UNIVERSITY OF GHANA CAUSES OF SMALL AND MEDIUM SCALE ...

UNIVERSITY OF GHANA

CAUSES OF SMALL AND MEDIUM SCALE ENTERPRISES TAX EVASION: A CASE STUDY OF THE INFORMAL SECTOR IN THE

ACCRA METROPOLIS.

BY

NANA ABA ANAMOAH

(10703155)

THIS DISSERTATION IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON, IN PARTIAL FULFILMENT OF THE REQUIREMENT

FOR THE AWARD OF MASTER OF SCIENCE IN DEVELOPMENT FINANCE DEGREE.

JULY 2019

University of Ghana http://ugspace.ug.edu.gh

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DECLARATION

I, Nana Aba Anamoah do hereby declare that this thesis was supervised in accordance with

procedures laid down by the University. I therefore declare that this thesis is my own work and all

references have been recognised accordingly.

…………………………………. ………………………………………….

NANA ABA ANAMOAH DATE

(10703155)


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CERTIFICATION

I hereby certify that this thesis was supervised in accordance with procedures laid down by the

University.

……………………………….. ……………………………..

SAINT KUTTU, PhD DATE

(SUPERVISOR)


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DEDICATION

I dedicate this thesis to my son, Jyotir Tyrese McEwan Anamoah, an Economics Student of the University of South Florida, USA.


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ACKNOWLEDGEMENT

I would like to thank the University of Ghana Business School for the opportunity to complete my Master of Science Degree in Development Finance here.

Special thanks to my supervisor, Dr Saint Kuttu for his guidance, patience and understanding.

I also remain eternally grateful to Dr. Agyapomaa Gyeke-Darko for encouraging me to keep going at a time when I had come close to giving up.

In addition, I acknowledge all my lecturers especially Professor Godfred Bokpin, Dr. Lordina Amoah and Dr. Lord Mensah for making the journey towards my MSc in Development Finance

a memorable one.


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TABLE OF CONTENTS

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

CERTIFICATION .......................................................................................................................... ii

DEDICATION ............................................................................... Error! Bookmark not defined.

ACKNOWLEDGEMENTS ........................................................... Error! Bookmark not defined.

TABLE OF CONTENTS ................................................................................................................ v

LIST OF TABLES ....................................................................................................................... viii LIST OF FIGURES ....................................................................................................................... ix

ABSTRACT .................................................................................................................................... x

CHAPTER ONE: INTRODUCTION ............................................................................................. 1

1.1 Background to the Study ....................................................................................................... 1

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

1.3 Aim and Objectives of the Study .......................................................................................... 5

1.4 Research Questions ............................................................................................................... 5

1.5 Significance of the Study ...................................................................................................... 6 1.6 Scope of the Study ................................................................................................................. 7

1.7 Organisation of the Study ...................................................................................................... 7

CHAPTER TWO: LITERATURE REVIEW ............................................................................... 10

2.0 Introduction ......................................................................................................................... 10

2.1 Conceptual Review ............................................................................................................. 10

2.1.1 Defining Related Terms ................................................................................................ 10

2.1.2 Challenges in Collecting Taxes .................................................................................... 13

2.1.3 Effective Tax Enforcement Strategies .......................................................................... 16

2.2 Theoretical Review ............................................................................................................. 19 2.3 Empirical Review of Literature ........................................................................................... 21

2.3.1 International Studies ..................................................................................................... 21

2.3.2 Regional Studies ........................................................................................................... 23

2.3.3 Local Studies ................................................................................................................ 24

2.4 Conceptual Framework ....................................................................................................... 27

2.5 Conclusion ........................................................................................................................... 29

CHAPTER THREE: METHODOLOGY ..................................................................................... 31

3.0 Introduction ......................................................................................................................... 31


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3.1 Research Setting .................................................................................................................. 31

3.2 Research Approach ............................................................................................................. 31

3.3 Research Design .................................................................................................................. 33

3.4 Research Paradigm .............................................................................................................. 34

3.5 Research Population, Sample and Sampling Technique ..................................................... 34 3.6 Data Gathering Tools and Procedures ................................................................................. 36

3.7 Reliability and Validity ....................................................................................................... 37

3.8 Data Analysis Tools and Techniques .................................................................................. 38

3.9 Ethical Considerations ......................................................................................................... 39

3.10 Conclusion ......................................................................................................................... 40

CHAPTER FOUR: DATA ANALYSIS AND DISCUSSION OF FINDINGS ........................... 41

4.0 Introduction ......................................................................................................................... 41

4.1 Questionnaire Retrieval Rate .............................................................................................. 41 4.2 Demographic / Personal Information .................................................................................. 42

4.2.1 Genders Distribution of Respondents ........................................................................... 42

4.2.2 Age Distribution of Respondents ................................................................................. 42

4.2.3 Educational Backgrounds of Respondents ................................................................... 43

4.3 Firm Information ................................................................................................................. 44

4.4 Main Results ........................................................................................................................ 45

4.4.1 Objective One: Businesses Covered by Ghana’s Tax Net ........................................... 45

4.4.2 Objective Two: Tax Enforcement Strategies ................................................................ 50 4.4.3 Objective Three: Challenges Involves in Collecting Taxes ......................................... 51

4.4.4 Objective Four: Determinants of Sales Tax Compliance ............................................. 53

4.5 Discussion of Findings ........................................................................................................ 54

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .................. 57

5.0 Introduction ......................................................................................................................... 57

5.1 Summary of the Findings .................................................................................................... 57

5.2 Conclusions ......................................................................................................................... 58

5.3 Study Recommendations ..................................................................................................... 60

5.4 Perceived Research Limitations .......................................................................................... 61 5.5 Directions for Future Research ........................................................................................... 62

REFERENCES ............................................................................................................................. 64


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APPENDICES .............................................................................................................................. 72

Appendix A: Research Questionnaire ....................................................................................... 72

Appendix B: Interview Guide ................................................................................................... 74


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LIST OF TABLES

Table 3.1: Test-Retest Reliability Results .................................................................................... 38

Table 4.1: Questionnaire Retrieval Rate ....................................................................................... 41

Table 4.2: Gender Distribution of Respondents ........................................................................... 42

Table 4.3: Age Distribution of Respondents ................................................................................. 43

Table 4.4: Educational Backgrounds of Respondents .................................................................. 43

Table 4.5: Industry / Sector of Firm .............................................................................................. 44

Table 4.6: Duration in Industry ..................................................................................................... 45

Table 4.7: Annual Income Tax Rates Applicable to Resident Individuals ................................... 48

Table 4.8: Monthly Income Tax Rates Applicable to Resident Individuals ................................. 48

Table 4.9: Former Annual Income Tax Rates ............................................................................... 48

Table 4.10: Former Monthly Income Tax Rates Applicable to Resident Individuals .................. 49

Table 4.11: Determinants of Sales Tax Compliance .................................................................... 53


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LIST OF FIGURES

Figure 1.1: Flow Diagram of the Research Process ........................................................................ 9

Figure 2.1: Compliance Risk Management Framework ............................................................... 18


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ABSTRACT

This study is aimed at devising new and more effective tax enforcement strategies for the collection of taxes

from informal sector in the Accra Metropolis. The research methodology involved semi-structured interviews

with the Commissioner, Deputy Commissioner and Assistant Commissioner of the GRA and administering

questionnaires to 385 informal enterprises in the Accra Metropolis. The findings of the study revealed that both

resident and non-resident eligible persons who are either employed, have businesses, self-employed or have

investments are covered by Ghana’s tax net. The strategies used to collect taxes from those in the informal sector

include being provided with stickers to put on vehicles and being imprisoned for not paying taxes for those

stickers; and businesses receiving visits from GRA representatives and being given invoices to pay at local tax

offices. However, these efforts have been thwarted by tax offices being understaffed; inadequacy with regard

to the number of computers, information technology systems, and the number of telephones, stationery and cars,

the public not having enough tax education; many people not being aware that they must pay taxes; the

punishment for not paying taxes being inadequate, poor legal enforcement mechanisms for tax evaders, a poorly

trained tax administration, poor tax collection systems and those in charge of collecting taxes not being

adequately motivated to do so. Furthermore, some other hindering factors have included informal businesses not

being profitable, inadequate punishment being given for non-compliance with tax laws, citizens having a bad

conscience, and citizens not trusting in the nation’s tax system.


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CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Tax is a broad term and is defined as a compulsory payment that is made by both firms and

individuals to a government for the improvement of the nation in spite of the benefits that may or

may not accrue to the taxpayer. The payment of taxes predates the A.D. dispensation (Lymer &

Oats, 2010). Tax evasion occurs when these same individuals or firms deliberately neglect their

tax obligations or improperly disclose their true income / sources of income to tax authorities in

order to pay lesser taxes. Some common causes of tax evasion have included ignorance, poor

recordkeeping and incorrect returns. Voluntary tax compliance has been an issue in Ghana and

many other countries around the world since time memorial (Kuug, 2016).

This is highly unfortunate as tax revenue has been noted to be a very important revenue stream for

governments for the purpose of development projects; especially since it is usually both predictable

and stable. In the case of Ghana, the country has increased its tax mobilization efforts in recent

times. However, this has not proven to be enough to support its annual government budget for

development which, in turn, has put the Government of Ghana (GoG) in a bad state as it has forced

it to turn to its donor partners and other international organizations (such as the World Bank,

European Union and IMF) to support its annual budgets. Moreover, this has usually been with

strict and unfavourable conditions attached (Fagariba, 2016).

According to Nduruchi, Makokha, and Namusonge (2017), an effective and efficient tax system is

essential to the well-being of any country. They added that one of the main objectives of a good

tax policy should be to collect taxes efficiently at a low cost while, at the same time, minimizing

revenue loss, economic disruption to a country, and the inequity of the tax burden on different


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members of society. Unfortunately, governments in Africa and other parts of the world have been

fond of giving larger establishments more attention and pressure when it comes to the payment of

taxes because theirs usually amounts to far more than what normal small and medium-sized

enterprises (SMEs) would pay. This, however, has turned out to be a folly as it has resulted in a

good number of SMEs being able to operate without paying their taxes and the numbers adding

up significantly to the disfavor of the governments (Atawodi & Ojeka, 2012).

In Ghana, many of the SMEs tend to operate in the informal sector in which workers are either

self-employed or work for others who are self-employed (Mantey, 2015). As a matter of fact, it

has been recorded that over 90% the businesses in Ghana come in the form of either individual or

small scale enterprises. Furthermore, that the informal sector provides employment opportunities

for over 80% of the nation’s labour force which translates into diverse sources of income which,

if properly taxed, could serve as a considerable amount of internally generated revenue for the

Government (Amanamah, 2016).

Nevertheless, a key observation has been that since many of the informal sector businesses are not

on payrolls, they are therefore not taxed regularly. Another challenge is accessing these

individuals who are known to conduct their business operations in rather unprotected and

unsecured places (Wahabu, 2017). In 2011, however, it was recorded that the contribution that

SMEs made towards domestic tax revenue was less than 4 percent (Dzadzra, 2011).

The non-payment of taxes by those in the informal sector has not only been a problem in Ghana,

but in other countries as well. For instance, in Kenya in 2017, there was observed to be low tax

compliance levels among SMEs in Bungoma County (Nduruchi et al., 2017). Meanwhile, in

Tanzania, the revenue lost from not taxing the informal sector was found to reach up to 55 percent

of the total taxable revenue (Amanamah, 2016).


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It even came as a surprise in 2016 when it was discovered that many small enterprises in Ghana

chose to remain in the informal sector in order to avoid paying taxes. Another significant

revelation was that the Government of Ghana (GoG) had made little or no effort to collect taxes

from these groups or individuals as the costs associated with the monitoring and collection of taxes

was high and usually outweighed the revenues that were generated (Appiah, 2016).

