two

(2) traders representing about four percent (4%) of the total sample. Majority of the

32

respondents, however, came from VEOs (49%) and WEOs (27%) because are the

ones at the grassroots level involved in tax collection, thus their views and response

were considered to be of significance for the study.

In this study, the researcher used Purposive and simple random sampling techniques.

Purposive sample design involved selecting units (people) whose views are thought

to be relevant, important and particularly worth obtaining for the research, Kothari

(2010). Thus the researcher deliberately selected units to be included in the sample;

the sampling method was called for, due to the nature of the study which demanded

for the collection of Data from units with involvement, specialist, and experience in

matters or field related to Local Government Authorities taxation where most people

are reluctant to share information. However, for the traders, simple random sampling

technique was used as this offered the researcher with the opportunity to select

respondents who fully represent the entire population. Among the traders category

two (2) people one is dealing with agricultural produce and the other in animal

businesses were picked for the interview and questionnaires filling.

3.6 Research Variables

The principle independent variable was factors for tax compliance and the dependent

variable was tax compliance.

3.6.1 Independent Variable

Factors for tax compliance was measured using satisfaction of tax payers to the

Sumbawanga District Council in form of transparency on the use of collected taxes,

service delivery, tax laws enforcement, complexity of by-laws and behavioral

attitude.

3.6.2 Dependent Variable

Tax compliance as a dependent variable was measured using practices used by tax

payers to evade and avoid local taxes.

33

3.6.3 Validity of Instruments

The validity of the instruments was performed by sending the questionnaire to an

expert for rating the relevance of the questions.

3.7 Sources of Data

The researcher used both primary and secondary data. Primary data were obtained

from responses administered through questionnaires to officials of SDC responsible

for local tax collection for which the following were included; District treasurer (DT)

and District trade officer (DTO) at the head office, where by 14 Ward executive

officers (WEOs) and 25 Village executive officers (VEOs) from low level were

interviewed.

Also 8 contracted revenue collecting agents were involved in the study together with

1 crop trader and 1 animal trader in the council. Secondary data were obtained from

Sumbawanga District Council documents such as audited and unaudited financial

reports, minutes of the planning and finance committee and the medium term

expenditure frame work (MTEF).

3.8 Data Collection Instruments

Questionnaires were used to collect data from respondents; some questionnaires were

left to those with busy schedules and were picked later after being filled. Where the

respondent could neither read nor write especially in English, the researcher read the

questions to the respondent with a number of probes. Before interviewing, the

researcher introduced himself, the title of the study, and clarified on the overall

objective, time to be taken and confidentiality assurance by the use of interview

guide. The researcher also attended the stock market at Muze. The interview guide

used is attached as Appendix 2.

3.8.1 Questionnaires

Questionnaires were issued to respondents, having both closed-ended and open-

ended questions. The closed-ended questions enabled the researcher have responses

in his own words, while the open-ended questions provided chances to interviewees

34

to include more issues that were outside the knowledge and experience of the

researcher. The questionnaire used is attached as Appendix 1.

3.9 Data processing and Analysis

Data collected were carefully compiled, sorted, edited, classified, coded and checked

for accuracy and relevancy.

3.9.1 Data processing

Data from various documents including questionnaires were read carefully, edited for

completeness and accuracy. Data pertaining to local revenue collected over 5 years

was aggregated with the help of Exel spread sheet and SPSS programme.

3.9.2 Data analysis

Tables, graphs, figures and percentages were used to analyze and present the findings

of the study.

3.10 Limitations to the study

Like any other research, a number of problems were encountered during the study.

i. Lack of co-operation from respondents, as some of them thought they were

suspects of tax evasion and avoidance. Here the researcher was forced to give

more clarification and submit an introduction letter from the University that

tried to convince respondents to understand that, the study was for academic

purpose and their responses would be kept confidential in order to give them

confidence and thereafter, they were able to respond positively.

ii. Communication was a problem as most of the respondents were not able to

read and write in English, in this case, questionnaires had to be translated

during the interview and others were allowed to write their responses in

Swahili language.

iii. The study was affected by non-response from some expected respondents that

included one WEO, Revenue accountant and two agricultural products

traders.

iv. Financial constraints did not permit for in-depth investigation, as some

respondents required money before they could respond.

35

v. Busy schedules of some potential respondent rendered the researcher difficult

to interview them, especially for respondents dealing with a business of

buying and selling animals in different markets, as evidenced at Muze market

where by after buying they immediately rushed to other animal markets.

