An Analysis of SMEs’ Attitudes and Practices Toward Tax Compliance in Zimbabwe

The informal sector has become the major employer in Zimbabwe, but the sector is not contributing meaningfully to the treasury due to noncompliance on tax remittances by the operators. The research was done on 50 businesses in the retail sector in Gweru. The findings are that minimal efforts are being put in place to enforce compliance, and corruption levels are high among the tax collection officials. Small and medium enterprises (SMEs) evade compliance by paying bribes, keeping two sets of records, relocating to new premises without notifying authorities, and temporarily closing businesses during compliance blitz. Penalties have been found to be the most effective in enforcing compliance. Publicity should be increased by authorities using radio, television, and pamphlets, which were found to be most effective. In addition, the Zimbabwe Revenue Authority (ZIMRA) should give business people more formal tax education to enhance understanding of tax obligations and compliance.


Introduction
According to Kadzere and Bonga (2013), "the Zimbabwean economic sectors are performing below par; largely as a result of biting liquidity constraints, the effects of illegal sanctions, fall in prices of commodities on global markets and the poor performance of the agriculture sector." This view is shared by the Confederation of Zimbabwe Industries who stated that "activity at manufacturing firms fell from 44% in 2012 to 35% this year" (Kadzere & Bonga, 2013). The manufacturing sector is struggling under pressure from lack of capital, high cost of utilities, and lack of competitiveness. Mangudhla and Mambo (2013) reported that more than 700 firms have closed while others are scaling down operations. This to a great extent has a telling effect on government income and projects.
The unofficial unemployment level in Zimbabwe has been pegged at more than 87% and as a result of job losses, about 5.4 million Zimbabweans are employed in the informal sector (Mhlanga, 2012). The informal sector has become the major employer in the country but the majority of these concerns are not registered for tax and other purposes. According to the Zimbabwe National Statistics Agency (ZIMSTATS), the largest number of employees was in the wholesale and retail trade, repair of motor vehicles and motor cycles, constituting 52%, followed by other services and manufacturing at 14%. Therefore, by extension the retailers should constitute a significant portion of tax revenue for the authority and therefore focus of this study will be on this sector. The sector should now be filling the gap in revenue collection by government.
Revenue collections for the third quarter of 2013 amounted to US$897.3 million against a target of US$904.9 million, resulting in a negative variance of 1%. The marginal negative variance was due to the harsh economic conditions prevailing in the country and the sluggish economic conditions during the run-up to the harmonized elections (www.zimra. co.zw). Table 1 illustrates actual collections against targets for the period under review.
According to Acting Business Reporter (2014), there was a 6% shortfall in tax collected for the year 2013. According to www.zimra.co.zw (2013b), Registered operators are only required to charge and collect VAT, maintain the necessary records, furnish tax returns and remit the taxes paid by customers within set time frames. The VAT is due after adjusting for output and input tax, therefore 542776S GOXXX10.1177/2158244014542776SAGE OpenNyamwanza et al. Value added tax (VAT)-registered clients are urged to observe statutory obligations relating to submissions of VAT returns as well as payments of the amount of the tax, which is due by the 25th of the calendar month after the end of each tax period; again, the focus of taxation is on registered taxpayers (www.zimra.co.zw). However, the majority of players in the economy are not registered as they operate informally. These fall outside the normal tax regulations and thus do not contribute taxes to government income.
There seems to be overemphasis on penalties by authorities to induce payments and compliance on the part of the operators. The revenue headlined other income, presupposes that the majority of this revenue will be outsourced from players in the informal sector in the form of prescriptive taxes. From the returns, the expected income was US$45 million and the actual income was only US$ 29.53 million giving a massive negative variance of US$24.695 million or 35%. This deficit comes despite the heavy penalties that the tax authorities charge on businesses that fail to pay taxes due to the informality of most business operations in Zimbabwe.
