Effects of VAT Regulations to

SMEs’ Compliance: A
Proposed Tool for Minimizing
Its Administrative Burden
 INTRODUCTION
• SMEs sector is faced with multiple challenges such as enormous tax burden and complicated compliance.
• The sizeTheandResearchers
complexity of indirect taxes significantly influence the situation of SMEs since the impact of taxation falls harder to them because of the
compliance cost.
• It is also worth noting that it is not solely the tax rate that affects the SMEs but also the tax administration.
• Tax administration that is capricious and ineffective is likely to reduce businesses’ growth.
• The failure of the government to improve the VAT tax system partnered with businesses’ shortfall in minimizing the impact of taxation resulted in
widespread tax evasion and non-compliance.
• The government must rethink how they operate, offering the prospects towards increased compliance.
• SMEs, on their part, should also bank on making strategies to relatively lessen the impact of taxation on them, especially VAT.
• This
Flores, research
Paul sought to
Joshua P. explore
Geli, theMae
Christel impact
C. of VAT’s regulations on SMEs in Batangas City, given that tax compliance is as complex as the tax policy itself.
• The regulatory burden falls excessively on SMEs as most of them lack the adequate expertise to comply with diverse, radical, and complicated regulations
(Atawodi & Ojeka,2012).

Lucero, Ella Jhoana L.

RATIONALE
Cabrera, Rona Mae L.
Explore the effects of VAT regulation in the VAT compliance of
SMEs in Batangas City given the fact that literature and past studies
have not contributed much in exploring the topic
 STATEMENT OF THE PROBLEM
What is the business profile of SMEs in Batangas City in terms
1 of: 4 Is there a significant relationship between the ease or
1.1. Company Background difficulty of complying with VAT and the factors
1.2. VAT Status associated with compliance?

2 How can SMEs’ adherence to VAT regulations be described in

termcs of ease or difficulty? Is there a significant difference between the responses of
5
SMEs with regard to the association of VAT compliance
How can the following factors be associated with VAT and the factors affecting it in terms of:
3 compliance in Batangas City SMEs? 5.1 Company Background?
3.1. Use of Tax Adviser 5.2 VAT Status?
3.2. Non-hiring of Tax Adviser
3.3. Sources of Advice and Information
3.4. Attitude and Norms of taxpayers towards VAT Based on the findings, what measures and strategies can
6
compliance be proposed to address the effects of VAT regulations on
3.5. Perception of Fairness compliance?
3.6. Relationship between tax officials and
taxpayers
CONCEPTUAL FRAMEWORK

INPUT PROCESS OUTPUT

Business Profile of SMEs Questionnaire

in Batangas City Proposed Tool in
Minimizing the
VAT Regulation for SMEs Survey Administrative Burden
of Vat Regulation to the
Factors Associated to Compliance of SMEs in
VAT Compliance of SMEs Statistical Batangas City
Treatment

THEORETICAL FRAMEWORK

• Theory of VAT Regulation • Theory of VAT Compliance

- National Internal Revenue Code - Psychology – Based Theory
- Process of Complying and Necessary - Economic – Based Theory
Requirements
 METHODOLOGY
RESEARCH DESIGN
• Quantitative Research
- Correlational Research

RESPONDENTS OF THE STUDY

• 241 SMEs in Batangas City
- Determined using Raosoft sample size calculator

DATA GATHERING INSTRUMENT

• Adopted survey questionnaire from study of Msangi (2015) entitled “Evaluation and Analysis of Value Added Tax (VAT)
compliance: A Case Study of Small and Medium Enterprises in Tanzania.” The questions were modified to fit in the local
context.

• Validators:
1. CPA and Certified Tax Technician from a local firm in Lipa City
2. CPA and Audit Supervisor from a local firm in Batangas City
3. Statistician and Master of Arts in Teaching holder
 METHODOLOGY
• Survey Questionnaire undergone pilot testing with 24 respondents and tested for reliability using Cronbach Alpha

 VAT Regulations and Compliance : 0.961

 Use of Tax Adviser : 0.938
 Non-hiring of Tax Adviser : 0.975
 Sources of Advice and Information : 0.958
 Attitude and Norms of Taxpayer : 0.862

