Abstract
Recent years have seen SMEs' tax compliance become a major challenge. Many SMEs in developing countries struggle with VAT compliance, despite their important economic contributions. However, the factors that affect SMEs' VAT compliance in Zanzibar are understudied, leaving a major information vacuum that must be filled. To fill this information vacuum, this work investigates extensively by utilizing a cross-sectional research design. This technique enabled the collection of 400 SMEs data, whereas the logit model and propensity score matching were used for data analyses. The logit model results reveal that simplified tax systems, computerized tax payments, tax audits, and taxpayer services improve VAT compliance. Providing tax audits to SMEs in Zanzibar annually increases VAT tax compliance by 11%, while tax knowledge increases the chance of SMEs complying with VAT tax by 10 percent. Conversely, secondary and university education lowered compliance. University education decreases the probability of SMEs complying with VAT tax by 57%. An investigation of matching propensity scores showed that VAT compliance hurt SMB income. Compliant SMEs lost money due to electronic tax payments and IT tax management systems. In contrast, non-compliant SMEs reported higher incomes after adopting EFDs. Research outcomes lend to the sustainable growth and development of small and medium-sized enterprises (SMEs) in Zanzibar. They also reinforce the government's efforts at revenue mobilization in a way that enhances economic stability. It is recommended that governments should simplify tax systems, provide clear guidelines in local languages, and implement categorization based on size and turnover.