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CHAPTER FOUR

PRESENTATION AND DISCUSSION OF FINDINGS

4.0 Introduction

This chapter contains the results, discussions and the interpretation of the responses

from the study. The chapter starts by presenting the profile of respondents being

either village executive officers (VEOs), ward executive officers (WEOs), private

revenue collecting agents, traders and head office officials directly involved in tax

affairs guided by study objectives. The findings and presentation included: First, the

characteristics of respondents by title and experiences, characteristics of respondents

by age and sex, level of education and causes of tax evasion and tax avoidance.

Moreover, the same chapter discusses on formal knowledge in taxation, reasons for

non-tax compliance, accountability for the collected tax and procedures used to

collect tax in local governments.

4.1 Profile of the Respondents

The study was able to collect data from different respondent as shown in Table 4.1.

Out of 51 respondents who participated in the study, about 25 (49%) were Village

Executive Officer (VEOs). About 14 (27.5%) respondents were ward Executive

Officer (WEO), while 8 (15.7%) were agents and two of them equal to (4%) were

officials at the district council head office, involving District Treasurer and the

District trade officer.

Table 4.1: Title of Surveyed Respondents

Title Frequency PercentWEO 14 27.5Agent 8 15.7Traders 2 3.9District Trade officer 1 2.0District treasurer 1 2.0VEO 25 49.0

Total 51 100.0

Source: Research primary data, 2014

37

Majority of the respondents (76%) were ward and village executive officers whose

functions include revenue collection, monitoring, supervision and custody of revenue

at their levels before the collected revenue is remitted to Council head office for

banking and accounting procedures. The study was furthermore interested to know

for how long the respondents have been in those positions. Responding to this

question, majority of the respondents 19 (37.3%) had experience of more than 10

years (Table 4.2). About 18 (35.3%) respondents had experience of 5 to 10 years;

others had an experience less than 5 years. The findings indicate that, data collected

is of worth as most of respondents had enough experiences in relation to issues

pertaining to local tax collection and its compliance.

Table 4.2: Characteristics of Respondents by Title and Experience

Title < 2 years 2 - 5 years5 - 10years 10+ years Total

WEO2

(3.9%)2

(3.9%)2

(3.9%)8

(15.7%)14

(27.5%)

Agent1

(2.00%)3

(5.9%)4

(7.8%)0

(0.0%)8

(15.7%)

Traders0

(0.00%)0

(0.0%)2

(3.9%)0

(0.0%)2

(3.9%)

District Trade officer0

(0.00%)0

(0.0%)1

(2.0%)0

(0.0%)1

(2.0%)

District treasurer0

(0.00%)1

(2.0%)0

(0.0%)0

(0.0%)1

(2.0%)

VEO4

(7.8%)1

(2.0%)9

(17.6%)11

(21.6%)25

(49.0%)

Total7

(13.7%)7

(13.7%)18

(35.3%)19

(37.3%)51

(100.0%)

Source: Research primary data, 2014

Concerning their sex, the study was able to capture data from 46 male who constitute

90% of the respondents while female were 5 (10%) as seen in Figure 4.1. Majority of

the respondents were male because in the council the majority of VEOs and WEOs

are male.

38

Figure 4.1: Sex of the Respondents

Characteristics of respondents by age are as per Table 4.3. From the Table it has been

revealed that, many respondents 22(43.1%) were aged between 31 and 40 years of

age. Actually 48 (94.1%) of the respondents were 31 and above years of age. This

indicates that, the study collected data from matured people who were able to

provide reliable information about tax compliance and practices used to evade and

avoid tax.

Table 4.3: Characteristics of Respondents by Age and Sex

Age groupSex Total

Male Female

18 – 302

(3.9%)1

(2.0%)3

(5.9%)

31 - 4020

(39.2%)2

(3.9%)22

(43.1%)

41 - 5017

(33.3%)2

(3.9%)19

(37.3%)

51 - 607

(13.7%)0

(0.0%)7

(13.7%)Total 46

(90.2%)5

(9.8%)51

(100.0%)

Source: Research primary data, 2014

39

Among the surveyed respondents, about 29(56.9%) had secondary education,

8(15.7%) had primary education, 6(11.8%) had certificate, 2(3.9%) had degree and

above while 6(11.8%) had diploma or advanced diploma education. More

information is revealed in Figure 4.2. The majority of respondents in this aspect had

secondary education, showing that trainings especially in tax expertise is needed to

enhance tax revenues to Sumbawanga District Council.

Figure 4.2: Level of Education of the Respondents

0

10

20

30

40

50

60

Primary Secondary Certificate Diploma or Adv.Diploma

Degree andabove

15.7

56.9

11.8 11.8

3.9

%

Education

4.2 Causes of tax evasion and avoidance in Sumbawanga District Council

In finding reasons for why there is tax evasion and avoidance in the council, the

study started by asking respondents if they have at all heard about people evading

tax. All of the respondents in the study said that they have heard about tax evasion.

