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

Enhancing tax compliance behaviour among SMEs will improve revenuecollection, thus enable government to finance social-economic welfare of itscitizens. Therefore, this study investigated the effects of perceived severity ofpenalties on individual income tax compliance among Tanzanian Small andMedium Enterprises. A cross-sectional survey of 382 SMEs was conducted insix tax regions of Tanzania – Kinondoni, Kariakoo, Temeke, Mtwara, Singidaand Tabora, selected using simple random technique. Descriptive and PartialLeast Square Equation Modelling were used for data analysis. The findings ofthe study show that perceived severity of penalties has positive and significanteffects on the decision of the individual to register with the tax system and makecorrect declaration of income. On the other hand, it has a positive, butinsignificant effect on the decision of the taxpayer to pay taxes within due dates.The findings imply that penalties are more effective in enhancing compliancebehaviour at the registration and declaration than on payment stage. Thus,government through the Tanzania Revenue Authority should continue to usepenalties and other administrative measures including inter alia, taxpayereducation, good customer care and services, to enhance tax compliancebehaviour among SMEs