In the grand scheme of things, it has been forecasted that the indifference of these businesses

towards expansion could negatively affect tax revenue, job creation and Ghana’s gross domestic

product (GDP) in the long run. Therefore, it is essential for the country to implement tax policies

that would promote voluntary tax compliance by considering their levels of income and need for

survival (Wahabu, 2017).

1.2 Statement of the Problem

Many countries around the world depend on revenue generated from taxes in order to meet their

expenditure requirements; with some definitely more than others. In the case of Ghana, although

there have been some recent gains in the mobilization of tax revenue, it is still not enough to

support the annual government budget for development (Atawodi & Ojeka, 2012). As a matter of

fact, this alone has motivated the Government of Ghana (GoG) to rely on donor partners and

international organizations to support its national budget with strict and unfavourable conditions

attached. In view of this, it can be said that although the collection of taxes and tax evasion in

Ghana has received considerable attention, this attention has not been well focused to arrive at an

implementable solution (Fagariba, 2016).

Regarding previous studies on the subject matter, a study was conducted by Amanamah (2016) in

order to identify the main factors that affected small and medium-sized enterprises’ (SME’s) tax

compliance in the Kumasi Metropolis of Ghana. The study revealed that 90% of the respondents


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lacked tax education. Moreover, enforcement for the non-payment of taxes was also a problem, as

well as taxes being too high. A study by Mantey (2015) evaluated tax compliance among small

business income earners in Kumasi’s Suame Magazine. The results indicated that these earners

rarely revealed their true incomes, lacked proper tax education, and had a negative attitude towards

the Ghanaian tax system. Appiah (2016) conducted another Kumasi study, but investigated the

challenges of paying taxes for its SMEs. Through the study, it was discovered that the lack of

understanding of tax laws, the lack of proper bookkeeping, distance between the tax office and

place of business, and the cumbersome processes involved in paying factors were the main

hindrances.

Another study by Wahabu (2017) focused on the Tamale Metropolis and examined the tax

compliance of SMEs in this metropolis. Through the study, it was found that the complexity of the

tax laws, perception of government spending, the profit levels of companies in the metropolis, and

the tax rate were the main factors which affected SMEs’ compliance with tax laws. Fagariba (2016)

conducted a study on the perceptions of the causes of SMEs and traders tax evasion in Accra,

Ghana. According to the findings of the study, high levels of corruption in the government, weak

enforcement, poor tax education, loopholes in the tax net, issues of tax burden, poor revenue

generated by companies and the low capacity of tax authorities to detect defaulters were the main

factors which caused tax evasion among the aforementioned parties. Kuug’s (2016) study

investigated the factors influencing tax compliance of SMEs in Ghana. The findings of the study

indicated that capital structure, compliance cost, tax rates, tax audits and the morals of tax payers

were the greatest factors which influenced tax compliance. Of the studies that were found on the

subject matter, no studies could be found which not only investigated the factors affecting tax

compliance, but also focused strictly on informal sector workers and made an attempt to investigate


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the loopholes in Ghana’s tax laws and tax collection strategies in order to ensure tax compliance.

It is in light of the aforementioned that this study is being conducted.

1.3 Aim and Objectives of the Study

The aim of this study is to devise new and more effective tax enforcement strategies for the

collection of taxes from informal sector businesses in the Accra Metropolis.

1. To identify and analyze what types of businesses are covered by Ghana’s tax net according

to the Income Tax Act, 2015 (Act 896).

2. To identify and analyze the tax enforcement strategies used by the Ghana Revenue

Authority (GRA) to collect taxes from informal sector businesses in the Accra Metropolis.

3. To determine the challenges involved in the Ghana Revenue Authority (GRA) collecting

taxes from informal sector businesses in the Accra Metropolis.

1.4 Research Questions

§ What categories of businesses are required to pay taxes according to the Income Tax Act,

2015 (Act 896)?

§ What particular strategies have the Ghana Revenue Authority (GRA) been utilizing to

effectively ensure that informal sector businesses in the Accra Metropolis pay the accrued

taxes on their income?

§ What challenges, obstacles and other hindrances have the Ghana Revenue Authority

(GRA) been facing in its effort to collect taxes from these parties?


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1.5 Significance of the Study

This study will serve as a benefit to different members of the Ghanaian society and the global

society in general. According to Creswell (2013), academic research is of sound benefit to

industry, government and society. With respect to the general public or the citizenry of Ghana and

other nations, this study will provide them with information regarding the tax enforcement

strategies and procedures being used by the Ghana Revenue Authority—a semi-autonomous public

institution in charge of evaluating, collection and account for tax revenue in Ghana. More

specifically, it will enlighten them on: the categories of businesses required to pay taxes according

to the Income Tax Act, 2015 (Act 896); the strategies which the Ghana Revenue Authority (GRA)

has been utilizing to effectively ensure that informal sector businesses in the Accra Metropolis pay

taxes on their income; the challenges, obstacles and other hindrances which the Ghana Revenue

Authority (GRA) has been facing in its effort to collect taxes from informal sector businesses in

the Accra Metropolis; and the factors which cause informal sector businesses in the Accra

Metropolis to pay their necessary corporate and income taxes.

Concerning government, this study will ultimately provide the Government of Ghana (GoG) with

insight into more effective tax enforcement strategies for the collection of taxes from informal

sector businesses in the country. The findings can also serve as a useful resource for other African

and developing countries with societal and governance structures similar to Ghana. This could

also apply to industry as the Ghana Revenue Authority (GRA) is a public institution charged with

the collection of taxes from the citizens of Ghana. In other words, the findings could also assist

them in the enhancement of their tax collection strategies. With that, it should be noted that other

countries such as Rwanda which rely almost solely on tax revenue to fund state activities have


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equipped the Rwanda Revenue Authority with much more effective and efficient tax collection

strategies.

Lastly, according to Graziano and Raulin (2012), academic studies can serve as an inspiration to

students, providing them with new ideas and inculcating in them research etiquette. In addition,

apart from adding to the existing literature on the subject matter, this study will serve as a source

of reference for other researchers who wish to delve deeper into the problem area or explore other

areas of the subject matter.

1.6 Scope of the Study

A study’s scope refers to the extent to which the study covers the subject matter that it deals with

(Passer, 2013). With respect to this study, it deals specifically with tax collection in Ghana. The

coverage of this subject, however, will be limited to: (i) the categories of businesses required to

pay taxes according to the Income Tax Act, 2015 (Act 896); (ii) the particular strategies which the

Ghana Revenue Authority (GRA) has been utilizing to effectively ensure that informal sector

businesses in the Accra Metropolis pay the accrued taxes on their income; (iii) the challenges,

obstacles and other hindrances which the Ghana Revenue Authority (GRA) has been facing in its

effort to collect taxes from these parties; and the factors which cause informal sector businesses in

the Accra Metropolis to pay their necessary corporate and income taxes. This defines the scope

of this particular study.

1.7 Organisation of the Study

This study has been broken down into five major chapters, which each serving a different purpose

and having a different value. Chapter one, for instance, served as an overview of the subject matter

of the study having provided readers with the background to the study, statement of the problem,

aim and objectives of the study, research questions, significance of the study and scope of the


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study. Chapter two reviews existing relevant literature on the subject matter of the study and

includes literature dealing with concepts, theories and empirical studies. In doing so, the chapter

affirms the research gap and also constructs a conceptual framework to guide the study.

Chapter three indicates the manner in which the study’s data was collected and analyzed and

includes the research setting, research approach, research design, research paradigm, data

collection instruments and procedures, methods for ensuring reliability and validity, data analysis

techniques and ethical considerations. Meanwhile, chapter four includes the actual presentation,

analysis and interpretation of the data.

Finally, chapter five provides a summary of the study’s findings, draws conclusions from those

findings, provides study recommendations, describes the limitations of the study from the

Researcher’s perspective and proposed directions for future research. A depiction of this chapter

breakdown can be seen in Figure 1.1 below.


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Source: Author’s Conceptualization (2018).

Chapter One

Background to the Study, Statement of the Problem, Aim and Objectives of the Study,

Research Questions, Significance of the Study, Scope of the Study, Organization of the Study

Chapter Two Conceptual Review of Literature, Theoretical Review of Literature, Empirical Review of

Literature, Conceptual Framework

Chapter Three Research Setting, Research Approach, Research

Design, Research Paradigm, Data Collection Instruments and Procedures, Methods for Ensuring

Reliability and Validity, Data Analysis Techniques, Ethical Considerations

Chapter Four Presentation of Data, Analysis of Data, Discussion of Findings

Chapter Five Summary of Findings, Conclusions, Recommendations, Limitations, Directions for

Future Research

Figure 1.1: Flow Diagram of the Research Process


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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

The purpose of this literature review is to review existing literature on the subject matter; namely,

literature dealing with concepts, theories and empirical studies. Regarding the conceptual review,

the appropriate section will define the term informal sector; discuss the challenges in collecting

taxes; and discuss some strategies for collecting taxes. The theoretical review, on the other hand,

will review existing theories on the subject matter before settling on one to guide the study. The

empirical review will review empirical studies on the subject matter in order to arrive at the

research gap. Finally, based on the guiding theory and empirical studies, a conceptual framework

will be developed in order to form a hypothesis on how the study’s variables relate to each other.

2.1 Conceptual Review

2.1.1 Defining Related Terms

Informal Sector

The first term that will be defined in this section is the term informal sector. According to Magreth

(2012), the informal sector of an economy can be described as a grey market. It was also mentioned

that it is the part of an economy which does not experience taxation or government monitoring in

the same manner as the formal economy. Magreth (2012) added that those economic activities

that take place in the informal sector are not included in a nation’s gross domestic product (GDP)

or gross national product (GNP). Nevertheless, it was indicated that the informal sector often

provides important economic opportunities for the poor.

Quainoo (2011), on the other hand, defined the informal sector in terms of job security. With that,

the informal sector was defined as a sector in which participants do not have employment security,


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work security and social security. Quainoo (2011) also argued that participation in the informal

sector is often motivated by the desire to avoid taxation and / or regulation.

According to USAID (2012), the term informal sector can be viewed from different angles. The

first angle was a sector which consists of jobs which are not considered to be normal sources of

income, and on which taxes are not paid. Another point of view was a sector in which only illegal

activity takes place such as tax evasion. USAID (2012) also indicated that the term can also refer

to a cruel situation in which individuals are forced to work without being paid. Finally, USAID

(2012) mentioned that it can also denote a sector which includes legal activities such as jobs that

are performed in exchange for something other than money.

The United States International Trade Commission (USITC) (2010) described different

characteristics of an informal sector. Firstly, they indicated, much like USAID (2012), it does not

contain normal income sources. In the same manner as USAID (2012), they also indicated that

the participants in this sector do not declare income or pay taxes.

Furthermore, USITC (2010) mentioned that this sector can include illegal activities such as drug

dealing and smuggling. Additionally, they that it usually includes odd jobs such as cleaning car

windshields, construction work, etc. Finally, they indicated that it can also include situations in

which people work without being compensated.

The last viewpoint about the informal sector that will be looked at was provided by the European

Union (EU) (2015). They described the informal sector as having a low level of organization;

little or no division between labour and capital as factors of production on a small scale; and labour

relations primarily based on casual employment, kinship or personal and social relations as

opposed to formal, contractual agreements.


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In the final analysis, the informal sector can be described as the part of an economy for which there

is a low level of organization, economic opportunities are available to the poor, participants do not

have employment security, work security or social security, and taxes and government monitoring

are not advanced. This definition is based on components of the definitions that were provided by

Magreth (2012), Quainoo (2011) and European Union (2015).