The Zimbabwe Revenue Authority (ZIMRA) in its financial statement actually acknowledged the impact of the harsh economic environment on its performance but did not extend this problem to small and medium enterprises (SMEs) operators when they fail to pay presumptive taxes. It seems the SMEs are struggling to meet their ZIMRA obligations, which position is made worse by the heavy penalties charged by the authorities. This is a clear indication that ways have to be found to cajole SMEs to pay taxes due by them to government. Why are SMEs operators noncompliant with tax payments when failure results in heavy penalties? Is the penalties mentality by ZIMRA the best method to use in enticing SMEs to be compliant?
The objectives of this study are i. To assess the importance of regulatory compliance for SMEs and its costs.
ii. To assess the level of compliance among SMEs and impact on business operations of SMEs. iii. To assess the communication methods used in informing SMEs about regulatory developments. iv. To provide a framework for assessing the impact of regulations on SMEs.

Literature Review
Governments' responsibilities are on the increase while sources of revenue are narrowing and as a result, the Government of Zimbabwe has found it necessary to extend tax collection to SMEs and the informal sector. The laws to collect such revenue are in place but from Table 1 above most SMEs players have not complied with the tax laws in existence. The majority of people in the informal sector can be classified as self-employed. According to Briscoe, Dainty, and Millet (2000), "Historically the self-employed operative has gained financially over directly employed counterparts through evasion of taxes and National Insurances contributions" p.602. They point out that by the 1990s it was apparent that the Inland Revenue and the Contributions Agency were being deprived of large amounts of revenue, a case that also applies to the Zimbabwean situation. In response to high levels of noncompliance in Ireland, the Office of the Director of Corporate Enforcement (ODCE) was established by the Company Law Enforcement to enforce the Irish Company Act with the aim to reduce the business risks of noncompliance by limiting the occurrence of fraudulent, dishonest, and noncompliance behavior (Heneghan & O'Donnell, 2007). As a result, Schmidt, Bennison, Bainbridge, and Hallsworth (2007) believed that the retail and service sector is now one of the most highly regulated parts of the U.K. economy, with the introduction, implementation, and enforcement of new business legislation resulting in substantial additional costs. Schmidt et al. (2007) stated that administrative costs include all the time and resources spent by owners, managers, and staff or hired expects to understand regulations, collect, plan, report, retain data, and fill in forms required by governments. Munnich (2007) contended that compliance costs for SMEs is up to 6 times higher than those for large companies, a disproportionality that is particularly pronounced in the service sector. Three main reasons for this are the scale of the cost as regulatory costs make up a larger proportion of overheads, the fixed nature of many compliance costs that result in raising the breakeven points, and indirect costs from the diversion of entrepreneurial attention (Schmidt et al., 2007). Many owners of SMEs feel overburdened with existing workloads and find it hard to go through all their paperwork and stay up-to-date on legislation (Schmidt et al., 2007). Accordingly, SMEs have to bear the differential costs of, for example, devising and administering more formal procedures for managing traditionally very informally handled staff base, as well as the often higher variable costs associated with manual checks where larger businesses have automated systems in place (Schmidt et al., 2007). For example, Briscoe et al. (2000) reported that the New Construction Industry Scheme (CIS) brings with it new responsibilities for employing contractors and these involved checking the validity of any presented certificates and recording any payments made on appropriate vouchers.
