The Impact of Taxation Knowledge on Tax Compliance among Small and Medium Enterprises (SMEs) in Kurunegala District

Abstract

The present study analyzes the intricate nexus between taxation knowledge and tax compliance of Small and Medium Enterprises (SMEs) registered in Sri Lanka's Kurunegala District. This research aims to identify the degree to which various parameters of tax awareness influence the tax compliance activity of SME operators. A systematic quantitative questionnaire was employed to gather data from a random sample of 200 SMEs, wherein various demographic and business related data were collected. These are the gender of the respondents, age of operation of the businesses, age groups of the business operators, types of businesses, and educational levels of respondents. For data collected to be analyzed, extensive methodology was employed such as descriptive statistics, reliability tests, correlation analysis, regression modeling, and hypothesis testing. Findings of the study confirm a positive relationship between compliance and awareness of taxes. In particular, it has been shown through research that companies with higher maturity of tax rights and obligations consciousness, higher comprehension of business and employment income taxation, and higher awareness of legally mandated penalty for non-compliance are more likely to exhibit compliant behavior. These have been shown to have considerable impact on the readiness and ability of SMEs to pay their taxes appropriately and in a timely manner. The study highlights the significance of tax literacy in voluntary tax compliance and illustrates that increased taxation awareness has the ability to support more effective tax administration. The findings carry substantial implications for policy-makers, tax administrators, and educators to design focused interventions and education programs to improve SMEs' tax compliance in the region.