Of importance, as can be seen, one of the main characteristics of the informal sector is tax evasion.

Now looking at the definition of tax evasion, Brigham and Ehrhardt (2016) defined it as the act of

illegally not paying or underpaying taxes. Another definition was provided by Higgins (2015) as

an individual or entity deliberately avoiding the payment of a true tax liability. Of importance here

is how the word “deliberately” was mentioned. With that being said, Kaplan (2012) pointed out

that even though the terms tax evasion and tax avoidance are often used interchangeably, they do

not mean the same thing. As a matter of fact, it was explained that while tax evasion is a deliberate

attempt to avoid paying taxes according to the law, tax avoidance is an attempt to legally minimize

taxes using methods provided by a tax code.

Another assertion that was made by Kaplan (2012) was that tax evasion and tax fraud are the same

thing. It was then explained that tax fraud involves deceiving tax authorities or misrepresenting

taxes.

Looking at the specific activities that constitute tax evasion, it was pointed out by Weaver (2012)

that it can comprise of: (i) not reporting income, (ii) reporting expenses that are not permitted

legally, and (iii) not paying taxes that are owed. On the other hand, Jacobs and Chase (2013)

indicated that tax evasion can include: (i) the underreporting of income, (ii) deliberately

underpaying taxes owed, (iii) substantially understating taxes, and (iv) providing false information

to tax authorities about business income or expenses.


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The final points that will be made were put forward by Atawodi and Ojeka (2012). They mentioned

that income taxes, business taxes, state taxes, and employment taxes can be evaded. Furthermore,

that in the case of tax evasion, ignorance of the law can never be used as an excuse.

In the final analysis, a suitable definition for the term tax evasion can be given as deliberately

failing to pay or underpay taxes via not reporting income, reporting expenses that are not permitted

legally, not paying taxes that are owed, underreporting income and understating taxes.

2.1.2 Challenges in Collecting Taxes

Where the challenges in collecting taxes is concerned, this section will look at the cases of different

countries with the belief that these are not isolated cases, but rather, that the same incidents occur

in different countries. For example, in the case of Uganda, it was indicated by Oxfam and

SEATINI (2017) that the country’s tax base is very narrow. Moreover, that the aim of the present

government is to move away from its overreliance on foreign assistance and to finance the national

budget through the collection of taxes from its citizens and residents. Many of the income earners

who do not pay taxes in the country have been identified as small businesses and those in the

agricultural sector (World Bank, 2018). Regarding the small businesses, it was mentioned by

World Bank (2018) that the majority of them are profitable, but not taxed.

Furthermore, where it concerns challenges in collecting taxes, it was indicated by Oxfam and

SEATINI (2017) that many of the taxpayers do not understand how and why they are being

charged taxes, thereby creating resentment among them. Another observation was that many of

the workers (especially in the agricultural sector) are not in the habit of recording their revenues

and other financial information, and therefore have no basis for which to be charged taxes.


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Corruption was pointed out to be another major challenge in the sense that stolen public funds

serves as a discouragement for citizens / residents to pay taxes (Oxfam & SEATINI, 2017). World

Bank (2018) also indicated that uneven income distribution is another reason why many in Uganda

do not pay taxes. For instance, it was argued that since many Ugandan citizens do not earn up to

one US dollar (or its equivalent) per day, they should not be expected to pay taxes.

Finally, since it has not been pointed out to be public how the government has been accountable

or how tax revenue has been used, the taxpayers therefore do not see the benefit in paying taxes

(Oxfam & SEATINI, 2017).

Carnahan (2015) examined the revenue raising capabilities of 58 developing countries around the

world. First off, it was pointed out that a consistent and stable revenue system is important for any

government as it enables the government to achieve and sustain economic development through

funding public expenditure on a physical, social and administrative infrastructure which aids

businesses to launch or expand. It was further indicated that “without safety and security, few

people will invest” (p. 169).

First off, during the course of Carnahan’s (2015) research, it was found that 65% of the countries

that were evaluated were aware of their tax liabilities. This is quite a considerable amount of

individuals / entities and contradicts that assertion made by Oxfam and SEATINI (2017).

Additionally, it was also investigated the degree to which citizens’ / organizations’ tax revenues

could be effectively assessed. This included three subcomponents; namely, (1) whether there were

effective controls in the registration system in order to register taxpayers with linkages across the

tax database and other regulatory and financial databases; (2) the effectiveness and the consistency

of penalties for noncompliance; and (3) the presence of an audit and fraud investigation unit.


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Nevertheless, less than 50% (45%) of the countries which were evaluated received good ratings,

which is bad. Therefore, it was concluded that although the countries generally understood their

tax obligations, they were not able to appropriately register and evaluate those obligations

(Carnahan, 2015).

Carnahan’s (2015) research also examined the degree to which taxes were collected effectively in

these countries. In other words, (1) the collection ratio for gross tax arrears; (2) how effectively

the revenue administration transferred tax revenue to the national Treasury; and (3) the frequency

with which reconciliation occurred between tax assessments, tax collections, arrears and receipts

by the Treasury. With that being said, it was discovered that in only 25% of the countries the taxes

were collected effectively. Furthermore, it was argued by the International Monetary Fund (IMF)

(2015) that the main challenges developing countries face in developing effective tax

administrations include: the high turnover of senior staff, the inadequate or unstable financing of

operations, and a weak headquarters.

After having looked at the general challenges, it is important to focus on the challenges facing the

collection of taxes from those in the informal sector. In a working paper by Joshi, Prichard and

Heady (2013), it was argued that on one side, when considering taxing those in the informal sector,

the main challenges include the fact that there is limited revenue potential, high costs of collection,

and it could potentially have a negative impact on the survival of small firms. With this in mind,

it was concluded that in order to encourage tax compliance among those in this social group, the

government must lower the costs of collection and increase the potential benefits of a more

formalized tax system from increased security to new economic opportunities. It was also argued

that successful reform requires support from political leaders, tax administrators and taxpayers.


16

In a report by Kundt (2017), the main challenges facing the collection of taxes from the informal

sector were outlined as follows: (i) the difficulty in evaluating the exact size of the informal sector;

(ii) the fact that broad-based taxation might come at the expense of significant administrative costs

resulting from the existence of a large number of informal firms and entrepreneurs and the

difficulties in monitoring them; and (iii) the observation that informal firms tend to be less

productive than formal ones.

Lastly, In the case of Ghana, according to Mensah-Pah (2014), the main issues in Ghana related to

the collection of taxes from the informal sector deal with weak and under-resourced revenue

authorities, a considerably large informal sector, and a national bias towards collecting taxes easily

which imposes a higher tax burden on poor households and employees in the formal sector.

2.1.3 Effective Tax Enforcement Strategies

After having looked at the challenges governments face in the collection of taxes from citizens /

residents, it is now important to review some proposed tax enforcement strategies. First off,

according to Hasseldine et al. (2010), it is important to encourage honest tax reporting by small

business proprietors due to the fact that they have a high cost of noncompliance and a high

opportunity for noncompliance. In addition, they suggested that governments and tax authorities

should resort to using persuasive communications with either normative or sanction appeals.

In their study in the United Kingdom, they investigated the different effects of normative appeals

and sanction appeals. Regarding normative appeals, it was observed that appeals for tax

compliance resulted in greater compliance; especially among those who do not pay someone to

prepare their taxes for them. Sanction appeals, on the other hand, were found to be far more

effective than normative appeals, especially when used on those who prepared taxes for


17

themselves. In view of these results, it seems prudent for a tax authority to begin with a normative

appeal. If the appeal fails, then they should then move on to a sanction appeal.

Russel (2010) argued that for the informal sector, the following mitigation strategies should be

implemented by revenue authorities: (i) the reduction of community tolerance of the informal

sector’s “shadow economy”; (ii) providing assistance to those in the informal sector in the form of

social security in order to encourage voluntary compliance; (iii) encouraging self-regulation; and

(iv) demonstrating to this segment that the government has a visible and credible detection and

enforcement capability.

Another point of view was provided by Deloitte and Touche (2015) in their report on the Nigerian

tax system. The major recommendations that were given were that: (i) the informal sector may

require stratification to exclude SMEs from the sector; (ii) an alternative tax regime may need to

be created for the informal sector; (iii) incentives may need to be provided for those in the informal

sector in order to encourage them to pay taxes; (iv) assurances may need to be given for voluntary

disclosures of tax default.

As can be seen in Figure 2.1, OECD (2010) proposed a compliance risk management (CRM)

approach or framework in order to influence taxpayer compliance. The main elements of this

model are: (i) coming to a comprehension of the causes of compliance gaps; (ii) delivering

mitigating and tailored responses which either stress the facilitation of compliance or deterrence;

(iii) prudently allocating resources to different segments of taxpayers; and (iv) measuring the

impact of the mitigating actions taken. It appears that the point concerning the allocation of

resources to different segments insinuates that enforcing the compliance of those in the informal

sector would most likely have a different approach than enforcing compliance in other sectors. In

fact, as indicated by OECD (2010), there is never a one-size-fits-all approach to tax enforcement.


18

Nevertheless, it was stressed that since compliance is vulnerable to shocks, enforcement and the

encouragement of voluntary compliance should be treated as a balancing act (OECD, 2010).

Figure 2.1: Compliance Risk Management Framework

Source: OECD (2010).

Finally, research into tax enforcement in Sub-Saharan Africa would not be complete without

examining the situation in Rwanda. Rwanda is an East African country which, since 1997, has

been striving to reduce aid dependency and finance its national budget entirely with its own

resources. In doing so, the country has made continuous efforts to widen its tax base and improve

tax compliance and revenue collection. In addition, the revenue figures for the 2016 / 2017 fiscal

year showed that the Rwandan Revenue Authority (RRA) has succeeded in steadily increasing the

nation’s tax revenue mostly due to the registration of new taxpayers, the use of e-tax facilities, and

increased compliance. In fact, the first semester of the 2015 / 2016 fiscal year was Rwf 470.6

billion as compared to 514 billion in the 2016 / 2017 fiscal year (Hope Magazine, 2017).


19

Some measures that were taken to achieve these results included, among other things, the

government widening the tax base by making it mandatory for commercial houses to pay value

added tax (VAT) on rental income; and making it mandatory for professional associations (i.e.

engineers, architects, bailiffs, property valuers) to pay personal taxes, corporate taxes and VAT.

Regarding the e-tax facilities aforementioned, these were meant to simplify the filing and paying

of taxes by citizens / residents. The RRA has also been known to monitor taxpayer compliance,

enforce the payment of tax arrears, and conduct strong sensitization campaigns to improve the

public’s understanding of the importance of paying taxes (Hope Magazine, 2017).

Furthermore, electronic billing machines (EBMs) were required for VAT registered firms in the

country when invoicing firms and final consumers (Hope Magazine, 2017). It was argued by

Naritomi and Jensen (2018) that despite this effort, VAT compliance still remains rather low.

Some proposed causes of this have been that: (i) the EBMs have not always been used by VAT

registered firms; (ii) consumer audit incentives have been observed to be ineffective; (iii) final

consumers have few incentives to request official invoices; (iv) the roll-out of the EBM machines

outside of the capital Kigali is incomplete; and (v) many firms operating in the country claim to

earn revenues just below the VAT-eligibility criteria (Naritomi & Jensen, 2018).

2.2 Theoretical Review

During the review of literature, a number of exiting theories were reviewed and analyzed in order

to assist in developing a conceptual framework. Through the review, it was uncovered that the

main approaches to tax compliance include the (1) Economic Deterrence Approach and the

(2) Wider Behavioral Approach.

