The Determinants of SME’s Tax Compliance in Indonesia

Abstract

Tax compliance is the behaviour shown by taxpayers in fulfilling their tax responsibilities and exercising their rights in taxation. Tax compliance is a problem that still needs to be resolved to date. That can be seen from poor tax performance, namely low tax ratios, tax gaps and tax revenues that still need to meet targets. SMEs have a significant role in the Indonesian economy, are one of the potential taxpayers in the SMES sector, and are the most significant contributor to gross domestic product (GDP) compared to other sectors. Indicators of the success of a country's tax revenue can be seen through the tax ratio. The tax ratio is one of the essential factors for assessing the effectiveness of a country's tax revenues. Indonesia's tax efficiency is lower than many ASEAN countries. The relatively low tax ratio observed in this context indicates the low level of understanding and compliance with tax obligations, especially among small and medium enterprises (SMEs). This research applies a quantitative approach involving a survey of SME taxpayers. A structured questionnaire was given to 395 SMEs randomly and as eligible. Respondents were taken from the third largest city in Indonesia, namely Medan City. Structural Equation Modeling (SEM) was used in this research with Smart PLS data analysis and goodness of fit test requirements. The study found that Tax Knowledge, Tax Morals, Knowledge of Digital E-Filling on Tax System and Tax Rates positively and significantly influence tax compliance in the SME sector. Practical Implications This study contributes to the existing conceptual framework and provides essential insights into management implications in the field. The findings of this research provide valuable insights for practitioners and the government, indicating that the government has the potential to change existing policies and programs to increase tax compliance among small and medium enterprise (SME) taxpayers in Indonesia.