To register or not to register for value-added tax? How tax rate changes can influence the decisions of small businesses in South Africa

Abstract

PURPOSE : Correct registration for the value-added tax (VAT) is a key aspect of tax compliance; it is vital in ensuring adequate tax revenue collection in all countries but particularly in developing countries such as South Africa. Non-registration hinders sufficient tax revenue collection, stifles economic growth and causes unfair competition with formal businesses. The purpose of this study is to determine whether changes in the VAT rate affect the registration decisions of businesses, ultimately impacting upon tax compliance behaviour and tax revenue collection. DESIGN/METHODOLOGY/APPROACH : An online 2 × 2 between-subjects field experiment was conducted, as part of a broader study, to consider compliance with registration requirements by small business entities in South Africa, specifically when there are changes in the VAT rate. FINDINGS : Although the study establishes that changes in the VAT rate tend not to have a significant impact on the registration decisions of such taxpayers, it nonetheless indicates that the magnitude of the change in the VAT rate may be influential on registration decisions, whether relating to compulsory or voluntary registration. More particularly, the greater the magnitude of the VAT rate decrease (increase), the more likely it is that taxpayers will register (deregister) for VAT purposes, indicating that the magnitude of changes in the VAT rate do have an impact on VAT registration decisions and therefore on tax compliance more generally. RESEARCH LIMITATIONS/IMPLICATIONS : Not only does the study add to the limited knowledge available on registration decisions of small businesses, but also gives valuable guidance to policymakers in terms of determining the VAT rate for the country. ORIGINALITY/VALUE : Not only does the study add to the limited knowledge available on registration decisions of small businesses, but it also gives valuable guidance to policymakers in terms of determining the VAT rate for the country.