DATA GATHERING PROCEDURES

• Online Survey through Google Forms with no retrieval after 5 days and opted for Face-
to-face Administration
STATISTICAL TREATMENT OF DATA
SOP 1 – Percentage Frequecy Distribution
SOP 2 - Mean and Weighted Mean
SOP 3 - Mean and Weighted Mean
SOP 4 – Mean, Standard Deviation, Pearson r and Regression Analysis
SOP 5 - One Way Analysis of Variance
 FINDINGS
1. What is the business profile of SMEs in Batangas City in terms of:
1.1. Company Background;
Table 1
Legend:
Frequency Distribution as to Type of Business Based on Operations
HIGHEST

LOWEST

Based on the responses, most of the respondents are merchandising business. It is further supported by the statistics provided by
Department of Trade and Industry showing that most MSMEs are ventured in merchandising and service business even after delineating the
micro sector in the scope.

Table 2
Frequency Distribution as to Form of Business Organization
Legend:
HIGHEST

LOWEST

The responses have shown that most of the respondents are Corporation. Such is supported by the related literature discussing that SMEs are
enterprises whose total assets are within the range of 3,000,001 to 100,000,000; hence, among the three types of businesses based on operation,
corporations are the ones most likely to fit in the asset criteria given it has the highest capital pooling capability.
 FINDINGS
1.2. VAT Status?
Table 3
Frequency Distribution as to Way of Registering for VAT Purpose

Legend:
HIGHEST

Based on the responses, majority of the responses registered to VAT voluntarily. In accordance with the study of Sukhi (2021), aside from the
technical drivers of registration, one of the motivations behind this is that being VAT registered enhances the image of the business to being
“successful” and not being “too small.”
Table 4
Frequency Distribution as to whether their Submission of VAT Return is on time or not

Table 5
Frequency Distribution as to how Frequent the VAT Returns are Made on Time
Legend:
HIGHEST

LOWEST

Tables 4 and 5 have shown a high level of compliance. In connection, studies of Msangi (2015) and Ali et al. (2013) have shown that there are two
general classifications of motivation driving this high percentage of compliance namely Economic-Based Theory and Psychology-Based Theory,
 FINDINGS
Table 6
Weighted Mean of SMEs Adherence to VAT Regulations in Terms of its Level of Ease or Difficulty

Legend:
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Very Easy; 2.50 – 3.49 = Easy; 1.50-2.49 = Difficult

The general composite mean has shown that VAT regulations are considered difficult, in general. This is supported by the study of Paying
Taxes (2017), indicating that, while VAT is the most common consumption tax system used around the world, it is concurrently being considered
among the most complicated forms of taxation.
 FINDINGS
3. How can the following factors be associated with VAT compliance in Batangas City SMEs?
3.1 Use of Tax Adviser
Table 7
Legend:
Use of Tax Adviser
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Strongly Agree; 2.50 – 3.49 = Agree; 1.50-2.49 = Disagree
Based on the results, it is communicated that the respondents are recognizing the importance of having a tax adviser. It is supported by
Sagesa.net (2019), discussing that it is unthinkable to pursue a business without a tax adviser, as a business without legal problems are bound to
be perceived as business in good reputation.
3.2 Non-hiring of Tax Adviser
Table 8
Legend: Non-hiring of Tax Adviser
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Strongly Agree; 2.50 – 3.49 = Agree; 1.50-2.49 = Disagree
To conclude, the respondents do not agree that organizations do not need a tax adviser. Hence, it is to be drawn that the respondents believe
that for seamless compliance, an organization shall implore the service of a tax adviser
 FINDINGS
3.3 Sources of advice and information
Table 9
Sources of Advice and Information
Legend:
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Strongly Agree; 2.50 – 3.49 = Agree; 1.50-2.49 = Disagree

The responses have shown, the respondents believe that the source of advice and information is crucial in proper compliance
with VAT regulations. This is supported by Australian Taxation Office (2021), explaining that by having accurate, reliable, and
timely information, value is being acquired.
 FINDINGS

3.4 Attitude and norms of taxpayers towards VAT compliance

Table 10
Attitudes and Norms of Taxpayers towards VAT Compliance

Legend:
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Strongly Agree; 2.50 – 3.49 = Agree; 1.50-2.49 = Disagree

The general composite mean suggests that the attitude and norms of taxpayers towards VAT compliance play a
considerable role in their compliance with VAT. This is also further proved by Braithwaite (2009), stating that attitude, norms,
and other psychological factors significantly affects compliance.
 FINDINGS
3.5 Perception of fairness
Table 11
Perception of Fairness

