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An examination on attitude of business owners towards tax stamp (a case study of taxpayers in sekondi, ghana)

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Governments and rulers have always sought methods to collect money from their people in the form of taxes throughout human history. Other than the right to declare war, none of the functions of government, according to Lamont (1992), bears more incisively on the welfare of people, both personally and in their economic activity, than the power to tax. Taxation has the effect of forcing people to give up their hard-earned money or belongings, or, in the early days, even payments in kind, without getting any tangible advantages in return. In many respects, generating tax money is a state’s most important task. Fundamentally, tax income is what keeps the state afloat, financing everything from social programs to infrastructure improvements. Taxation plays an important role in determining how benefits are distributed, as it serves as the foundation for redistribution from those with the highest incomes to those who are most in need, and it allows the government to encourage some activities while discouraging others by altering their relative prices (Prichard, 2009). The responsibility to pay one’s fair share of taxes when they become due is part of the new morality that democratic government must instill in all citizens. Tax evasion and fraud are generally acknowledged to be among the most pernicious kinds of crime that afflict Ghanaian society, with tax criminals diverting millions of cedis from the national revenue every day (Ayee, 2007). In recent years, taxation on small and medium businesses (SMEs) has gotten a lot of attention in both developed and developing countries. The rising emphasis on SMEs reflects a growing recognition of their potentially essential role in promoting innovation, employment, and development, particularly in the service sector, which is becoming more significant in both developed and developing nations. Privatization and deregulation have aided the growth of small and medium-sized businesses, particularly in nations moving to market economies (Prichard, 2009). Because of their potential economic relevance and vibrancy, the tax treatment of SMEs is given much more weight than their income contribution alone would suggest. Ghana’s informal economy is vast and varied. Trading, spare parts, transportation, building, agriculture, livestock, food preparation, credit facilities, refrigeration, electricity, dressmaking, footwear distilling, gold and silver smiting, and traditional medicine are only some of the activities covered (Ayee, 2007). The Ministry of Finance and Economic Planning, as well as the Statistical Service, have found it impossible to get accurate data on their membership and operations due to their vast size. The informal sector in Ghana is considered to be essential to the overall economy’s development since it provides (a)major sources of employment; (b)main sources of job creation; and (c)main sources of continuing job creation.

c)requirement for big companies to continue to expand;

d)as a foundation for national competitiveness and

(e)sources of entrepreneurship and innovation It is, however, plagued by a number of issues, including a scarcity of skilled labor, limited access to capital and technology, poor entrepreneurship, small and segmented markets, a lack of record-keeping culture, a very illusive, highly itinerant, unregulated by legislation, and finally, a very low literacy rate (Ayee, 2007). The informal sector’s scale also makes it difficult to collect income taxes. Ghana’s income tax base is very limited. Only approximately 20% of the workforce is working on a wage-and-salary basis. The remainder work in the unorganized sector. Because they are mostly self-employed, determining the income of individuals in the informal sector may be difficult in certain instances. As a result, the majority of their actual income cannot be accurately evaluated. As a consequence, the informal sector has been the primary source of income tax evasion. Non-declaration of income, underdeclaration of income, and inflation of deductions from income are three types of evasion (Ayee, 2007). Ghana’s economy is dominated by the operations of informal sector businesses. The self-employed sector, which mostly operates informal structures, is estimated to account for 86.3 percent of economic activity (Ghana Living Standard Survey, 2000), despite the fact that a significant number could easily be classified as earning below the taxable threshold of income liable to tax. According to the Ghanaian Registrar General’s Department, there are 266,760 self-employed people registered in Ghana’s informal sector. However, it is regrettable to see that just 53,352 people have registered and are being taxed (Ghana Revenue Authority [GRA], 2009). In Ghana, like in any other country, the informal sector is made up of a wide range of people, companies, beliefs, and backgrounds. It’s possible that the cultural origins of these small business groupings, as well as their political and social history, have influenced their views on taxes. Their views about tax compliance may be influenced by these beliefs. If taxpayers’ views of taxes affect their attitudes toward compliance, it is clear that altering taxpayers’ perceptions of taxation is critical to achieving a more positive attitude toward compliance. It’s critical to figure out how taxpayers feel about taxes, not just to influence government policy on the subject, but also to help the government advertise itself and its services more successfully to the broader public. Between the tax that is theoretically collectible from economically active people in the nation and the tax that is actually collected, there seems to be a significant tax gap. Noncompliance by taxpayers and prospective taxpayers with tax law is one of the major causes of the tax gap. People’s attitudes and views have been shown to be one of the reasons of non-compliance.