This signifies that, there is a problem of tax evasion in Sumbawanga District

Council. More important is that the government officials who represent the District

Executive Director of the council also have information about tax evasion and tax

avoidance.

Figure 4.3 presents results of response on formal knowledge in taxation from the

respondents. It has been revealed that, neither VEOs nor WEOs had formal education

40

in taxation. Only three respondents other than VEOs and WEOs had knowledge

about taxation that includes one agent, district trade officer and the district treasurer.

Despite that the majority of the respondents had no formal education about taxation,

but they were aware with the tax system of Tanzania at different levels: 39 (76.5%)

respondents understand the system a little while 12 (23.5%) respondents understand

the system very well. Regarding to awareness of tax by-laws and its guideline of

Sumbawanga District Council, all respondents were aware of it. These results

suggest that, knowledge, awareness and practice of taxation in the council is

satisfactory because most of the council officers were at work for many years.

Figure 4.3: Formal Knowledge in Taxation

In Table 4.4, causes of tax evasion and avoidance in Sumbawanga District Council

have been presented. About ten reasons have been mentioned. Out of these, five

reasons have been pointed out many times by respondents. These are: inappropriate

enforcement by the council 44 (86.3%); complexity of the by-laws of the council 40

(78.4%); behavioural attitude 40 (78.4%); unsatisfactory return in form of service

41

delivery 39 (76.5%); and absence of trustworthiness in the local government 38

(74.5%).

Table 4.4: Reasons driving people not to pay tax

ReasonResponses Percent of

Casesn PercentAbsence of trustworthiness in the local government 38 16.2 74.5Unsatisfactory return in form of service delivery 39 16.6 76.5Inappropriate enforcement by the council 44 18.7 86.3Complexity of the by-laws of the council 40 17.0 78.4Behavioural attitude 40 17.0 78.4Lack of tax knowledge 19 8.1 37.3Corruption 3 1.3 5.9Remoteness of some areas 3 1.3 5.9Politics 1 0.4 2.0High tax rate 8 3.4 15.7Total 235 100.0 460.8

Source: Research primary data, 2014

Inappropriate enforcement by the council is the most pointed out cause of tax evasion

and avoidance. This implies that, the council has not demonstrated readiness to

secure compliance from non compliant by taking appropriate measures against tax

evaders. Enforcement requires that, evaders are sufficiently penalized in order to

increase the cost of evasion, as no law can reshape behaviour without a back up of an

effective enforcement.

Complexity of the Council’s tax by-laws, like unsatisfactory return in form of

service delivery also has significant scores. Traders in agricultural products sees the

tax by-laws of Sumbawanga District Council a complex on the fact that, the by-laws

require packaging of 100kgs per sack while the same council has no weighing

facilities and its citizen commonly use “Debe” as unit of measurement of their crops,

due to differences in unit of measurements, traders are being charged with over

packaging as a means of tax evasion and avoidance. Therefore, a translation of

100kgs into equivalent local units of measurement by the Council is important.

Citizens trusts the Government only to the extent that they believe will act in their

interests and perceive that its procedures are fair and reasonable. Hence willingness

42

to pay tax voluntarily depends on the local government’s capacity to provide

services, as return for their tax paid.

Dishonest officials and lack of transparency in local government revenue collections

and its expenditures impaired credibility of Sumbawanga District Council as

evidenced in Table 4.4 above. People fear that, the tax paid is not fully reaching the

appropriate office and those monies remitted to head office are not used properly or

are misappropriated by local government officials.

To overcome the problem of tax evasion and tax avoidance, the respondents were

asked to suggest measures of interventions which its results have been presented in

table 4.5. Enforcement of tax by-laws was the most pin-pointed measure for solving

the problem of tax evasion and avoidance, 36 respondents equivalent to 75 percent of

cases pointed at it. Education on the importance of tax payment ranked second as a

solution to tax evasion in order to enhance tax compliance. Education to tax payers,

potential tax payers and the public in general can promote voluntary tax payment and

enhance sound local tax revenues to SDC. 31respondents equivalent to (64.6%) of

cases, viewed education on the importance of tax payment is of paramount.