Information is also disseminated via the Internet though many SMEs do not make use of this information source (Schmidt et al., 2007). They further stated that the lack of awareness of what needs to be done, and when there is awareness of oncoming regulations, individuals' perceptions of potential costs and benefits are often distorted, as illustrated by the owner of the farm shop who worries about getting it wrong and only responds by avoiding rather than addressing the issue. Poor information can lead to overly expensive compliance solutions, adding further costs as a result of ignorance and misperceptions. Many run an SME as a lifestyle and may adopt a victim stance, whereas a more proactive approach can do much more to support the longterm success of business (Schmidt et al., 2007). Bannock (2001, p.3) argued that, "regulatory costs are real resource costs which have alternative uses . . . if regulatory costs could be reduced by, say, 2 percentage points of GDP, taxation on business could be increased by a similar amount without business being worse off." Schmidt et al. (2007) believed that alternatively the resources could be invested in the growth and running of SMEs, enabling them to continue to make a vital contribution to the U.K. economy. Briscoe et al. (2000) reported that the authorities tried to close loopholes in the legislation by, for example, making it compulsory for contractors to formally employ the selfemployed so that they will be eligible to paying Pay as You Earn (PAYE) and National insurance. The other possibilities were to transfer workers into Labor agencies and rehire their service or to assist groups of self-employed to form into a limited company (Briscoe et al., 2000). In addition, a system of fines and charges apply to contractors who failed to properly implement the new scheme such as obtaining relevant certificates with failure to obtain such certificates being forced onto the SC60 scheme, where basic rates of taxes and national insurance are deducted at source from any payment.
There are other approaches to prompting greater compliance rather than fines and tighter regulation. Schmidt et al. (2007) reported that their findings strongly support the possible solutions proposed by the Public and Corporate Economic Consultants (2004) whereby respondents asked for fewer regulations, a reduction in the complexity and paperwork required, enhanced consultation prior to the introduction of new regulations, greater flexibility in compliance, as well as a one-stop-shop for providing information and support. They further stated that it would appear that most of the issues raised in their study could be resolved via additional advice and support mechanisms aimed specifically at SMEs and delivered through channels traditionally used and trusted by SME owners.
Despite the efforts of authorities to curb noncompliance, there are obstacles to tax compliance, for example, Rusi and Sadiraj (2003) noted that 59% of enterprises were found in locations that did not coincide with addresses found in the tax offices. This made it difficult for authorities to track taxpayers, resulting in massive tax evasion. An equally serious problem, according to Fries, Lysenko, and Polanec (2003), was that "organisations both under reported actual sales to tax authorities and bribed them in order to reduce their fiscal burden. Customs appears as the highly corrupted institution, as nearly 90% of its officials resorted to dishonest practices" p. 14.
Such practices tend to compromise the ability of tax authorities to collect enough revenue for the fiscus as highlighted by Bitzenis and Nito (2005) that many firms in Albania in the formal sector evade taxes to some extent by maintaining "two sets of books" while unregistered firms have a significant tax advantage because they evade the high tax burden. Most people do not believe in the tax system and Bitzenis and Nito (2005, p.573) stated, 10% of the sample believed that the taxation system is appropriate, 15% felt that it is partially appropriate and needs further incentives for improvement, while 71% claimed that the taxation system is inappropriate and VAT rates were considered to be too high.. This attitude seems to prevail in the majority of would be taxpayers in Zimbabwe and therefore taxpayers tend to resort to any method to avoid paying taxes. It will be interesting to see what else ZIMRA is doing to boost tax collection from the hitherto untaxed majority.

Method
A quantitative study was adopted for the study with a view to gather information from the owner/managers of retail operators in Gweru regarding their attitudes and practices toward tax compliance. The survey used questionnaires that made use of the Likert-type scale, which were pilot-tested on respondents from the retail sector. The list of respondents was drawn from the shop licenses' list administered by the Gweru City Council for licensing purposes. Random sampling was used to select the respondents and 120 questionnaires were administered to these owner/managers of the retail shops. Fifty questionnaires were successfully completed and were useful for analysis in the study. Sixteen female and 34 male owner/managers participated in the study and 80% of the participants were aged from 20 to 35 years, 18% were older than 35 years and 2% were younger than 20 years. The data was entered into Stata 11 and analyzed using linear regression analysis and correlation coefficient. Supplementary interviews were used to gather additional information from 10 of the participants.