The Economic Deterrence Approach examines tax evasion and tax compliance. Some specific

areas that it focuses on include: the complexity of the tax system; the level of revenue information


20

services; withholding and information reporting; the responsibilities and penalties of the preparer;

the probability of receiving audit coverage; progressive and actual levels of tax rates; and penalties

for not complying with tax regulations (Weaver, 2012). The main argument behind the Economic

Deterrence Approach is that individuals and entities can be deterred from evading taxes through a

number of punitive and persuasive approaches. Punitive approaches include increasing the

probability that tax evaders will be detected, increasing the tax rate, or by imposing stricter and

tougher penalties.

Meanwhile, persuasive approaches include better education on the importance of taxes and tax

regulations and codes, incentives for paying taxes, and increased advertising and publicity

(Carnahan, 2015). However, it should be mentioned that this approach limits the motives of

taxpayers to either seek rewards or avoid punishments, which cannot be for all individuals / entities

in all cases. Therefore, this approach will not be chosen for this particular study.

The Wider Behavioral Approach, on the other hand, is an approach which incorporates social and

fiscal psychological approaches into the equation. In other words, it combines elements of the

Economic Deterrence Model and social psychology models. In doing so, it focuses on moral

values as well. For example, the perception of how fair the tax system is or the perception of the

moral behavior of tax authorities.

This approach will be chosen as, according to Hasseldine et al. (2010), it acknowledges that

taxpayers are able to possess a variety of attitudes and beliefs which interact and respond to social

norms.


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2.3 Empirical Review of Literature

2.3.1 International Studies

Looking at empirical studies on the subject matter, a study by Alshir’ah, Abdul-Jabar and

Samsudin (2016) studied the determinants of sales tax compliance in small and medium-sized

enterprises in Jordan. This study, however, did not focus specifically on the informal sector of the

economy. The independent variables under consideration were the tax system structure, tax moral,

tax fairness, peer influence and sales turnover. These were all inspired by the Fisher Model.

In the final analysis, it was determined that tax system structure, tax moral and tax fairness were

all significant explanatory variables of sales tax compliance.

Another study conducted by Jabbar (2009) investigated the factors affecting income tax

compliance in Malaysia. To be specific, the study looked at the determinants of the noncompliance

behavior of small and medium-sized companies in Malaysia under the Income Tax Self-

Assessment System (SAS) regime. However, it should be noted that the research questions were

as follows:

§ What are the costs faced by SMEs in complying with corporate income tax laws in

Malaysia for the tax year 2006?

§ To what extent do compliance costs influence the likely compliance behavior of SMEs?

§ What is the extent of the relationship between compliance costs and compliance behaviour,

taken together with other variables?

The findings of the study indicated that SMEs were paying an average of RM 9,295 per firm and

an aggregate amount of RM 1,084 million for the 2006 tax year. Furthermore, under the SAS


22

regime, the tax compliance costs decreased by approximately 58 percent. However, external costs

increased by 16 percent and computational costs increased by 15 percent.

In addition to compliance costs, it was found that business size, tax level, the managerial

perceptions about tax fairness, and the managerial perceptions about the Inland Revenue Board

were found to not influence corporate tax noncompliance. Meanwhile, the effect of business

length, sector, tax rate and tax incentives was found to be inconclusive. As can be seen, the study

did not provide any significant variables which affected tax noncompliance.

Rai (2004) examined the challenges of tax collection in India. Through the study, it was discovered

that the major challenges included: long delays in dispute resolution cases; and a question of

fairness in the dispute resolution system. To mitigate these challenges and minimize tax evasion,

the study recommended that: the citizens of developing countries should be issued a tax

identification number (much like the social security number in the United States) in order to keep

track of their transactions; currency of all higher denominations should be withdrawn and all

sources of income made taxable; governments should withdraw all popular and politically

motivated exemptions; tax authorities should closely monitor the activities of larger taxpayers and

their motives for tax avoidance; the officers of the tax department and other senior politicians and

officials should be held to higher standards of tax compliance; codes and regulations should be

simplified in order to enable the better understanding of tax codes and thus permit more tax

compliance; a single comprehensive VAT should replace all commodity taxes; officials in tax

departments should be given fixed tenure; and structural changes must be made in the dispute

resolution system in order to enable the fair and speedy disposal of disputes.


23

2.3.2 Regional Studies

In a Nigerian study by Akeju (2018), it examined the viability of trade unions and associations in

the informal sector as agents for state tax collection. Through the study, it was determined that

association membership in informal sectors had a positively significant relationship with ensuring

tax compliance among taxpayers. It was in response to this that Akeju (2018) recommended that

trade associations should be used by the Government of Nigeria in an effort to facilitate the

integration of the informal sectors into the formal economic mainstream of the country. However,

unlike the previous studies, this study dealt specifically with the informal sector.

Another study which dealt with the informal sector was conducted by Munjeyi et al. (2017). The

purpose of the study was to examine the feasibility of the efforts of the Zimbabwe Revenue

Authority (ZIMRA) to collect taxes from the informal sector. Through the study, it was determined

that the lack of commitment by ZIMRA staff and corrupt practices destroyed public confidence

and trust in the nation’s tax system, thus causing those in the informal sector to evade paying taxes.

In a study by Gitonga, Kyolo and Maina (2015), the purpose was to determine the influence of tax

rates on tax compliance in Kenya’s informal sector. This was in response to observations that tax

collections from the informal sector in Kenya were above average but on a declining trend.

Through the study, it was found that: (i) the majority of respondents who were surveyed (74%)

had tried their best to comply with all tax procedures; (ii) the majority of respondents (75%) felt

that tax charges were too high; and (iii) tax rates had a significant relationship with the tax

compliance of those in the informal sector at the 95% confidence level.

A study by Mlay (2013) explored the challenges facing tax collection from those in Tanzania’s

informal sector. To be specific, the study investigated the factors influencing the willingness of

enterprises in the informal sector to pay taxes; the factors hindering procedural tax obligations;


24

and alternative mechanisms for improving tax collection. The study revealed that the major

factors which influenced the willingness of small and medium tax payers to pay taxes were tax

morale, low transaction costs, a functioning tax administration and the ability to perform the

auditing function as well as to monitor tax payments.

The last regional study conducted in Sub-Saharan Africa that will be looked at was conducted by

Yoffo and Brun (2016). The purpose of this study was to investigate the factors that influence tax

compliance in Cameroon. The main finding of the study was that the decision to pay taxes in

Cameroon’s informal sector depended on more than the economic and personal characteristics of

business operators. In other words, the most successful enterprises with the highest level and

productivity of tax payments significantly and positively influenced other similar firms to pay

taxes.

2.3.3 Local Studies

A study by Amanamah (2016) was conducted in order to identify the key factors which influenced

tax compliance among SMEs in the Kumasi Metropolis. The study made use of a sample of 70

SMEs. The findings of the study indicated that 91.4 percent of the respondents were aware that

the payment of taxes was obligatory, and 92.9% were aware that noncompliance was punishable

by law. Looking at the specific factors, the respondents indicated that a reduction in the taxable

amount, tax revenue being used for developmental projects, punishment for noncompliance, and

educating SMEs about their tax obligations would promote voluntary compliance.

Appiah (2015) also conducted a study in Kumasi. The purpose of the study was to examine the

challenges of paying taxes in the Kumasi Metropolis. This study was also conducted from the point

of view of SMEs. The main challenges included: the lack of proper understanding of tax laws, lack

of knowledge about bookkeeping, a long distance between the tax office and place of business,


25

cumbersome procedures involved in paying taxes, complicated procedures for filing taxes,

inadequate managerial skills of the Ghana Revenue Authority (GRA), government interference,

inadequate logistics, and inaccurate reporting of income and tax liability.

Another study dealing with SMEs was conducted by Wahabu (2017) in the Tamale Metropolis.

The main objective was to examine the tax compliance of SMEs in the Tamale Metropolis. Unlike

Amanamah’s (2016) study, the tax knowledge of respondents was found to be low and the major

factors influencing tax compliance included: the complexity of tax laws, their perceptions of

government spending, the profit levels of companies, and the tax rates. Furthermore, there was

found to be a significant relationship between tax knowledge and tax compliance.

A study by Fagariba (2016) examined the causes of tax evasion by SMEs and traders in the Accra

Metropolis. Through the study, it was found that the major factors which hindered tax compliance

included: a high level of government corruption, high compliance costs, the weak enforcement of

tax laws, the weak capacity of tax authorities to detect those who evade tax payments, a poor tax

education, loopholes in the tax net, issues of tax burden and poor sales.

Kuug (2016) investigated those factors influencing tax compliance of small and medium

enterprises in Ghana. The main factors that were found to influence tax compliance included

capital structure, compliance costs, tax rates, tax audits and the morals of the taxpayer. In addition,

unions and associations of business also positively influenced the voluntary payment of taxes by

SMEs.

Moving away from SMEs, a study by Mantey (2015) examined the tax compliance of small scale

businesses in the Suame Magazine Industrial Area of the Kumasi Metropolis. The objectives of

the study were to: determine the attitudes and knowledge of small business income earners towards


26

tax compliance; determine their actual level of compliance; and identify the challenges associated

with tax compliance.

During the course of the study, it was brought to light that although these businesses registered

with local tax authorities, they did not properly understand tax laws and regulations or declare their

incomes. It was further pointed out that it was difficult for them to compute tax liabilities.

Furthermore, it was revealed that they had a negative attitude towards Ghana’s tax system.

In response to these findings, it was recommended that the general public and organizations should

be properly educated on tax regulations; and that the GRA should minimize the inconveniences

and obstacles involved in the tax registration process.

Now looking specifically at the informal sector, a study by Somuah (2011) explored the reasons

why tax noncompliance was high in Bolgatanga’s informal sector, as well as the challenges

involved in taxing its informal sector. Through the study, it was found that the major factor which

affected the compliance levels of tax payers included the application of sanctions, regular tax

education, anticipation of benefits and high tax rates. The challenges, however, included capacity

constraints, the large size of the informal sector, the large size of the tax district and improper

accounting and bookkeeping.

Another study by Ehun (2015) studied those factors that encouraged tax compliance among

artisans in the Brong Ahafo Region of Ghana. Through the study, it was found that the number of

children of the artisans, education level, and the number of years of work experience were all

important factors, whereas the age of the artisan was not. In response, it was recommended that

artisans who did not comply with tax regulations should have their assets seized.


27

The last study that will be looked at was conducted by Ofori (2009). The specific objectives of this

study were to: analyze the variables that made the informal sector a difficult sector to tax; examine

the factors which accounted for high tax noncompliance in the informal sector; and to provide

suggested recommendations on the way forward for the taxation of the informal sector.

This study focused on Accra, Ho, Tema and adjoining communities. Through the study, it was

determined that those in the informal sector were hard to tax because they did not have a permanent

place of business; there was a predominance of cash transactions; they had poor record keeping

practices; and there were high illiteracy rates. The factors accounting for high tax noncompliance,

on the other hand, were the fact that they were not aware that they had to pay taxes; they did not

keep adequate records of accounting transactions; and asocial noncompliance.

After having reviewed all of the studies, it was brought to light that none of the studies dealing

with the investigation of the factors influencing tax compliance / noncompliance as well as the

challenges involved in the collection of taxes dealt exclusively with the Accra Metropolis. With

this in mind, it should be mentioned that Ofori’s (2009) study dealt with Accra, Ho and Tema.

Furthermore, it did not investigate the tax enforcement strategies of the GRA or any other tax

authority. This can therefore be seen as a research gap.

2.4 Conceptual Framework

After having reviewed relevant theories, it was concluded that the Wider Behavioral Approach to

taxpayer compliance would be used to serve as the foundation for the conceptual framework.

