CHAPTER 2 LITERATURE REVIEW
2.4 Empirical Studies on EFD Use and Voluntary Compliance
2.4.1 Voluntary compliance and Electronic Fiscal Device Use
study ignores this aspect. Furthermore, the use of EFDs is contrary to the habits of business owners (Tanzania Revenue Authority, 2017). Traditionally, businesses used to issue hand- written receipts or not issuing any at all. This habit minimised their expenses and enabled them to avoid tax (Batrancea, Nichita, & Batrancea, 2012; Agbi, 2014). Since some businesses are resistant toward using EFDs, this is the reason for the revenue authority imposing punishments.
2013; Kira, 2016). Studies by Saad (2014) and Tanzi (2017) commented on the complexity of tax systems as a tax framework where one item is subjected to several taxes that makes compliance difficult. The business owner fails to comply because of excessive tax dues or the inability to understand every tax element (Awasthi & Engelschalk, 2018). In acknowledging the challenge of the complex tax system, the government of Tanzania invested effort to identify and remove unnecessary taxes on the business community (Chan, 2012).
Ineffective tax enforcement is identified as a reason for the shadow economy and eventually non-compliance to the tax system (Awasthi & Engelschalk, 2018).
Nevertheless, the approach used for tax enforcement in one country may not necessarily work in another. For example, the study by Mohdali, Isa and Yusoff (2014) suggests that the threat of punishment insignificantly influences the compliance of taxpayers and triggers the intention for non-compliance in Malaysia. In Tanzania, tax enforcement that was parallel with the reduction of penalties due to avoidance, increased compliance (Chege, Kiragu, Lagat, & Muthoni, 2015). In both cases, if the probability of detection is treated as a moderating factor, it may change the level of compliance (Gemmell & Ratto, 2012; Mohdali, Isa, & Yusoff, 2014).
Another reason identified as affecting the degree of shadow businesses and tax compliance is the level at which businesses trust the government. Section 2.3.1.2 discussed this aspect in detail; however, the literature strongly points out factors such as transparency and accountability to impact tax compliance (Modugu, Eragbhe, & Izedonmi, 2012; Sá, Martins, & Gomes, 2014). The lack of transparency and accountability is likely to increase corruption in revenue collection; therefore, make the taxation system unfair (Hofmann, Voracek, Bock, & Kirchler, 2017). The government that is accountable will ensure fairness in the taxation process, while putting in controls as necessary to prevent evasion (Igbeng, Beredugo, & Adu, 2015). Meanwhile, a complex tax structure is likely to offer non- compliance opportunities to taxpayers. When exploited, the opportunities increase non- compliance.
Accordingly, studies acknowledge that the traditional taxation environments are constantly changing (Lubua E. , 2014; Al-Maghrebi, Ahmad, & Palil, 2016). Technological innovations are among key agents of change; for example, the introduction of computer
systems and related EFDs. Generally, the record shows that taxation used fiscal devices (electronic devices) for the first time in 1983 in Italy; today, their use extends to most parts of the world (Casey & Castro, 2015). Extended uses of EFDs come with other technological and social risks. For example, in Tanzania, there was a movement by business owners to oppose the use of EFDs in business operations (Lema, 2013). Although the opposition is now passive, cases are reported where traders reduce total sales by sabotaging the EFD use through frequently reporting that the EFD machine does not work properly (Chege, Kiragu, Lagat, & Muthoni, 2015; Al-Maghrebi, Ahmad, & Palil, 2016).
Furthermore, the study by Chege, Kiragu, Lagat and Muthoni (2015) and Bakar (2014) examined the impact of EFDs on Value Added Tax (VAT) in Tanzania. Overall, they asserted that compliance with EFD use determines the VAT collection. The results of these studies were expected, because the use of EFDs ensures that VAT information is captured by the revenue authority through its electronic systems (Cătălina, Dobre, & Şerba, 2013;
Faizal & Palil, 2015). The captured information provides the room for VAT establishment.
In Tanzania, all VAT-registered businesses are required to use EFDs. The VAT contribution to revenue collection was 31% of the domestic revenue collected in the 2017/2018 financial year (Tanzania Revenue Authority, 2018). In the Tanzanian context, this is the only category of EFD users whose contribution is well established. Although EFDs are important in VAT collection, the study by Chege, Kiragu, Lagat and Muthoni (2015) recommends the analysis of the relationship between the EFD enforcement and the level of compliance. The current study considers this suggestion and applies it to small business owners because it this the latest group to adopt EFDs; morever, small businesses employs the most citizens (Tanzania Revenue Authority, 2019).
While a number of studies opt to analyse the impact of using EFDs in tax collection, they overlook user acceptance, which is an important condition for technology use. In their study, Mandari and Koloseni (2017) confirmed that user acceptance of EFD use increased tax compliance in Tanzania. Furthermore, the technical awareness and trust are necessary in influencing user acceptance of the technology (Casey & Castro, 2015; Mativo, Muturi,
& Nyang‟au, 2015). Moreover, the study by Kira (2016), added that traders‟ knowledge about the benefits of using EFDs in their business also enhances acceptance and compliance. Another factor affecting the user acceptance of EFDs is the social pressure (Ikasu, 2014; Kapera, 2017). The current study concentrates on the actual use of EFDs, and
how it impacts the perception of the effectiveness of auditing, fairness in taxation procedures, and the level of transparency in audit processes. These factors are theoretically important is determining tax compliance; however, their relationship with EFD use is not explored despite the relevance (Murphy, 2008; Gurama, Mansor, & Pantamee, 2015).