Findings and Discussion
There were 16 (32%) female and 34 (68%) male respondents, which can point to the fact that there are more men in business than females. A relationship was sought to find out if gender influenced compliance of owners and managers within the legal system. The results showed a weak relationship with a coefficient of 0.133 and a t statistic of 0.08. These results are indicative of a nonexistent relationship of the influence of gender on compliance of owners and managers in operating in a legal system. The demographics of the sample were 2% were younger than 20 years, 48% between 21 and 30 years, 32% between 31 and 35 years and 18% older than 35 years. The older than 35 years age group was found to be generally compliant with regulation. Fifty percent of the respondents were below 30 years, which shows that young people are starting businesses. The majority of the respondents (84%) cumulatively have less than 5 years of trading. There was no correlation between age and tax compliance. There was no evidence that one's age influenced compliance.
The level of education was also considered for its impact on compliance of owners and managers on operating within the legal system. The findings reflected a coefficient of 0.185, which showed that there is a weak relationship between the level of education and the ability to operate in a legal system, which means these variables are unrelated and that education does not influence any compliance on the part of managers and owners. This seems to indicate that the education held by the owners could have failed to include tax compliance on the part of business owners. This is reflected by the noncompliance rate indicating that the education might not be relevant to business or tax issues.
Eighty-six percent of the respondents believe it is the responsibility of the owner of the business to be compliant with all legal requirements, 6% think that employees are responsible for legal compliance of the business operation, and 6% respondents believe other individuals apart from owners and managers are responsible for legalizing their operations, and 2% did not respond to the question. These results are reflective of the opinion that the owners are the custodians of their business and the honor lies with them to legalize their businesses because the owner at the end is legally liable and not the employee.
Forty-five percent of the respondents indicated that taxes have minimum impact on their business operations, whereas 55% have indicated that the taxes have a high impact. These findings are augmented by the results on compliance with respect to PAYE legislation, where 67.35% indicated that they never comply, 4.08% rarely comply, 12.24% sometimes comply, 2.04% comply most of the time, and 14.29% always comply. The results show that there is very low compliance by SMEs on PAYE legislation that applies to them. On compliance with income taxes legislation, the results collected showed that 55.10% never comply with requirements of income taxes, 20.41% rarely comply, 2.04% sometimes comply, 4.08% comply most of the time, and 18.37% always comply with the said regulation. The low levels of compliance among the SMEs are similar to what Bitzenis and Nito (2005, p.573) found out that 10% of the sample respondents believed that the taxation system is appropriate, 15% per cent felt that it is partially appropriate and needs further incentives for improvement, while 71 per cent claimed that the taxation system is inappropriate and VAT rates were considered to be too high.
The results indicate that most respondents do not believe in the tax system.
Effort was made to find out the effectiveness of communication channels used by regulatory authorities to raise awareness on compliance issues. Generally, 49% of the respondents were of the notion that these channels are not effective, whereas 51% indicated that they are effective. On the effectiveness of communication done through newspapers, 47% of the respondents indicated that they are not effective, whereas 53% said they are an effective method of communicating compliance messages. Compliance messages communicated through the Internet were found to be ineffective (78%) with 22% showing that it is effective. Regulatory authorities also communicate to stakeholders through the use of compliance workshops. It was found out that 29% of respondents agreed that they are informative and effective, whereas 71% of the respondents disagreed. The use of pamphlets was also found to be effective, as indicated by 76% of the respondents, with 24% showing that they are ineffective. The communication channels used to disseminate compliance messages were further analyzed through the regression model and it was found that there is a positive relationship between radio/television and pamphlets with the compliance to the legal requirements of operating a business in the Zimbabwean environment. However, SMEs in Zimbabwe do not comply with legislation despite having the relevant information.
Authorities take a number of measures in enforcing compliance such as garnishing orders, closure of business premises, confiscation, and penalties. These measures were rated by research respondents in terms of their effectiveness as follows: penalties (42%), closure of businesses (29%), garnishing orders (12%), and confiscation (12%). However, 21% of respondents also indicated that regulatory authorities are not taking any action to enforce compliance. Evidence on the ground revealed that ZIMRA officials only undertook blitz raid at designated times during the year. Those in the transport parked their vehicles until the blitz was over. Thereafter, they would continue operations without fear until the next blitz period. Those operating shops adopted different strategies including closing businesses temporarily until the visit was over or deliberately closing the business completely by deregistering with ZIMRA and reestablishing the business under a new name.