Table 4.5: Measures to Encourage People Pay Tax

Measure Responses Percent ofCasesn Percent

Improve services e.g. road, hospital etc. 24 17.0 50.0Enforce law to tax evaders 36 25.5 75.0Law making according to environment/area 6 4.3 12.5Education on tax payment to the citizens 31 22.0 64.6Citizen be given information about tax uses 1 0.7 2.1Availability of weighing machine/scale to crops stations 10 7.1 20.8District council give back required percent to village on time 2 1.4 4.2Customer care/use of good language 4 2.8 8.3Transparency in revenue and expenditure 15 10.6 31.3Trustworthy of tax collectors and supervisors 7 5.0 14.6Law conflicting 1 0.7 2.1Tax rates be reasonable 3 2.1 6.3Avoid tax exemption 1 0.7 2.1Total 141 100.0 293.8

Source: Research primary data, 2014

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4.3 Accounting for Collected Taxes

In order to determine the way collected tax is accounted for, respondents were asked

to state where they pay tax and if they were acknowledged with appropriate

Council’s receipts. Tax revenue collected by VEOs is remitted to WEOs who also

take the same monies to the cashier of the council, contracted agents for revenue

collection, they pay agreed monthly installments sometimes directly through the

bank and bring the bank pay in slip to the council cashier for acknowledgement

receipt, depending on the circumstance these agents sometimes paid their installment

to the cashier of the council. Table 4.6 reveals that, 25 respondents equivalent to 49%

paid tax to WEOs , 19 respondents equivalent to 37.3% made Payment to cashier of

the council while only 7 (13.7%) said that the tax is normally paid to agents. All the

payments made to either of the officials were normally and appropriately

acknowledged.

Table 4.6: Remittances and accountability of collected tax

Official Frequency Percent

Cashier of the Council 19 37.3

WEOs 25 49.0

Agent 7 13.7

Total 51 100.0

Source: Research primary data, 2014

The collected tax revenue by VEOs takes 25 up to 3o days before is remitted to

WEOs who also stays with the same funds for 3 up to 5 days and again is remitted to

the main cashier of the council and immediately is deposited into the bank account of

the Sumbawanga District Council. Contracted agents for revenue collection pay their

instalments in accordance with the requirements of the contract, the contract require

the agents to deposit the instalments with the bank or to the council cashier before

seventh of each next month.

44

4.4 Procedures used to collect taxes in Sumbawanga District Council

This section presents findings on how the imposed taxes are collected within the

council.

4.4.1 Council Head Office

The results of the study found that, tax collection procedures within the council is

simply by receiving all bank pay in slips from agents for monies deposited through

the banker of Sumbawanga District Council through a given bank account number,

while other tax revenue is collected from WEOs in form of cash and the cashier takes

the same money to the bank immediately. Some tax payers pay their obligations to

the main cashier at head office of the council depending on the circumstances,

council officials especially the Revenue Accountant makes follow ups and irregular

patrols on low level revenue collectors and tax payers respectively, so as to prevent

them from dishonest acts and tax evasion, if in so doing collects any amount of

revenue the same is promptly remitted to the main cashier by Revenue Accountant.

4.4.2 Ward Executive Officers’ Office

Tax collection procedures in WEOs office is done in five different ways as presented

in Table 4.7. One of the procedures is to collect direct from tax payers premises if he

himself declared to have agricultural products or other materials that are chargeable

to local tax, sometimes WEOs goes to tax payers premises after getting information

from other sources especially when the crops trader is about to transport. This kind of

collection procedures was 6 times mentioned by respondents and constitutes 40

percent of cases.

Another procedure is collection of tax revenue from VEOs, VEOs remits the

collected tax revenue to WEOs office every month between 25th and 30th each month,

in case of delay, and WEOs make follow ups and collect tax revenue at VEOs offices

this practice is eventually a sign of non compliance as regard to time and voluntary

remittance. This again was 6 times mentioned. Apart from the above two procedures,

sometimes tax payers voluntarily went to WEOs office and make payment for

declared taxable amounts which eventually required the WEO or his representative to

45

attend the premises where those products were stored for verification of amount and

types as every type of cereal crop has different tax rate.

In some situations there is cheating of tax payers so WEOs offices have established

farm gates in some strategic areas to capture tax evaders. In these farm gates vehicles

that transport cereal crops are inspected to ascertain if crops transported have been

properly taxed.

Table 4.7: Tax Collection Procedures by Ward Executive Officers’ OfficeProcedure Responses Percent of Cases

n PercentTo collect from tax payers premises 6 26.1 40.0From VEOs Office 6 26.1 40.0They pay in the office 6 26.1 40.0Through gates 4 17.4 26.7Inspect vehicles 1 4.3 6.7Total 23 100.0 153.3

Source: Research primary data, 2014

4.4.3 Village Executive Officers’ Office

For the case of VEOs office, there are several procedures that are used to collect tax

as presented in Table 4.8. The common practice of tax collection is for VEOs going

to tax payer’s premises or stores for verification and tax collection, since only few

tax payers voluntarily goes to him to pay tax. This accounted for 92.3 percent of

cases from 24 respondents. Voluntary tax payments in the office were revealed by 14

respondents, equivalent to (53.8%).

