The effects of changes in the Value-Added Tax rate on tax compliance behaviour in South Africa

Abstract

Enhanced revenue mobilisation is essential in developing countries such as South Africa but 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 is conducted, designed to identify the implications of rate changes of various directions and magnitude. Statistical analysis of the data obtained from the experiment indicates that small business entities are inclined to reduce the VAT liability when there is an increase in the VAT rate by overstating purchases rather than under-declaring sales, leading to an increase in noncompliance. The greater the magnitude of the VAT rate increase, the greater the level of non-compliance. In contrast, no significant relationships are identified between a decrease in the VAT rate and tax compliance. The results further indicate that the greater the magnitude of the VAT rate increase, the more likely it is that taxpayers registered as VAT vendors will deregister. Correspondingly, the greater the magnitude of the VAT rate decrease, the more likely it is that taxpayers will register as VAT vendors. This study contributes to the literature and our understanding of tax compliance behaviour in three ways. Firstly, the research contributes to the limited body of knowledge on the effect VAT rate changes may have on the tax compliance behaviour of small business entities, particularly in a developing country context. Secondly and at a practical level, the research has implications for policymakers contemplating VAT rate changes. Finally, the study indicates how experimental research methods can be used in tax compliance behaviour research in Africa.