Looking at it from that perspective, the study by Alshir’ah, Abdul-Jabar and Samsudin (2016)

studied the determinants of sales tax compliance in small and medium-sized enterprises in Jordan.

The study found that tax moral was a significant explanatory variable of sales tax compliance.

Munjeyi et al. (2017) examined the feasibility of the efforts of the Zimbabwe Revenue Authority


28

(ZIMRA) to collect taxes from the informal sector. The study revealed that corrupt practices

destroyed public confidence and trust in the nation’s tax system.

Gitonga, Kyolo and Maina (2015) determined the influence of tax rates on tax compliance in

Kenya’s informal sector. The study found that tax rates had a significant relationship with the tax

compliance of those in the informal sector at the 95% confidence level. Mlay (2013) explored the

challenges facing tax collection from those in Tanzania’s informal sector. The study revealed that

the major factors which influenced the willingness of small and medium tax payers to pay taxes

included tax morale and low transaction costs.

A study by Amanamah (2016) was conducted in order to identify the key factors which influenced

tax compliance among SMEs in the Kumasi Metropolis. The respondents indicated that punishment

for noncompliance, and educating SMEs about their tax obligations would promote voluntary

compliance.

Wahabu (2017) examined the tax compliance of SMEs in the Tamale Metropolis. The major

factors influencing tax compliance were found to include tax rates and tax knowledge. Fagariba

(2016) examined the causes of tax evasion by SMEs and traders in the Accra Metropolis. The

major factors which hindered tax compliance included: a high level of government corruption,

high compliance costs, and a poor tax education.

Kuug (2016) investigated those factors influencing tax compliance of small and medium

enterprises in Ghana. The main factors that were found to influence tax compliance included

compliance costs, tax rates and the morals of the taxpayer.

Finally, Somuah (2011) explored the reasons why tax noncompliance was high in Bolgatanga’s

informal sector, as well as the challenges involved in taxing its informal sector. The factors


29

influencing tax noncompliance included, among other things, included the application of

sanctions, regular tax education and high tax rates.

Based on the findings of these studies, the following conceptual framework has been featured in

Figure 2.2.

Figure 2.2: Conceptual Framework Diagram

Source: Author’s Conceptualization (2019).

2.5 Conclusion

The purpose of this literature review chapter was to review existing literature on the subject matter

in order to confirm the research gap and construct a conceptual framework to guide this particular

study. Through the review of literature, it was determined that the informal sector is the part of an


30

economy for which there is a low level of organization, economic opportunities are available to

the poor, participants do not have employment security, work security or social security, and taxes

and government monitoring are not advanced. Furthermore, tax evasion is deliberately failing to

pay or underpay taxes via not reporting income, reporting expenses that are not permitted legally,

not paying taxes that are owed, underreporting income and understating taxes.

Some potential challenges to the collection of taxes that were found included: taxpayers not

understanding how and why they should pay taxes; taxpayers not being in the habit of recording

their revenues or other financial information; the corruption of tax authorities; uneven income

distribution; the high turnover of senior staff at tax offices; the inadequate or unstable financing of

operations at tax offices; a weak tax office headquarters; a limited revenue potential of taxpayers;

high costs of collection; paying taxes potentially having a negative impact on the survival of small

firms; the difficulties in monitoring firms; under-resourced revenue authorities; and a national bias

towards collecting taxes easily which imposes a higher tax burden on poor households and

employees in the formal sector.

After having looked at the Economic Deterrence Approach and the Wider Behavioral Approach,

the Wider Behavioral Approach was chosen because it acknowledges that taxpayers are able to

possess a variety of attitudes and beliefs which interact and respond to social norms. Lastly, after

having reviewed all of the studies, it was determined that none of the studies dealt with the

investigation of the factors influencing tax compliance / noncompliance, and the challenges

involved in the collection of taxes dealt exclusively with the Accra Metropolis. This was found to

be the research gap.


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CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter covers the research methods and practices that were found to be appropriate while

conducting this particular study. The coverage of this chapter will include the research setting,

research approach, research design, research paradigm, research population, research sample,

sampling technique, data gathering tools and procedure, methods for ensuring reliability and

validity of data gathering tools, data analysis tools and techniques and ethical considerations. This

is then followed by a conclusion summarizing the chapter’s contents.

3.1 Research Setting

A research setting describes the physical geographic location or environment in which a study

takes place (Creswell, 2013). This study took place in the Accra Metropolis of Ghana. This was

primarily based on the view of the Researcher that Accra would provide a generalizable sample of

respondents since, after all, it contains generous portions of members of each of the country’s

genders, religions and ethnic groups (Ghana Statistical Service, 2012). The Accra Metropolis is

one of Ghana’s 254 Metropolitan, Municipal and Districts (MMDAs), and one of the 29 located

in the Greater Accra Region with a land area of 60 square kilometres (Ghana Districts, 2019).

3.2 Research Approach

The term research approach generally describes the plan and procedure for conducting a research

which consists of broad assumptions, data collection methods, as well as methods for data analysis

and interpretation that are based on the nature of the research problem (Graziano & Raulin, 2012).

The four main research approaches that have been used by researchers over the years include the


32

quantitative, qualitative, mixed methods and emancipator approaches. The quantitative approach

to research involves the use of numerical, statistical, or computed data derived from

questionnaires, surveys and / or pre-existing statistical data. This data is then analyzed using

numerical, statistical or computational techniques to arrive at research findings (Creswell, 2013).

According to Trochim, Donnelly and Arora (2015), the main uses of the quantitative approach are

to determine the statistical relationship(s) between two or more variables; make predictions;

generalise the findings of a sample to a whole population; and to determine cause and effect

relationships (Graziano & Raulin, 2012).

The qualitative approach gathers and analyzes non-numerical data in an effort to possess an in-

depth understanding of a social phenomenon. It can be used to gather in-depth detail on a research

problem; develop hypotheses to be tested with the quantitative approach; and understanding the

feelings, perceptions, experiences and values that motivate human behavior (Graziano & Raulin,

2012).

The mixed methods approach to research integrates elements of the quantitative and qualitative

approaches. It can be used when one single research approach does not provide enough data for a

study, and therefore, it is essential to combine their strengths. It can also be used simply to grasp

a deeper understanding of a research problem by combining different data collection and analysis

methods (Passer, 2013).

Finally, the emancipator approach to research focused on marginalized communities, and as such,

seeks to provide them with a voice to facilitation social reform or change. With this point, it can

be said that its main use is to bring about social reform or change among marginalized groups of

people (Trochim et al., 2015).


33

After having reviewed all of these approaches, it was decided upon that the mixed methods

approach to research was optimal as the quantitative approach was needed to generalize the

determinants of sales tax compliance for informal sector businesses in the Accra Metropolis. On

the other hand, in-depth detail from the qualitative approach was needed to determine which types

of businesses were covered by Ghana’s tax net according to the Income Tax Act, 2015 (Act 896);

the tax enforcement strategies used by the Ghana Revenue Authority (GRA) to collect taxes from

informal sector businesses in the Accra Metropolis; and the challenges involved in the GRA’s

collection of taxes from informal sector businesses in the Accra Metropolis.

3.3 Research Design

The term research design denotes the overall strategy for conducting a research which comprises

of specific methods and procedures. Moreover, this strategy combines the different components of

a study such as the methods and principles that are used for data collection, measurement and

analysis (Creswell, 2013). Under the quantitative approach, the applicable research designs are

the descriptive research design, correlational design, experimental design and quasi-experimental

design.

The descriptive research design seeks to describe and observe a research subject in its natural

setting without influencing it in any way. The correlational research design is a non-experimental

design which deals with the measurement of two variables and the determination of their statistical

relationship without the use of extraneous variables (Passer, 2013). The experimental research

design utilizes statistical analysis to determine a cause and effect relationship and, in doing so,

either proves or disproves a research hypothesis. The quasi-experimental research design differs

in the sense that it does not incorporate a control group, random selection, random assignment or

active manipulation (Creswell, 2013).


34

This study made use of the descriptive research design in order to fulfill the research objectives.

Moreover, it was the descriptive case study design which was employed with the case study

focusing on informal sector businesses in the Accra Metropolis. The other forms of descriptive

research include descriptive survey and descriptive observation (Creswell, 2013).

3.4 Research Paradigm

A research paradigm is an accepted belief system which guides the decisions that are made during

a study and how the research is carried out (Graziano & Raulin, 2012). The four main types of

research paradigms are the Positivist, Interpretivist, Pragmatism and Transformative Paradigms.

The Positivist paradigm posits that the way to arrive at the truth and an understanding of the world

is through observation, logical reasoning and objective measurements. The Interpretivist paradigm

rather relies on subjective experiences and views for doing so. The Pragmatism paradigm avoids

trying to arrive at the truth, but rather searches for a solution which is both feasible and practical

(Graziano & Raulin, 2012).

Lastly, the Transformative paradigm explores the experiences of marginalized communities while

considering the power differentials that resulted in the marginalization and seeking to mitigate

these disparities through the study’s findings. The Pragmatism paradigm was chosen since it is

closely linked to the mixed methods approach.

3.5 Research Population, Sample and Sampling Technique

A research population is a large collection of persons or objects with similar characteristics that is

used by a researcher to make generalizations. A research sample is a subset of a research

population that is used to make generalizations about the population (Creswell, 2013).


35

The study’s research populations comprised of the Management of Ghana Revenue Authority

(GRA) in the Accra Metropolis, and all of the informal sector businesses in the Accra Metropolis.

Meanwhile, the research samples included the: Commissioner, Deputy Commissioner and

Assistant Commissioner of the Domestic Tax Revenue Division of the GRA; as well as 385

informal businesses in the Accra Metropolis. The 385 number was arrived at through the following

equation which was provided by Passer (2013):

Where:

§ Population is unknown

§ no is the sample size;

§ Z2 is the abscissa of the normal curve that cuts off an area a at the tails (1 – a equals the

desired confidence level);

§ e is the desired level of precision = + 5%

§ p is the estimated proportion of an attribute that is present in the population;

§ q equal 1-p.

As far as the sampling technique was concerned, the Commissioner, Deputy Commissioner and

Assistant Commissioner were chosen using the purposive non-probability sampling technique. In


36

line with this technique, respondents were chosen per the judgment of the Researcher as to the

individuals who would be able to provide the most relevant information on the subject matter.

On the other hand, the 385 informal businesses in the Accra Metropolis were chosen using the

convenience sampling method. In other words, the Researcher focused on those businesses that

were both accessible and in close proximity in order to maximize the probability of project success

as was inspired by Graziano and Raulin (2012).

3.6 Data Gathering Tools and Procedures

The Researcher chose to utilize the questionnaire and the semi-structured interview for this study.

The questionnaires consisted of closed-ended questions with answer choices. Closed-ended

questions were prioritized as they are easier and faster for respondents to answer; it is easier to

cross-compare the answers of different respondent; and it is easier to interpret these types of

questions (Graziano & Raulin, 2012). Meanwhile, the Researcher considered questionnaires to be

an easy and quick way to survey a large sample of respondents.

The semi-structured interviews consisted of a standardized set of questions asked via an interview

guide. However, during the interviews, the questions were not limited to these. In fact, as the

interview progressed, the Researcher was prompted to ask follow-up questions which provided

additional information on the subject matter. Another advantage is that it allowed the respondents

to express their views in their own terms.

Regarding the questionnaires, respondents were first visited at their places of businesses before

they were informed about the purpose of the study, its benefits and risks. They were then asked

for their consent to participate in the study. Afterwards, the Researcher administered them on


37

questionnaire each and gave them between 30 and 45 minutes to complete it. After they were done,

they then submitted the questionnaire back to the Researcher.