Table 4. 8: Tax Collection Procedures by Village Executive Officers’ OfficeProcedure Responses Percent of

Casesn PercentTo observe when buying crops 1 2.4 3.8Inspect stores and levy tax 1 2.4 3.8To go to tax payers 24 58.5 92.3Pay in the office 14 34.3 53.8Through gates and support of police 1 2.4 3.8Total 41 100.0 157.5

Source: Research primary data, 2014

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4.4.4 Tax Collecting Agents

Table 4.9 presents tax collection procedures by private revenue collecting agents.

Two methods of tax collection were mentioned: sometimes they collected tax, direct

from tax payers when they are about to transport and through farm gates when they

are transporting to the identified markets, they pay tax directly to the agents to avoid

disturbances when taking their products to the market, however, the issue of

compliance remain questionable as their declarations bear some cheatings in order to

reduce tax liabilities. The two collection procedures revealed above, have been

disclosed by other tax collectors such as Ward Executive Officers and the Village

Executive Officers.

Table 4.9: Tax Collection Procedures by Agents

Responses Percent of Casesn Percent

Collect direct from tax payers 3 60.0 100.0In the gate 2 40.0 66.7Total 5 100.0 166.7

Source: Research primary data, 2014

4.5 Tax Evasion and Avoidance Practices

The study was also interested to know practices used to evade and avoid tax

payments in the council. The practices have been presented in Table 4.10. The most

mentioned practice of tax evasion was transportation of cereal crops in small

quantities using donkeys and bicycles to mention a few and thereafter the previous

small quantities are mixed into quantities that would have been taxable at farm gates.

The practise was disclosed by 34 respondent equivalents to (66%), this practice is

typical kind of tax avoidance hence the loophole need to be plugged in the by-laws of

SDC to allow appropriate tax estimations for quantities than falls below the required

and common packaging.

From the Table, the second practice of tax evasion is transportation of crops over mid

night as revealed by 29 respondent equivalents to (58%). As we have seen earlier

that, LGAs established farm gates to overcome tax evasion and avoidance, tax payers

on the other hand transport farm products over mid night, this practice may require

47

the council to keep a person at each farm gate over night, and hence more cost of tax

collection can be incurred. Third technique used by tax payer to evade taxes, is

through various cheatings where by 20 respondents equal to (40%) of cases

disclosed.

The fourth practice of tax evasion, is bribing tax collectors, 18 respondent

equivalents to (36%) revealed this, the study results indicate that corruption exists in

the council. With corruption, tax payers can pay lesser and lesser than the required

amounts of tax or pay no tax at all in lien of small amounts of money given to tax

collectors which is not accounted for in the books of accounts of the council.

Corruption impairs Trustworthiness of the council, as those engaged in are officials

of the council entrusted with the duty of tax collection, compliant tax payers can be

tempted to start evading tax especially when the administration does not have proper

dealings with those tax payers and tax collectors who act dishonestly.

Over packaging is fifth in ranking, farm products are being packaged such that sacks

weigh more than 100kgs and the same sack considered as one sack of crops hence

being charged at the rate of a normal single sack and thus tax liability is so

minimized, although tax payers claim to do so in order to minimize transport costs,

but the same technique indeed affects local tax revenues of the Council. 12

respondent equal to (24%) asserted this.

Sixth technique used to escape tax as revealed by the study is mixing sacks of more

than one type of crops at the time of transportation where by sacks of crops with

higher tax rates are put under those with low tax rates, and tax payers tend to declare

a type of crop with lower tax rate arranged above that of higher tax rate in the

transporting vehicle as a kind of crop wholly transported in such vehicle, for this case

all types of crops are charged by one tax rate of the crop having lowest tax rate to

minimize tax obligation. This technique was disclosed by 8 respondent equivalents to

(16%) of total respondent cases, this cheating is a typical kind of tax evasion that

require tax collectors to exercise deep inspections and heavy penalties for those who

have been caught in this technique. The last upper ranked two practices includes;

48

transportation of crops in piece meal and force from business men, these practices

were pointed out by 6 respondents equal to (12%) for each, transporting crops in

piece meal creates a possibility of tax payers to use the same receipt more than ones.

Also in some areas where local militia is absent and that the assistance of police is

not immediate, tax payer forcibly passed through farm gates as disclosed by 6

respondent equal to (12%).

