Factors Influencing Tax Compliance among Small and Medium Enterprises in Sri Lanka

Small and Medium Enterprises sector is an important sector for tax collection purposes in Sri Lanka so that, researching this particular area is crucial for tax authorities to become more sensitive to the needs of SMEs when introducing or changing tax policies. This study aims to establish factors affecting the level of tax compliance by Small and Medium Enterprises. The main objectives of the study include establishing the influence of tax rates, availability of tax information, attitudes, country's legal framework and cost of tax compliance among Small and Medium Enterprises. The study adopts a descriptive research design involving a quantitative research methodology. The target population was 2, 945, out of which a sample size of 196 respondents was drawn, using a simple random sampling technique. Questionnaires were used to collect primary data from the respondents, which were analyzed using SPSS applying both descriptive and inferential statistical tools. There were positive relationships exist between the tax rate (r=.013), tax information (r=.290) and the attitudes (r=.546) with the level of tax compliance however, there were negative relationships exist between the legal framework (r=-.162) and the cost of tax compliance (r=-.010) with the level of tax compliance. The findings showed that tax information, taxpayers' attitudes and the legal framework had significant relationships with the level of tax compliance. It is recommended that the tax system should provide a clear and simple guideline on how to complete tax returns but also should provide proper training and education to enable taxpayers to understand their rights and obligations as taxpayers. Further, it is also important to maintain a uniform penalty structure to enhance their level of tax compliance.