Tax compliance and procedural fairness in SME

Abstract

Although SME's is one sector that contributes greatly to GDB, the low level of tax compliance makes the amount of tax revenues from this sector still low. This study aims to analyse the interaction power of authority and trust in authority in affecting tax compliance withprocedural fairness appraoch, based on slippery slope framework (SSF). The primary data is collected from 100 respondents after questionnaires distribution to small medium enterprises (SME) in Jakarta and its surrounding areas. The questionnaire consists of open and closed questions. Power of authority, trust in authority, and tax compliance are measured by using a Likert scale, and confirmatory factor analysis is developed to test whether the data fit a hypothesised measurement model. This study shows that the power of authority, trust in authority, and the interaction of both affect the level of tax compliance. The result indicated that taxpayer compliance index is high, but the fact that tax revenue from the SME sector is still low. Respondents felt the tax rate to be high and not treated fairly, and tax dissemination by tax authorities to SME is minimal. Hence, in making policy of fines, tax rates, and tax audit, tax authority should consider the perceived fairness and the taxpayer's ability to pay. The tax authority ignore the procedural fairness. This study provides a new understanding about tax compliance, the results showed that the level of compliance SMEs is high, but not followed by compliance to pay taxes.