Prior to the interviews being conducted, they a schedule was made between the Researcher and

each interviewee. On the actual dates of the interviews, a tape recorder was used and notes were

occasionally jotted as the interviewees were asked the relevant questions which were written on

the interview guide. In addition, two of the respondents requested to preview the interview guide

before participating in the actual interview.

3.7 Reliability and Validity

In the context of this study, reliability denotes the degree to which stable and consistent results are

produced through the use of a data collection tool. Validity, on the other hand, is a measure of the

degree to which the data collection tool measures what it is intended to measure.

The reliability of the questionnaire was ensured through test-retest reliability. For test-retest

reliability, a sample of respondents was obtained prior to the actual survey. They were

administered the research questionnaire on two separate occasions and the extent to which they

provided the same answers on both occasions was ascertained. As can be seen in Table 3.1, the

stability rate of 91.4% indicates a high level of consistency.

Per Passer’s (2013) suggestions, the reliability of the interviews was ensured by making them one-

on-one interviews with standardized questions. And also by ensuring that the Researcher was the

only one to conduct the interviews.

Regarding validity, face validity (according to Creswell (2013) was utilized). Face validity

involved adopting questionnaire and interview questions from similar studies on the same subject

matter.


38

Table 3.1: Test-Retest Reliability Results

Question No.

Agreement in responses of the participants (n = 25) on each item

for both occasions

Number (%) of individuals with the same responses on both

occasions 1 18 0.72 2 21 0.84 3 22 0.88 4 17 0.68 5 19 0.76 6 21 0.84 7 20 0.8 8 19 0.76 9 19 0.76

10 18 0.72 11 17 0.68 12 17 0.68 13 16 0.64 14 18 0.72 15 24 0.96

Mean 22.85 0.914 Standard Deviation 1.52 0.143

Source: Fieldwork (2019).

3.8 Data Analysis Tools and Techniques

After the questionnaires were submitted to the Researcher, she used the computer software—the

Statistical Package for Social Sciences (SPSS) Version 22.0—to analyze the data. This software

utilized descriptive statistics, inferential statistics, tables, charts and graphs in order to achieve the

desired outcome.

The interview data, on the other hand, was analyzed through the use of what is known as thematic

analysis. Thematic analysis identifies, examines and records patterns of meaning within data. This

was done through a method which was recommended by Trochim et al. (2015). This entailed


39

reading through the interview transcripts; taking note of important details and recording them;

highlighting important words, sentences or phrases; identifying patterns or themes within the data;

organizing the patterns or themes into categories; describing the categories and how they are

associated with one another; and interpreting and discussing the results.

3.9 Ethical Considerations

A number of considerations were made with respect to acceptable and professional research

practices. This was done primarily to avoid the reproach of the local and international research

community.

The first consideration that was made was with respect to informed consent. What this means is

that before consent was gained from the study’s participants, they were first briefed about the

purpose of the study, importance of the study, and any involved challenges or risks. After

consenting, they were further informed that they had the right to withdraw their participation at

any point in time without any backlash.

Another consideration that was made was with respect to anonymity and confidentiality. In other

words, the identities of the study’s respondents were kept secret and were not published or

disclosed to any third party. Furthermore, the responses that were provided were protected via a

safety lock box and a password protected pen drive to avoid being infiltrated.

In addition, no pressure was put on respondents for them to provide certain responses that were

deemed to be acceptable by the Researcher. This included pressure in the form of coercion and

monetary rewards.


40

Lastly, the Researcher avoided plagiarism or the copying of other’s ideas and works through:

(i) citing all the sources that were used; (ii) indicating these sources in a reference section; (iii) and

paraphrasing.

3.10 Conclusion

This chapter discussed the methods, strategies and underlying principles that were used to collect

data, analyze and interpret it. In doing so, the chapter covered the research setting, research

approach, research design, research paradigm, research population, research sample, sampling

technique, data gathering tools and procedure, methods for ensuring reliability and validity of data

gathering tools, data analysis tools and techniques and ethical considerations.

In the final analysis, the methods that were found to be suitable were the mixed methods approach,

descriptive case study design, Pragmatism paradigm, purposive non-probability sampling

technique, convenience sampling method, questionnaire, semi-structured interview, test-retest

reliability, face validity, descriptive statistics, inferential statistics and thematic analysis.


41

CHAPTER FOUR

DATA ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction

This chapter analyzes the data that was collected during the study and also discusses this data’s

findings in relation to the research objectives and relevant literature on the subject matter. Primary

data was collected through the use of questionnaires and semi-structured interviews. The

questionnaires were answered by informal businesses in the Accra Metropolis. Meanwhile, the

interviews were conducted with the Ghana Revenue Authority’s (GRA’s) Commissioner, Deputy

Commissioner and Assistant Commissioner of their Domestic Tax Revenue Division.

4.1 Questionnaire Retrieval Rate

Of the 385 questionnaires that were administered to respondents, 61.82% (238) were properly

filled and submitted to the Researcher, therefore allowing them to be classified as “retrieved” (see

Table 4.1). Although many of the questionnaires were not retrieved, the retrieval rate of above

60% was felt by the Researcher to be adequate as it was argued to be so by Passer (2013).

Table 4.1: Questionnaire Retrieval Rate

Questionnaire Retrieval Status

No. of Respondents

Percentage (%) of Respondents

Retrieved 238 61.82% Not Retrieved 147 38.18% Total 385 100.0%



42

4.2 Demographic / Personal Information

This section examines the demographic / personal information of respondents including their

genders, ages, educational backgrounds and industries / sectors.

4.2.1 Genders Distribution of Respondents

Of the 238 respondents who were successfully surveyed, 45.38% (108) were males, whereas

54.62% (130) were females. As can be seen from these results, the majority of the respondents

were females (see Table 4.2). The Researcher, however, is not of the conviction that this factor

had a significant effect on the answers given by the respondents as there was no proof in the

available literature that gender has any bearing on a person paying or being able to pay their state

taxes.

Table 4.2: Gender Distribution of Respondents

Genders No. of

Respondents Percentage (%) of Respondents

Male 108 45.38% Female 130 54.62% Total 238 100.0%


4.2.2 Age Distribution of Respondents

Of the 238 respondents who were surveyed, 6.3% (15) were between the ages of 18 and 25;

27.75% (66) were between the ages of 26 and 35; 30.67% (73) were between the ages of 36 and

45; 13.87% (33) were between the ages of 46 and 55; and 18.91% (45) were above the age of 55

(see Table 4.3).


43

Table 4.3: Age Distribution of Respondents

Respondents’ Ages

No. of Respondents Percentage (%) of Respondents

18 – 25 years 15 6.30% 26 – 35 years 66 27.73% 36 – 45 years 73 30.67% 46-55 years 33 13.87% Above 55 years 45 18.91% Missing 6 2.52% Total 238 100.00%


4.2.3 Educational Backgrounds of Respondents

Concerning the educational backgrounds of the respondents who were surveyed, as can be seen in

Table 4.4, none of the respondents possessed a tertiary education. However, 7.56% (18) professed

some sort of Professional Certification or another. Unfortunately, the level of certification was

not determined as they were not asked to specify.

Furthermore 4.62% (11) professed to have no education; 21.43% (51) possessed a basic education;

41.18% (98) had reached JHS or its equivalent; and 23.11% (55) had reached SHS or its equivalent

(see Table 4.4).

Table 4.4: Educational Backgrounds of Respondents

Educational Levels No. of Respondents Percentage (%) of Respondents

None 11 4.62% Basic Education 51 21.43% JHS (or equivalent) 98 41.18% SHS (or equivalent) 55 23.11% Professional Certification 18 7.56%


44

Missing 5 2.10% Total 238 100.00%

Source: Fieldwork (2019). 4.3 Firm Information

When respondents were asked which industry their firms were participating in, the majority of

respondents were involved in the sale of provisions (21.85%, 52); followed by the fashion industry

(14.71%, 35); followed by the beauty / cosmetic industry (10.5%, 25); followed by cleaning /

janitorial services (9.24%, 22); followed by electrical services (7.56%, 18); followed by the sale of

second hand clothes (6.3%, 15); followed by the sale of vehicular products (5.04%, 12); followed

by carpentry services (3.78%, 9); followed by phone repair products and services (2.1%, 5);

followed by car repair (1.26%, 3); and then followed by “other” (0.84%, 2). The “other” included

those known for carrying the bought products of consumers which is known in the Ghanaian

community as “kayayo” (see Table 4.5).

Table 4.5: Industry / Sector of Firm

Industry / Sector No. of Respondents Percentage (%) of Respondents

Food and Beverages 39 16.39% Sale of Provisions 52 21.85% Fashion Industry 35 14.71% Beauty / Cosmetic Industry 25 10.50% Second Hand Clothes 15 6.30% Cleaning / Janitorial Services 22 9.24% Sale of Vehicular Products 12 5.04% Electrical Services 18 7.56% Carpentry Services 9 3.78% Phone Repair 5 2.10% Car Repair 3 1.26% Other 2 0.84% Missing 1 0.42% Total 238 100.00%



45

When respondents were asked how long they had been in their respective industries, 5.04% (12)

indicated less than 1 year; 22.69% (54) indicated between 1 and 5 years; 41.18% (98) indicated

between 5 and 10 years; 18.49% (44) indicated between 10 and 20 years; and 10.08% (24) indicated

more than 20 years (see Table 4.6).

Table 4.6: Duration in Industry

Duration in Industry / Sector No. of Respondents Percentage (%) of Respondents

Less than 1 Year 12 5.04% 1 to 5 Years 54 22.69% 5 to 10 Years 98 41.18% 10 to 20 Years 44 18.49% More than 20 Years 24 10.08% Missing 6 2.52% Total 238 100.00%

Source: Fieldwork (2019). 4.4 Main Results

4.4.1 Objective One: Businesses Covered by Ghana’s Tax Net

When the Commissioner of the Domestic Tax Revenue Division was interviewed about the details

of the Income Tax Act, 2015 (Act 896), he brought to light that income tax is payable by eligible

persons who are either employed, have businesses, are self-employed or have investments. With

this in mind, the question arises as to which persons / businesses in the informal sector are eligible.

According to the Commissioner:


46

“If we are talking about businesses in Ghana, the general income tax

rate is 25% for all companies in Ghana. However, there are some

exceptions such as non-profit organizations.”

With regard to those that are exempt from taxes, the Deputy Commissioner brought more light on

this subject. He explained that:

“Section 6 of the Income Tax Act says that those organizations that

are exempt from taxes include religious organizations, charitable

institutions of a public character, state-sponsored educational

institutions or those that are owned by the state. However, tax

exempt organizations do not receive tax exemptions on all

categories of income. In fact, exempt organizations which take on

an activity of a business nature and derive income from this are

subject to taxes from what they do.”

The Commissioner went further to explain that apart from the general corporate income tax (CIT),

firms involved in the mining and upstream petroleum industry pay taxes of 35%; firms in the hotel

industry pay taxes of 22%; companies that engage in non-traditional exports pay 8%; banks

lending to the agriculture and leasing sectors pay a 20% tax on income from those businesses; and

firms in sectors such as agro-processing, rural banking and waste processing pay a tax of 1% during

their temporary concession. He also began to discuss the National Fiscal Stabilization Levy

(NFSL) which is a 5% tax payable by financial institutions (excluding rural and community banks),

non-bank financial institutions, telecommunications companies, breweries, inspection and

valuation companies, shipping lines, maritime, and airport terminals, insurance companies and


47

companies that provide mining services; and which was introduced in 2013. It was mentioned,

however, that this law was supposed to be removed in 2015, but it was announced by the current

Finance Minister, Mr. Ken Ofori-Atta, that it will in fact be removed by the end of this year—

2019.