Table 4.10: Practices of Tax Evasion and Tax Avoidance

Practice Responses Percent ofCasesn Percent

Transportation in piecemeal 6 4.4 12.0Transportation over mid nights 29 21.2 58.0Over-packaging 12 8.8 24.0Cheating 20 14.6 40.0Threat and stubbornness of businessman 6 4.4 12.0Bribes to tax collectors 18 13.1 36.0Mixing sacks of different crops with different tax rates 8 5.8 16.0Using different transportation e.g. donkey, buses, 34 24.8 66.0Selling crops at home 1 0.7 2.0Using receipt more than once 3 2.2 6.0Total 137 100.0 274.0

Source: Research primary data, 2014

In order to deal with the problem of tax evasion, the study asked the respondents to

suggest measures of intervention. As presented in Table 4.11. Seven major measures

were suggested that include: appropriate enforcement of tax law, where by 25

respondent equal to (19.8%) of the respondents found it as an intervention that could

help non complaints to comply with tax laws if they are appropriately penalized and

even taking them to court, the second ranking intervention is frequent follow ups

and inspections by both head office and lower level officials, this intervention was

suggested by 16 equal to (12.7%) of respondents, follow up ensures prompt

assistance to tax collectors while in the field. Thirdly, 15(11.9%) required the

Sumbawanga District Council to introduce weighing machine facilities to overcome

the problem of packaging ambiguities, while the fourth intervention was pointed out

by 12 respondent equal to (9.5%) of respondents which involved the introduction of

farm gates or barriers in areas that seem to be strategically of value so as to capture

49

tax payers intending to flee untaxed farm products. The suggestions to transport farm

products during day time and education to potential tax payers and the public in

general on the importance of paying tax both interventions were pointed out by 8

respondents equal to (6.3%), if crops are transported during day time can help to

control cheatings among tax payers because such cheatings can be discovered easily,

furthermore the costs of keeping persons in farm gates will be minimized. Regarding

to the education to tax payers and the public in general, is also imperative because it

will create awareness on the importance and benefits of paying taxes. Also there

were 7 respondents (5.6%) who suggested trustworthiness among council officials at

both head office and lower levels as an intervention measure that can arrest the

problem of non compliance of tax in the council, to build trust; information to the

public is crucial. Citizens’ access to and right to information is often seen as a

necessary condition to achieve accountable, transparent and participatory governance

and people centered development. However, public information of tax revenue

collected and financial allocations are scarce. Transparent and accountable tax

administration that is service oriented always have positive impact on public trust, if

revenue is properly spent in terms of a budget which the tax payers find agreeable,

compliance to tax laws can be obvious.

50

Table 4.11: Measures of Intervention to control Tax Evasion

MeasureResponses Percent

of CasesN PercentTo introduce farm gates 12 9.5 24.0Education on the importance of tax payment 8 6.3 16.0Reduction of tax rate 4 3.2 8.0Establishment of weighing facilities 15 11.9 30.0Similar tax rates on the same tax base for nearby councils 2 1.6 4.0Enforcement of tax law 25 19.8 0.0Frequent follow ups and inspection of crop luggage 16 12.7 32.0To consider crops transported in small quantities 4 3.2 8.0Transportation of crops be during day time only 8 6.3 16.0Tax collectors be trustworthy 7 5.6 14.0Tax be collected conveniently, when crops have been sold 3 2.4 6.0Availability of working facilities to tax collectors 1 0.8 2.0There should be night patrols 6 4.8 12.0Inspected receipt be stamped 1 0.8 2.0Prohibit mix of different types of crops 1 0.8 2.0Crops transported in Piecemeal be taxed 2 1.6 4.0Improve infrastructure 1 0.8 2.0Review of tax laws and their regulations 1 0.8 2.0Introduction of open market 1 0.8 2.0Close to business activity 2 1.6 4.0Reshuffle of tax collectors 1 0.8 2.0Establishment of businessman list 1 0.8 2.0Making law to force crops be sold in the market 1 0.8 2.0Availability of security/guard 2 1.6 4.0WEO and VEO be fully involved 1 0.8 2.0Total 126 100.0 252.0

Source: Research data, 2014

4.6 Summary of the Findings

4.6.1 Causes of tax evasion and avoidance in Sumbawanga District Council

The study found out that, it shows that local government officials are aware that there

are chances available for tax evasion and tax avoidance in the district council,

implying that non tax compliance was obvious, despite this, VEOs and WEOs being

main actors of tax revenue collection field, the majority had no formal education in

taxation. About five factors influencing tax evasion and avoidance have been

revealed. These are;

51

(i) Inappropriate enforcement by the council.