1.2 Statement of the problem

Taxation is a significant source of income for governments all around the globe. Tax revenue in Ghana is used for: a) infrastructural development, such as good roads, schools, portable water, provision of health and sporting facilities, electricity, and so on; b) the maintenance of law and order for the security of the state and all individuals; and c) the payment of salaries to government employees, such as doctors, teachers, and civil servants, in order to keep government operations running smoothly. In 2005, the Tax Stamp was established in an attempt to enhance the contribution of self-employed tax collection. This is a quarterly tax collected from small-scale self-employed people in the informal economy. Business operators in Ghana’s informal sector are classified by kind of business under the Tax Stamp System, such as dressmakers, susu collectors, chop bar proprietors, butchers, and so on. To arrive at fair rates to be paid according to both kind and size, the company categories are further classified by class/size (GRA, 2009). The Internal Revenue (Amendment) Regulations, 2004, established the Tax Stamp system. Legislative Instrument (LI) 1803 of 2004 put the system in place on Tuesday, February 1st, 2005. It enables easy identification of small-scale self-employed people in the informal sector based on their business type, such as those working in kiosks or on table tops, identifiable groups such as hairdressers, dressmakers, and tailors, butchers, market traders, chop bar and cooked food sellers, artisans such as masons, carpenters, welders, and mechanics, and artisans such as masons, carpenters, welders, and mechanics. Following the successful deployment of the Vehicle Income Tax (VIT) Sticker system for Commercial Vehicle Operators in the third quarter of 2003, the Tax Stamp System was introduced. The VIT, according to revenue authorities, was a tremendous success, necessitating the need to build the Tax Stamp System after it. Unfortunately, despite its best intentions, the Tax Stamp was greeted with opposition by the intended target population. The primary cause for the original Tax Stamp System’s resistance and seeming failure was related to the sector’s basic nature. It consists of a high number of small-scale operators, each with a low turnover rate, according to Ayee (2007). Many actions take place in private and out of sight, making it difficult to track them for tax reasons. The entrance barriers are modest. This results in intense rivalry as well as a high level of flux and unpredictability. Businesses that are now in existence may cease to exist in the future. Operators in industries such as transportation or street selling may be extremely mobile. Cash transactions are prevalent due to low literacy and lack of access to financial services. Most companies lack separate accounting of personal and business activities due to their family-oriented, small-scale character. Accountancy services that are reasonably priced are uncommon. Despite these challenges, the tax stamp was re-launched on September 28, 2006, when the issues that hindered its functioning were resolved.

1.3 Objective of the study

The primary objective of the study is as follows

  1. To Examine the level of compliance to the payment of taxes using the Tax Stamp
  2. To Identify major challenges business owners face in the payment of their taxes

iii.      Assess the effectiveness of measures to elicit compliance towards the Tax Stamp

  1. To proffer recommendations towards the improvement of compliance levels for the Tax Stamp

1.4 Research Questions

  1. To what extent are business owners complying with revenue collecting agencies toward the purchase of Tax Stamps?
  2. What are the challenges business owners face in the payment of their taxes?
  3. Is  the measures to elicit compliance towards the Tax Stamp effective?
  4. Are there solutions towards the improvement of compliance levels for the Tax Stamp

1.5 Significance of the study

This kind of research will be useful in a variety of ways. First, the research will allow the Tax Stamp System in the study region to be assessed five years after its reintroduction; second, the data from the study will help revenue officers and other company owners identify the taxation problems that exist in the informal sector. The research will also try to offer information to enhance tax collection and compliance in Sekondi; furthermore, the investigation may uncover important information that shows the informal sector’s ability to contribute to the national treasury. Finally, the research will provide the researcher real-world experience studying the informal sector.

1.6 Scope of the study

This study examines  An examination on attitude of business owners towards tax stamp.and also, Examine the level of compliance to the payment of taxes using the Tax Stamp.furthermore, furthermore, to Identify major challenges business owners face in the payment of their taxes.  And also, Assess the effectiveness of measures to elicit compliance towards the Tax Stamp and finally, proffer recommendations towards the improvement of compliance levels for the Tax Stamp. Hence will be delimited to  Taxpayers of selected businesses in Sekondi, Ghana

1.7 Limitation of the study

This study was constrained by a number of factors which are as follows:

 just like any other research, ranging from unavailability of needed accurate materials on the topic under study, inability to get data

Financial constraint , was faced by  the researcher ,in getting relevant materials  and  in printing and collation of questionnaires

Time factor: time factor pose another constraint since having to shuttle between writing of the research and also engaging in other academic work making it uneasy for the researcher

1.8 Definition of terms

Attitude: a settled way of thinking or feeling about something.

Tax stamp: a stamp affixed to an item as evidence that a tax on it has been paid especially

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