Regarding those who are self-employed, it was explained by the Assistant Commissioner that

personal income taxes for the self-employed are to be paid at graduated rates in four equal

installments (March, June, September and December) during a fiscal year. The current personal

tax rates took effect in 2016 and can be seen in Tables 4.7 and 4.8 (the annual and monthly personal

income tax rates for Ghana residents). The former ones (pre-2016) are displayed in Tables 4.9 and

4.10. During the interviews, the Assistant Commissioner mentioned that non-residents are taxed

at a flat rate of 20% on all of their income.

With regard to the difference between resident and non-resident tax payers, the Deputy

Commissioner explained that:

“Resident companies are those that are incorporated under Ghana’s

laws or have their management and control of their businesses

exercised within Ghana at any given time during the year. Non-

resident ones, on the other hand, are only taxed on the income that

is sourced in Ghana. Likewise, non-resident individuals are taxed,

but only on the income that is made in Ghana. Let me add that a

person is classified as a resident only if he or she spends at least 183

days out of a given year in this country.”


48

Table 4.7: Annual Income Tax Rates Applicable to Resident Individuals

Chargeable Income Rate Tax

Cumulative Chargeable

Income Cumulative

Tax GH₵ % GH₵ GH₵ GH₵

First 3,457 0 0 3,456 0

Next 1,200 5 60 4,656 60 Next 1,680 10 168 6,336 228

Next 36,000 17.5% 6,300 42,336 6,528 Next 197,664 25 49,416 240,000 55,944 Exceeding 240,000 30

Source: Commissioner, Ghana Revenue Authority (2019).

Table 4.8: Monthly Income Tax Rates Applicable to Resident Individuals



Income Cumulative


First 288 0 0 288 0 Next 100 5 5 388 5 Next 140 10 14 528 19 Next 3,000 17.5% 525 3,528 544 Next 16,472 25 4,118 20,000 4,662 Exceeding 20,000 30


Table 4.9: Former Annual Income Tax Rates



Income Cumulative


First 2,592 0 0 2,592 0 Next 1,296 5 64.80 3,888 60 Next 1,812 10 181.20 5,700 228 Next 33,180 17.5% 5,806.50 38,880 6,528


49

Exceeding 38,880 25 - - -


Table 4.10: Former Monthly Income Tax Rates Applicable to Resident Individuals



Income Cumulative


First 216 0 0 216 0 Next 108 5 5.4 324 5.40 Next 151 10 15.10 475 20.50 Next 2,765 17.5% 483.88 3,240 504.38 Exceeding 3,240 25 - - -


The last point concerning the eligibility of taxpayers was provided by the Deputy Commissioner.

He stated that:

“As the GRA, we do not have the technology nor the manpower to

collect from everyone. Only those with established, tangible

businesses that one can visit. Other who roam and sell or who use

containers are dealt with by their local assemblies and they use their

own strategies to collect taxes which I’m not qualified to speak

about.”


50

4.4.2 Objective Two: Tax Enforcement Strategies

Regarding tax enforcement strategies, long discussions were held with each of the respondents.

Keeping actual phrases, wordings and speech off the record due to confidentiality concerns, it

was communicated that for those in the transportation industry, they are made to pay taxes and

given stickers to put on their vehicles after having done so. Moreover, that without these stickers,

they will be arrested.

For those with established stores, they receive visits from the Ghana Revenue Authority (GRA)

and are given tax invoices for them to pay at their local tax offices. If they do not pay, penalties

and fines incur for which nonpayment can result in prosecution.

For those with containers or temporary structures, they are also given invoices, but the impression

given to me was that not so much pressure is put on them as those with established stores that are

somehow permanent and fixed in nature.

For those who sell in the markets, it was ascertained that they are rather handled by the local

assemblies. Finally, for those traders who sell and walk around with goods and / or services, it

was found that no pressure is put on them as their income usually falls below a certain threshold

which the GRA feels is not taxable. The actual threshold, however, was not obtained during the

visit due to oversight.

Finally, regarding enforcement, it was indicated by the Assistant Commissioner that:

“We are very serious about collecting taxes, can track all those who

owe, and use aggressive strategies to obtain what belongs to the

state. However, we don’t do this with cruelty or non-compassion.

If you can remember, at one point, we even provided all taxpayers


51

with a Tax Amnesty for a limited time from October to December

of 2018.”

In the final analysis, my own personal, intuitive feeling from the interviews tells me that although

the State might be serious about collecting taxes and implementing a variety of measures for

doing so, they seem not to go as far as to use force or “strong arm” those in the country’s informal

sector. In addition, it appears that they give too much leeway to informal sector workers by giving

them the opportunity to take the money to the tax offices themselves. They should rather collect

it on site. At least that is my personal opinion.

4.4.3 Objective Three: Challenges Involves in Collecting Taxes

Where it concerned the challenges that have been involved in the GRA collecting taxes from

informal sector workers, the Commissioner, himself, indicated that:

“As a matter of fact, one major problem is that too many tax districts

in the country are understaffed relative to the large number of

individuals in the informal sector and tight budgets. Keep in mind

that the informal sector is roughly 80 percent of all workers in the

country. Another thing is that we face logistical challenges in the

form of a lack of computers, information technology systems, not

enough telephones, not enough stationery, and not enough cars.

This is unlike the developed countries such as the United States, the

UK, etc.”


52

Regarding the Deputy Commissioner, he stated that:

“One major problem that I’ll be bold enough to say is with respect

to tax education. Without specific knowledge about the importance

of the payment of taxes, I doubt that anyone will do so. It just seems

so much like a burden and inconvenience. It’s unfortunate how

people just complain about the state of this country, but they forgot

that it takes State revenue to fix these problems. The FREE SHS

Programme, for example, it is very costly, but it has to be paid for

by the Government which taxes its people legally. Another thing I

guess is that many people are not even aware that they have to pay

taxes. That needs to change. Another challenge, in my own opinion,

is that the punishment for taxes does not seem to be enough for not

paying one’s taxes. It seems like just a ‘slap on the wrist.’”

When the Assistant Commissioner was interviewed, he made mention of the following:

“The poor functioning of tax authorities in this country is mainly

due to under-resourced or poorly trained tax administrators, poor tax

collection systems, and most importantly, poor legal enforcement

mechanisms for tax evaders. Let me stress the last point. People will

always do what they feel they will get away with. I think everyone

will agree with that. Lastly, concerning the taking of bribes and

other things that we have heard allegedly takes place, I can say that


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those in charge of collecting taxes are not adequately motivated to

do so. This may also tie in with the enforcement aspect.”

4.4.4 Objective Four: Determinants of Sales Tax Compliance

Looking at Table 4.11, it can be seen that when respondents were asked about what motivates

them to comply with tax laws. Where it concerned tax compliance, only eight variables were

looked at. The table indicates that the variables of profitability (4.55, 0.585); inadequate

punishment for non-compliance (4.24, 0.235); their own conscience (4.11, 0.224); and the lack

of trust in the nation’s tax system (4.09, 0.667) discouraged respondents from paying income

taxes. Additionally, respondents were unsure if having too many responsibilities (3.88, 0.558) or

their size of business (3.49, 0.245) was responsible for their unwillingness to pay taxes.

Furthermore, it was found that respondents were not discouraged by their perception of the tax

rate being high (2.13, 0.748) or tax unfairness (2.11, 0.883).

Table 4.11: Determinants of Sales Tax Compliance


Items Mean Standard Deviation

Profitability 4.55 0.585 Conscience. 4.11 0.224 Inadequate punishment for non-compliance. 4.24 0.235 Size of business. 3.49 0.245 High tax rate. 2.13 0.748 My perception of tax unfairness. 2.11 0.883 Lack of trust in the nation’s tax system. 4.09 0.667 Having too many responsibilities. 3.88 0.558 Overall Mean 3.575


54

4.5 Discussion of Findings

The first research objective was to identify and analyze which types of businesses are covered by

Ghana’s tax net according to the Income Tax Act, 2015 (Act 896). This objective was achieved

through conducting semi-structured interviews with the GRA’s Commissioner, Deputy

Commissioner and Assistant Commissioner of its Domestic Tax Revenue Division. Through the

survey, it was brought to light that the Income Tax Act covers both resident and non-resident

eligible persons who are either employed, have businesses, are self-employed or have investments.

It was also found that there are some exceptions which include non-profit organizations. However,

there were no studies found to corroborate or debunk these findings.

The second research objective was to identify and analyze the tax enforcement strategies used by

the Ghana Revenue Authority (GRA) to collect taxes from informal sector businesses in the Accra

Metropolis. This objective was also achieved through interviewing GRA’s Commissioner, Deputy

Commissioner and Assistant Commissioner of its Domestic Tax Revenue Division. In line with

the objective, it was determined that those in the transportation industry are made to pay taxes and

given stickers to put on their vehicles after having done so with the threat of jail time; those with

established stores and places of business receive visits from the Ghana Revenue Authority (GRA)

and are given tax invoices for them to pay at their local tax offices with the threat of penalties and

fines; those with containers or temporary structures are also given invoices to pay taxes with the

threat of penalties and fines; those who sell in markets are handled by the local assembles; and

those traders who sell and walk around offering goods and / or services are usually not pressured


55

to pay tax as they fall below a certain income threshold. Similar to the first research objective, no

studies were covered in the literature review which dealt with this research objective.

The third research objective was to determine the challenges involved in the Ghana Revenue

Authority (GRA) collecting sales taxes from informal sector businesses in the Accra Metropolis.

This objective was achieved through interviewing GRA’s Commissioner, Deputy Commissioner

and Assistant Commissioner. The research uncovered that these challenges include: (i) the tax

offices being understaffed; (ii) inadequacy with regard to the number of computers, information

technology systems, and the number of telephones, stationery and cars; (iii) the public not having

enough tax education; (iv) many people not being aware that they must pay taxes; (v) the

punishment for not paying taxes being inadequate; (vi) poor legal enforcement mechanisms for tax

evaders; (vii) a poorly trained tax administration; (viii) poor tax collection systems; and

(ix) those in charge of collecting taxes not being adequately motivated to do so. A related study

with similar results was Appiah’s (2015) study which examined the challenges of paying taxes in

the Kumasi Metropolis and found that inadequate logistics (or vehicles) was a factor. Meanwhile,

Fagariba’s (2016) findings indicated the weak enforcement of tax laws and people having a poor

tax education.

The last research objective was to investigate the determinants of sales tax compliance for informal

sector businesses in the Accra Metropolis. This objective was achieved through administering

questionnaires to 385 informal businesses in the Accra Metropolis. Through the questionnaire

administration, it was determined that: (i) profitability, inadequate punishment for non-

compliance, their own conscience, and the lack of trust in the nation’s tax system discouraged

respondents from paying their taxes; (ii) respondents were unsure if having too many

responsibilities or their size of business was responsible for their unwillingness to pay taxes; and


56

(iii) respondents were not discouraged by their perception of the tax rate being high or tax

unfairness.

In line with these findings, Amanamah’s (2016) study identified punishment for non-compliance

as an explanatory variable; Wahabu’s (2017) study identified the profit levels of companies as an

explanatory variable; and Munjevi et al.’s (2017) study identified public confidence and trust in

the nation’s tax system as an explanatory variable. Furthermore, in contrast to this study, Jabbar’s

(2009) study acknowledged business size and tax level as explanatory variables; and Kung’s

(2016) study indicated tax rates as an explanatory variable.


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CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction

After having arrived at adequate research findings in the previous chapter, this chapter in question

provides a summary of those findings; draws conclusions from those findings; makes

recommendations based on those findings; reviews the limitations experienced by the Researcher

during the study; and proposes possible directions for future research.

