Tax knowledge, tax fairness, enforcement strategies and income tax compliance among small and medium enterprises (SMES) in Makindye division

Abstract

This study explored the factors that influence income tax compliance of Small and Medium Enterprises (SMEs) that run their businesses in Makindye Division of Kampala Capital City. Very low-income tax compliance is registered by SMEs yet their operations add 20 percent to the country’s GDP and employ millions of Ugandans. Uganda’s tax-to-GDP ratio stood at 12.5% in 2022, below the African average of 16%, largely due to a significant tax gap caused by SMEs’ widespread tax evasion and aggressive tax avoidance particularly practiced by the informal sectors within the urban settings. The specific objectives of this research were; to examine the relationships between income tax knowledge and income tax compliance, to establish the relationship between tax fairness and income tax compliance, to establish the relationship between enforcement strategies and income tax compliance and to examine the combined effect of tax knowledge, tax fairness and tax enforcement strategies on income tax compliance of SMEs doing business in Makindye Division. This study adopted a descriptive cross-sectional research design to collect quantitative data from 293 SME owners and managers using structured questionnaires. Data was analyzed using both hierarchical and multiple regression techniques. The results revealed mixed effects regarding tax knowledge: while it was a significant positive predictor of tax compliance when considered alone (B = .409, p < 0.001), it became insignificant in the full model (B = -0.034, t = -0.515, p > 0.05), indicating that its influence may be moderated by other variables. These findings offer partial support for hypothesis H1. Perceived tax fairness emerged as the strongest and most consistent predictor of income tax compliance (B = 0.656, p = 0.000), with its effect remaining robust across all regression models, thereby confirming hypothesis H2. Enforcement strategies also significantly influenced compliance (B = 0.159, p = 0.009), supporting hypothesis H3. However, the introduction of enforcement strategies slightly reduced the effect of income tax fairness, which suggested existence of moderation that could be taking place between these constructs. Generally, the study sums up that improving the way SME owners and managers perceive fairness and establishing enforcement strategies that are more effective in improving income tax compliance among SMEs is more important than having only tax knowledge. The findings provide critical insights for tax policymakers and the Uganda Revenue Authority in efforts to improve domestic revenue mobilization. Subject Keywords; Tax knowledge, Tax fairness, Enforcement strategies, Income tax compliance, Small and medium enterprises, Makindye division.