(ii) Complexity of the by-laws of the council

(iii) Behavioural attitude

(iv) Unsatisfactory return in form of service delivery

(v) Absence of trustworthiness in the local government

In order to deal with the problem of tax evasion and avoidance, the following major

suggestions were outlined: improvement of service delivery such as water, health,

transport (roads), education etc.; enforcement of tax law and other related laws leads

increased compliance due to threats of detection and punishment to tax evaders;

education on the importance and benefits of tax payment to tax payers and to the

public in general about; introduction of weighing facilities to; and transparency in the

expenditures of council revenues.

4.6.2 Accounting for Collected Taxes

The study found that tax collected in Sumbawanga District Council is remitted to the

cashier of the Council and the same revenues are properly acknowledged by issuing

receipts to tax payers and thereafter entered in the books of accounts of the council.

The collected tax revenue takes more than 30 days to be deposited into the bank

account of the Sumbawanga District Council, since VEOs stay with the money for

25 up to 30 days in a month, before the same money is remitted to WEOs who also

stays with it for 3 to 5 days before remitting to the main cashier of the council.

Agents remit the money through banks or direct to the cashier since the contract

requires them to deposit the money on 7th of the next month.

4.6.3 Procedures used to collect taxes in Sumbawanga District Council

The study revealed that, basically there are four tax collection procedures within the

council. These includes: collection of tax at tax payer’s premises; tax payers going to

government offices to pay; collection through farm gates; and during inspection of

stores and transporting vehicles.

52

4.6.4 Tax Evasion and Avoidance Practices

The study found that there are four major practices used by tax payers within the

council to evade tax. These includes: transportation of goods over mid night;

cheating; bribing tax collectors; transportation of cereal crops in small quantities by

using donkeys, bicycles, buses etc.

In order to overcome tax evasion and avoidance the study found seven major

suggested measures. These involves; appropriate enforcement of tax law; frequent

follow ups; establishment of farm gates or barriers in all potential areas of the

council; education on the importance of paying tax; establishment of weighing

machine facilities in order to control the problem of over-packaging; transportation

of crops during the day time only; and night patrol.

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CHAPTER FIVE

CONCLUSION AND RECOMMENDATIONS

5.1 Conclusions

Generally, this study investigated on factors that affect tax compliance in the

Sumbawanga District Council, way of accounting for the collected tax and

procedures of collecting the imposed taxes.

The study revealed that, factors for non tax compliance includes; inappropriate

enforcement of tax law by penalizing tax evaders accordingly as such punishments

limits potential evaders, complexity of the by-laws of the council as evidenced by the

said over-packaging against 100kgs unit of measurement by the council, behavioural

attitude, unsatisfactory return in form of service delivery, and absence of

trustworthiness in the local government. This implies that the council has to address

above factors first if it really need to enjoy the potentials of its tax base.

Also the study found that, the Sumbawanga District Council tax collections are

accounted for appropriately since tax payers, VEOs, WEOs and Contracted

collecting Agents are properly acknowledged with receipts for their payments and

remittances. However, the researcher found that a stay of more than 30 days with

council monies in hands of tax collectors can complicate the exercise of assessing

monthly performance and in determination annual trend, because revenues collected

in a month are remitted and banked in next month.

Furthermore, the study found that most of tax revenue of the council is mostly

collected at tax payers’ premises, farm gates, during follow ups and inspection of

stores and sometimes at government offices. This implies that, voluntary compliance

is doubtful. There is a need for the council to curb this situation since it increases the

cost of collection in respect of time and other resources.

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5.2 Recommendations

Basing on the findings, of the study the researcher recommends the following;

Because VEOs and WEOs had no formal education about taxation, this study

recommends that these officials should be trained taking into account that

they are key persons in making local taxation in the council a successful.

The Sumbawanga District Council should educate its citizen in order to create

public awareness on the importance and benefits of paying tax.

Tax collectors should be motivated accordingly because this is a tempting

job, good work incentives and welfare can reduce the level of corruption to

tax collectors.

The council should make sure that all collected tax revenues are remitted to

the head office within the month it has been collected in order to facilitate

trend analysis between months in the year.

The existing chances for tax evasion and tax avoidance should be clearly

addressed by the council by the use of laws at its disposal to prevent it and

enhance its local revenue collection, bearing in mind that a lot of revenue is

lost through tax evasion and tax avoidance.

The Sumbawanga District Council should provide its citizens with

appropriate translations of its by-laws that fit the local environment,

especially in aspects of unit of measurements for packaging agricultural

products.

5.3 Area for Further Research

Because this was a case study and the findings cannot be generalized, there is a need

of conducting similar studies in different councils in Tanzania to know exactly the

factors for tax evasion and avoidance. Furthermore, one of the areas which need

further researches is to establish reasons for failure of councils to collect taxes.