5.1 Summary of the Findings

The purpose of this study was to identify and analyze which types of businesses are covered by

Ghana’s tax net according to the Income Tax Act, 2015 (Act 896); identify and analyze the tax

enforcement strategies used by the Ghana Revenue Authority (GRA) to collect taxes from informal

sector businesses in the Accra Metropolis; determine the challenges involved in the Ghana

Revenue Authority (GRA) collecting taxes from informal sector businesses in the Accra

Metropolis; and investigate the determinants of sales tax compliance for informal sector businesses

in the Accra Metropolis.

With regard to the types of businesses covered by Ghana’s tax net, it was found that these include

both resident and non-resident eligible persons who are either employed, have businesses, are self-

employed or have investments. The tax enforcement strategies used by the GRA to collect taxes

from informal sector businesses in the Accra Metropolis included: (i) those in the transportation

industry being made to pay taxes and being given stickers to put on their vehicles after having

done so with the threat of jail time; (ii) those with established stores and places of business


58

receiving visits from the Ghana Revenue Authority (GRA) and being given tax invoices for them

to pay at their local tax offices with the threat of penalties and fines; and (iii) those with containers

or temporary structures being given invoices to pay taxes with the threat of penalties and fines.

The primary challenges in the GRA actually collecting taxes from those in the informal sector

included: (i) the tax offices being understaffed; (ii) inadequacy with regard to the number of

computers, information technology systems, and the number of telephones, stationery and cars;

(iii) the public not having enough tax education; (iv) many people not being aware that they must

pay taxes; (v) the punishment for not paying taxes being inadequate; (vi) poor legal enforcement

mechanisms for tax evaders; (vii) a poorly trained tax administration; (viii) poor tax collection

systems; and (ix) those in charge of collecting taxes not being adequately motivated to do so.

Finally, the determinants of sales tax compliance for informal sector businesses included

profitability, inadequate punishment for non-compliance, their own conscience, and trust in the

nation’s tax system.

5.2 Conclusions

Before the study was conducted, it was brought to the attention of the Researcher that many

countries around the world depend on revenue generated from taxes in order to meet their

expenditure requirements; with some definitely more than others. Moreover, that although there

have been some recent gains in the mobilization of tax revenue in Ghana, it is still not enough to

support the annual government budget for development. Furthermore, that although the collection

of taxes and tax evasion in Ghana has received considerable attention, this attention has not been

well focused to arrive at an implementable solution. This and the fact that no studies could be

found which not only investigated the factors affecting tax compliance, but also focused strictly

on informal sector workers and made an attempt to investigate the loopholes in Ghana’s tax laws


59

and tax collection strategies in order to ensure tax compliance forced the Researcher to arrive at

the following research questions:

§ Which categories of businesses are required to pay taxes according to the Income Tax Act,

2015 (Act 896)?

§ Which particular strategies have the Ghana Revenue Authority (GRA) been utilizing to

effectively ensure that informal sector businesses in the Accra Metropolis pay the accrued

taxes on their income?

§ Which challenges, obstacles and other hindrances have the Ghana Revenue Authority

(GRA) been facing in its effort to collect taxes from these parties?

§ Which factors cause informal sector businesses in the Accra Metropolis to pay their

necessary corporate and income taxes?

After having conducted this study, it can be concluded that optimally, the Ghana Revenue

Authority should be able to collect taxes from both resident and non-resident persons in the

informal sector who are either employed, have businesses, are self-employed or have investments.

However, to date, they have not been able to successfully do so.

It doesn’t appear as if the blame can be put entirely on the GRA, even though it is their overall

responsibility to collect taxes on behalf of the Government. From their side, their undealt with

weaknesses include their tax offices being understaffed; there being inadequacy with regard to the

number of computers, information technology systems, and the number of telephones, stationery

and cars; the public not being educated enough about taxes or being made aware that they have to

pay taxes; poor tax collection systems; and those in charge of collecting taxes not being adequately

motivated to do so. The Government, on the other hand, can be blamed for the punishment for not


60

paying taxes being inadequate; and there being poor legal enforcement mechanisms for tax

evaders. It is debatable, however, whether not the Government and the GRA can share the blame

for certain factors.

Lastly, with regard to the general public, their fault lies in the fact that they have allowed excuses

such as the lack of profitability, inadequate punishment for non-compliance, their own conscience,

and a lack of trust in the nation’s tax system to dissuade them from paying their taxes.

5.3 Study Recommendations

As previously mentioned, one of the significances of this study is that it can provide informational

benefits to members of society. After having conducted the study and arrived at suitable findings,

the following recommendations are being given to certain societal members in order to mitigate

failure or generate improvement in certain areas.

1. First off, it was discovered that the Ghana Revenue Authority (GRA) provides invoices to

certain members of the informal sector and allows them to pay on their “own

recognizance.” However, in view of the large tax defaults that were found to have occurred

and motivated a major Tax Amnesty, this strategy does not appear to be efficient enough.

Therefore, in line with Nduruchi et al.’s (2017) school of thought, it is being recommended

that individuals should rather be forced to “pay-on-point.”

2. During the study, it was brought to light that the enforcement of tax payments was not

adequate enough, and that this has led to many citizens doing “what they can get away

with.” In response to this situation, it is being recommended that the GRA should employ

additional staff to enforce the payment of taxes of those in the informal sector, and that


61

these personnel should make face-to-face visits to record accumulated taxes and to collect

these taxes aggressively.

In addition, as is the case in Rwanda, “spies” should be employed to play a monitoring and

evaluation role. Therefore, if one is caught evading taxes, it could result in the seizure of

that person’s items / store or prison time. If a staff at GRA is caught aiding and abetting

tax evasion, on the other hand, it should result in employment termination and

imprisonment. These are strategies that were inspired by Lymer and Oats’s (2010) and

Hasseldine et al.’s (2010) suggestions.

5.4 Perceived Research Limitations

Research limitations concern those matters and occurrences that are beyond a researcher’s control.

In the case of this study, one of such limitations was the fact that since the primary data gathering

tool was the semi-structured interview, the data that was gathered was self-reported. Therefore,

even though having reviewed various publications that were made on the subject matter (i.e.

journal articles, websites, etc.), it was not possible for the Researcher to adequately confirm or

deny the accuracy of the collected data. Therefore, the data that was collected had to be taken at

face value.

With that being said, in retrospect, it would have been better for information concerning the tax

enforcement strategies used by the GRA to collect revenue from those in the informal sector to be

answered by those in the informal sector as well. This would have provided more insight and

given the chance for the Researcher to utilize triangulation.

The second limitation was the fact that the Ghana Revenue Authority (GRA) was the only

institutional body that was surveyed during the study. As a matter of fact, it was realized during


62

the study that many of those in the informal sector were made to pay taxes to their local assemblies.

Unfortunately, no officials or representatives of any local assemblies in Ghana were surveyed

during the course of the study, therefore limiting the degree of acquired knowledge about the

challenges involved in collecting taxes from those in the informal sector.

It is the view of the Researcher that the findings could have been more substantive if data were to

have been collected from some of the major local assemblies in Ghana such as the Accra

Metropolitan Assembly (AMA).

The last limitation that will be discussed is with respect to the sample size. Although those in

Ghana’s informal sector amount to approximately 80% of employed persons which could number

approximately 960,000 individuals, only 385 were administered questionnaires, and only 238

responded (Ghana Statistical Service, 2012). This is a very fractional number for which the views

of the majority of respondents may not be generalizable to the population of Ghana as a whole.

5.5 Directions for Future Research

Undoubtedly, this study did well to: identify and analyze which types of businesses are covered

by Ghana’s tax net according to the Income Tax Act, 2015 (Act 896); identify and analyze the tax

enforcement strategies used by the Ghana Revenue Authority (GRA) to collect taxes from informal

sector businesses in the Accra Metropolis; determine the challenges involved in the Ghana

Revenue Authority (GRA) collecting taxes from informal sector businesses in the Accra

Metropolis; and investigate the determinants of sales tax compliance for informal sector businesses

in the Accra Metropolis. However, during the course of the study, some issues and question arose

for which the Researcher feels should be given further attention by the research community, thus

making them potential research topics. They are as follows:


63

3. Benefits and Challenges that arise from the collection of taxes by both the local assemblies

and Ghana Revenue Authority.

4. Efficiency in the Collection of Taxes: A Comparative Study of Ghana and Rwanda.


64

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APPENDICES

Appendix A: Research Questionnaire

As a final year student pursuing an MSc. in Development Finance at the University of Ghana Business School, I am undertaking a study on the topic “Causes of Small and Medium Scale Enterprises Tax Evasion: A Case Study of the Informal Sector in the Accra Metropolis.” Therefore, I would plead with you to answer all of the following questions both honestly and to the best of your ability so that the data can be captured and used to make an analysis and generalize the findings. Any information that you provide will be kept confidential and will only be used for academic purposes.

Instructions: Please tick where appropriate

Section A: Demographic / Personal Information

1. Gender: Male [ ] Female [ ]

2. Age: 18 – 30 Years [ ] 31 – 40 Years [ ] 41 – 50 Years [ ]

Above 50 Years [ ]

3. Educational Background:

JHS (or equivalent) [ ] SHS (or equivalent) [ ] Diploma/HND [ ]

Bachelor’s Degree [ ] Master’s Degree and Above [ ] PhD [ ] None [ ]

Professional Certification [ ] Basic Education [ ]

Other____________________________ [ ] (Please Specify)


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4. Which industry are you / your firm involved in?

Food and Beverage [ ] Sale of Provisions [ ] Fashion Industry [ ]

Beauty / Cosmetic Industry [ ] Sale of Second Hand Clothes [ ]

Cleaning / Janitorial Services [ ] Sale of Vehicular Products [ ] Electrical Services [ ]

Carpentry Services [ ] Phone Repair [ ] Car Repair [ ]

Other____________________________ [ ]

(Please Specify)

5. How long have you been active in this industry? Less than 1 Year [ ] 1 to 5 Years [ ] 5 to 10 Years [ ] 10 to 20 Years [ ]

Over 20 Years [ ]

1. On a scale of 1 to 5, with1 signifying “Strongly Disagree,” 2-“Disagree,” 3-“Neutral,” 4-

“Agree” and 5-“Strongly Agree,” please indicate your perception of the following statements.

Statements Strongly Strongly Disagree Agree

a. The profitability of my business discourages me from paying taxes.

1 2 3 4 5

b. My own conscience discourages me from paying taxes. 1 2 3 4 5 c. Inadequate punishment for non-compliance discourages

me from paying taxes. 1 2 3 4 5

d. The size of my business discourages me from paying taxes.

1 2 3 4 5

e. The high tax rate discourages me from paying taxes. 1 2 3 4 5 f. My perception of tax unfairness discourages me from

paying taxes. 1 2 3 4 5

g. The lack of trust in the nation’s tax system discourages me from paying taxes.

1 2 3 4 5

h. My having too many responsibilities discourages me from paying taxes.

1 2 3 4 5


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Appendix B: Interview Guide

1. Who is your employer?

2. What is your position?

3. How many years have you worked for your employer?

4. Explain the purpose of the Income Tax Act, 2015 (Act 896).

5.. How is it designed to increase income tax revenue in Ghana?

6. Which types of businesses are covered by Ghana’s tax net according to the Income Tax Act?

7. Which types of businesses are not covered and why?

8. Generally speaking, what tax enforcement strategies are used by the GRA?

9. What tax enforcement strategies are used by the GRA to collect taxes from Ghana’s informal sector?

10. What are the strengths and weaknesses of these strategies?

11. What are the challenges involved in the GRA’s collection of taxes from informal sector businesses?

12. What is the Government doing to overcome these challenges?

13. In your mind, what are the determinants of sales tax compliance for informal sector businesses in the Accra Metropolis of Ghana?


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