Taxation Challenges Facing Small and Medium Scale Enterprises (SMEs): A Case Study of Mafinga Town Council, Tanzania
Hezbon Kassamo Regan *
Department of Business Administration, Faculty of Business and Economics, University of Iringa, Tanzania.
*Author to whom correspondence should be addressed.
Abstract
Taxation is a critical tool for domestic revenue mobilization, particularly in developing countries where funding for public services, infrastructure, and development initiatives is essential. Small and Medium Enterprises (SMEs) play a vital role in economic development, contributing significantly to job creation and GDP growth. However, SMEs often exhibit low tax compliance due to high informality and limited awareness of tax obligations. This study aimed to assess the taxation challenges facing SMEs in Mafinga Town Council, Tanzania, with a specific focus on the effectiveness of tax collection enforcement mechanisms. While much research has examined tax compliance in larger urban centers, there is limited empirical evidence on the challenges faced by SMEs in smaller councils, highlighting a critical gap in the literature. A mixed-methods approach was employed, combining quantitative surveys and qualitative interviews. The quantitative component involved structured questionnaires administered to 101 SME owners and managers, while qualitative insights were gathered through semi-structured interviews with local tax officials. Quantitative data were analyzed using the Statistical Package for Social Sciences (SPSS), and qualitative data were subjected to thematic analysis, providing a comprehensive understanding of SME tax compliance challenges. Key findings indicate that 48% of SMEs perceive tax officers as effective, yet a substantial proportion remains neutral, while 52.5% report experiences of corruption, highlighting major compliance barriers. Findings indicate that nearly half of SMEs perceive tax officers as effective, though a substantial proportion remains neutral, reflecting inconsistencies in service delivery and communication. Most SMEs view the tax collection system as transparent; however, over 52% report experiences of corruption, undermining trust in tax authorities and negatively affecting compliance. The study concludes that the perceived performance of tax officers, transparency of the tax system, and prevalence of corruption significantly influence SME compliance. To enhance tax compliance, the study recommends comprehensive training programs for tax officers to improve engagement and service delivery, strengthening communication about tax procedures, and ensuring transparency in revenue allocation. Implementing robust anti-corruption measures, such as independent audits and anonymous reporting channels, alongside support programs that educate SMEs on record-keeping, financial literacy, and tax obligations, is essential.
Keywords: Small and Medium Scale Enterprises (SMEs), tax collection, enforcement mechanisms, audit, penalties