55

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APPENDICES

APPENDIX 1: QUESTIONNAIRES TO THE RESPONDENTS

Dear Respondent

The researcher is a student at Mzumbe University pursuing Master of Science in

Accounting and Finance, is carrying out a study on Tax compliance in Sumbawanca

District Council, Rukwa region. The case study can help the Council management

and tax collectors on how to minimize tax evasion and tax avoidance to enhance

local revenue. You are therefore kindly requested to complete this questionnaire by

ticking against the appropriate answer and by filling in the space provided. Your

responses will be used only for research purposes and shall be confidentially

handled.

Thank you for participating and making this research a success.

PART A: GENERAL INFORMATION

1. Name of theunit/department/ward etc

2. Position or title3. How long have you

been in thatposition?

1. < 2yrs 2. 2 – 5 yrs 3. 5 – 10 yrs 4. 10+ yrs

4. Gender of therespondent

1. Male 2. Female

5. Age 1. 18 – 30 2. 31 – 40 3. 41 – 50 4. 51 – 60 5.60+

6. Highest EducationQualification

1. Primary 2. Secondary 3. Certificate 4.Diplomaor AdvDiploma

5. Degreeandabove

PART B: TAX COMPLIANCE

1. Do you have a formal knowledge in taxation? YES { } No. { }

2. Do you understand the tax system of Tanzania?

1. Not at all 2. A little 3. Yes I understand well

4. Are you aware of the tax by-laws and their guidelines of the SumbawangaDistrict Council?

60

5. What do you think are the reasons that drive people not to pay tax to theSumbawanga District Council?

i. Absence of trustworthiness in the local government (SDC) { }

ii. Un satisfactory return in form of service delivery { }

iii. Inappropriate enforcement by the Council { }

iv. Complexity of the by-laws of the Council { }

v. Behavioral attitude { }

vi. Others (other than the above)

…………………………………………………………………………………………………………………………………………………………..…………………………………………………………………………………………………………………………………………………………

6. What measures are you suggesting to solve the problem in (5) above?

a) …………………………………………………………………………

b) …………………………………………………………………………

c) ……………………………………………………………………

d) …………………………………………………………………………

e) …………………………………………………………………………

PART C: TAX EVASION AND AVOIDANCE PRACTICES

1. Have you ever heard about people evading or avoiding tax in the

Sumbawanga District Council?. YES { } NO { }

2. What do you think are the practices used to achieve this?

a) …………………………………………………………………………

b) ……………………………………………………………………

c) …………………………………………………………………………

d) ……………………………………………………………………

e) …………………………………………………………………………

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3. What measures of intervention are you suggesting?

a) …………………………………………………………………………

b) …………………………………………………………………………

c) …………………………………………………………………………

d) …………………………………………………………………………

…………………………………………………………………………………

PART D: ACCOUNTING FOR THE COLLECTED TAXES

1. To whom, among the following officials taxes are paid?

Cashier of the Council { }

WEOs { }

VEOs { }

Others (mention)

…………………………………………………………………………………

…………………………………………………………………………………

………………………………………………………………………………….

2. Are the taxes paid acknowledged by appropriate officials? YES { }

NO { }

3. For how long does it take the collected tax revenue to be deposited into Bank

Account of the Sumbawanga District Council

Cashier of the Council ……………………………………………………

WEOs …………………………………………………………………….

VEOs …………………………………………………………………….

Others

…………………………………………………………………………………

…………………………………………………………………………………

………………………………………………………………………………….

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PART: E. TAX COLLECTION PROCEDURES

1. Council head office

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

2. Ward Executive officers’ office

…………………………………………………………………………………

…………………………………………………………………………………

………………………………………………………………………………….

3. Village Executive officers’ office

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

4. Tax collection agents

…………………………………………………………………………………

…………………………………………………………………………………

………………………………………………………………………………….

5. Others

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

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APPENDIX 2: INTERVIEW GUIDE

I want to thank you for taking the time to meet with me today.

My name is ………………………………………………….. , and I would like to

talk to you about tax compliance in the Sumbawanga District Council particularly on

crop cess and livestock market fees. Our overall objective is to assess factors that

affect tax compliance in order to capture means that can be used in future

interventions.

The interview will take less than twenty minutes and I will be taking some notes

during the session.

All responses will be kept confidential. This means that your interview responses

will only be shared with the researchers and we will ensure that any information we

include in our report does not identify you as the respondent.

Are there any questions about what I have just explained?

Are you willing to participate in this interview?

…………………………. …………………… ..............................

Interviewee Witness Date

………………………………………………………………………………………….

Legal guardian (If interviewee is under 18)