The Effect of Changes in the Value-added Tax Rate on Tax Compliance Behaviour of Small Businesses in South Africa: A Field Experiment

Abstract

Enhanced revenue mobilization is essential in developing countries such as South Africa. However, it is inevitably a complex process, both from economic and political perspectives. Increasing the rate of value-added tax (VAT) has been identified as one option to increase tax revenue, although the likely effect of VAT rate changes on tax compliance behaviour is undetermined. This study considers the impact of such a change on the tax compliance behaviour of small business entities. In order to address the impact of VAT rate changes on tax compliance behaviour, a between-subjects pre-test/post-test online field experiment was conducted and designed to identify the implications of rate changes of various directions and magnitude.

Statistical analysis of the data obtained from the experiment indicated that small business entities are inclined to reduce the VAT liability when there is an increase in the VAT rate, and to do so by overstating purchases rather than under-declaring sales. This leads to an increase in non-compliance. The greater the magnitude of the VAT rate increase, the greater the level of non-compliance. In contrast, no significant relationships were identified between a decrease in the VAT rate and tax compliance.

Citation

Schoeman, A., Evans, C. and du Preez, H. (2021), "The Effect of Changes in the Value-added Tax Rate on Tax Compliance Behaviour of Small Businesses in South Africa: A Field Experiment", Hasseldine, J. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 29), Emerald Publishing Limited, Leeds, pp. 65-88. https://doi.org/10.1108/S1058-749720210000029004