The research also revealed that SMEs business owners have adopted a number of strategies to avoid compliance with the regulatory authorities, which include temporary closure of businesses (16%), paying bribes (51%), understating profits made (16%), keeping two sets of records (26%), and relocating to new premises without notifying authorities (22%). Keeping two sets of accounts by SMEs is supported by Bitzenis and Nito (2005) who concluded that many firms in Albania, in the formal sector, evade taxes to some extent by maintaining "two sets of books" while unregistered firms have a significant tax advantage because they evade the high tax burden. The findings on bribery (51%) and on lack of enforcement (21%) are fairly high, which affect the collection of compliance fees and taxes in the country. Fries et al. (2003) concluded that "customs appears as the highly corrupted institution, as nearly 90% of its officials resorted to dishonest practices." Relocating to new premises without notifying authorities was identified as one the major ways that SMEs use to evade the payment of compliance fees during compliance blitz by ZIMRA officials. This was also noted by Rusi and Sadiraj (2003) that 59% of enterprises were found in locations that did not coincide with addresses found in the tax offices, making it difficult for authorities to track taxpayers thereby resulting in massive tax evasion. Therefore, despite the high penalties, it was difficult to induce payments from business operators as the latter always found ways of avoiding payments. The other methods were considered cheaper by the business people, hence the high levels of avoidance.

Conclusions and Recommendations
The findings indicate that the government is not fully tapping into the informal sector to boost the revenue base. This is attributable to noncompliance tax regulations by the SMEs in the country. Results showed that many young people are starting businesses and this may be explained by few opportunities in the formal sector due to viability challenges facing industry and commerce. However, no relationship was found between age and compliance among the small business operators, which indicates that there are other factors that explain the phenomenon.
Most SMEs were found not to comply with income tax and PAYE as most of them do not believe in the tax system and viewed them as too high; thus they greatly affect their businesses. They are considered burdensome as the process of complying is viewed as unnecessarily consuming owner's time and is costly as most businesses do not have accountants as employees and therefore depended heavily on consultants who charge high fees. This was despite the fact that one operator interviewed indicated that presumptive taxes were very affordable and required no accounting records. The respondent indicated that setting aside US$5 per day would sufficiently meet the presumptive tax obligation. He however, conceded that trying to raise the presumptive tax obligation would be cumbersome if not done over a reasonable time period.
While SMEs were found not to comply with the pension, there are high levels of compliance with council regulations, where most of these have trading licenses, and the high levels of noncompliance with ZIMRA and National Social Security Authority (NSSA) regulations can be attributed to a number of factors such as lack of awareness through publicity. The communication channels used by authorities are not effective to raise awareness and compliance. The Internet, newspapers, and workshops were found to be the least effective, whereas the radio, television, and pamphlets were regarded as the most effective, which means more publicity should be done using the most effective channels.
SMEs have adopted a number of strategies to evade compliance, and on top of the list is payment of bribes to authorities, showing high levels of corruption among the officials. To evade high levels of tax, SMEs keep two sets of records, understate profits, and resort to temporary closure of businesses during blitz. In other instances, businesses are relocating to new premises without notifying authorities. Dalu, Maposa, Dalu, and Pabwaungana (2013) focused on tax and compliance by informal traders in the central business district of Harare and they found out that most of them were not registered and were not aware of their tax obligations. The actions taken by SMEs owner/managers are indicative of awareness of tax obligations, which is contrary to the views of Dalu et al. (2013) Furthermore, this study focused on shop owners and managers in Gweru and all the businesses that participated in the study are registered with the city council, and are in the taxpayers' database.
It is thus evident that authorities are putting in minimal effort to enforce regulations. Efforts must be made toward stamping out corruption among the officials in addition to publishing such practices on television and newspapers, among others.

Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding
The author(s) received no financial support for the research and/or authorship of this article.