State legitimacy and tax compliance among small and medium scale enterprises: a case study of Dodowa district, Ghana

Abstract

Purpose Improving tax compliance would drive the needed development in Ghana. Small and medium scale enterprises (SME) constitute a sizable proportion of the Ghanaian economy but its contribution to tax revenue is below expectation. This study aims to determine whether SME's perception of state legitimacy affects tax compliance. Design/methodology/approach A structured questionnaire was administered to 200 SMEs randomly drawn from Dodowa in the Shai-Osudoku District of Greater Accra Region. Descriptive statistics and the Probit model with sample selection were used to analyse the data. Findings The study found that SME's perception of government legitimacy exerts a significant negative effect on reducing profit to avoid tax liability (ß = −0.0305, p < 0.05). Other factors such as education and fear of fines and penalties were also found to reduce the likelihood that the firm would reduce profit to avoid high tax liability. Still, tax knowledge had a positive effect on this behaviour. Practical implications This study would help deepen policymakers' knowledge of how to improve tax compliance among SMEs in Ghana. Originality/value The originality of this work is that it explicitly models the role of fiscal exchange theory in explaining tax compliance among SMEs in Ghana by using robust methodology.