Legend:
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Strongly Agree; 2.50 – 3.49 = Agree; 1.50-2.49 = Disagree

The data have shown that a significant degree of perception of fairness will be necessary as to proper compliance of SMEs to VAT regulations. Saad (2014)
explains in his study that the negative perception of fairness in the tax system and government spending had businesses avoid and evade paying taxes.
3.6 Relationship between tax officials and taxpayers
Table 12
Relationship between Tax Officials and Taxpayers
Legend:
HIGHEST

LOWEST

Legend: 3.50 – 4.00 = Strongly Agree; 2.50 – 3.49 = Agree; 1.50-2.49 = Disagree

Generally, it can be interpreted that SMEs are inclined to maintain a good relationship with the taxing authorities. In the figures, a general weighted mean
score of 3.13 (Agree) is achieved, showing that the relationship between the tax officials and taxpayers is crucial in discussing matters about compliance.
 FINDINGS
4. Is there a significant relationship between the ease or difficulty of complying with VAT and the factors associated
with compliance?
Table 13
Relationship of SMEs Adherence to VAT Regulations in Terms of Ease or Difficulty
Legend:
Pearson’s p- Decision Verbal
HIGHEST Factors
r values on Ho Interpretation
Failed to
1. Use of Tax Adviser -0.063 0.106 Not Significant
Reject
2. Non-hiring of Tax Failed to
0.013 0.853 Not Significant
Adviser Reject
3. Sources of
Advice and 0.161 0.043 Reject Significant
Information
4. Attitude and
Norms of Taxpayers
-0.093 0.018 Reject Significant
towards VAT
Compliance
5. Perception of
0.232 0.001 Reject Significant
Fairness
6. Relationship
Failed to
between tax officials 0.017 0.355 Not Significant
Reject
and taxpayers
Significance level is 95% (<.05)

The data have shown that there is a significant relationship between source of advice and information, and the ease or difficulty of VAT
compliance. It is supported by the studies of Rajiff (2011), McKerchar (1995), and Saad (2010), showing that the source of information has
significant effect towards VAT. Further, the result showing the correlation of ease or difficulty of complying with VAT and attitude and norms of
taxpayers is further supported by the results of the study of Damayanti et al. (2015). It is shown that the attitude on tax compliance, subjective
norms, and perceived behavior affects the intentions to comply. Lastly, the result showing a significant relationship of the ease or difficulty of
complying with VAT and perception of fairness is supported by the study of Msangi (2015) showing that what pushes compliance is the perception
of whether a tax system is fair and being followed by everyone.
 FINDINGS
5. Is there a significant difference between the responses of SMEs with regard to the association of VAT
compliance and the factors affecting it in terms of:
5.1 company background; and
Table 14
Difference on the Responses of SMEs Concerning the Association of VAT Compliance and Factors Affecting
It in Terms of Company Background
F- p- Decision Verbal
Factors
Values values on Ho Interpretation
Type of Business
Failed to
Based on 2.431 0.091 Not Significant
Reject
Operations
Type of Business
Failed to
Based on 2.463 0.089 Not Significant
Reject
Ownerships

The data presented above show that the respondents' responses do not significantly differ whether they are operating as
merchandise, service, or manufacturing and whether the ownership type is a sole proprietorship, partnership, or corporation.
 FINDINGS
5.2 VAT status?
Table 15
Difference on the Responses of SMEs Concerning the Association of VAT Compliance and Factors Affecting
It in Terms of VAT Status

F- p- Decision Verbal
Factors
Values values on Ho Interpretation
Way of Registering
8.670 0.004 Reject Significant
for VAT Purposes
Submitting the VAT Failed to
0.535 0.465 Not Significant
Return on Time Reject
Frequency of
Failed to
Submitting the VAT 2.192 0.092 Not Significant
Reject
Return on Time

The data have shown that the significant difference lies on the groupings of whether they register to VAT voluntarily or
involuntarily after exceeding the threshold. Based on the study of Klahr et al. (2017), the most common reason given for
registering for VAT voluntarily is the expectation of reaching the threshold soon; hence, they were able to prepare beforehand
resulting to a significant difference to the level of compliance.
CONCLUSIONS

1. SMEs in Batangas City give importance and have high regard for complying with VAT requirements, especially in
submitting their VAT returns on time.

2. The respondents find it difficult to comply with the various VAT requirements imposed by the law.

3. There are numerous factors that influence the willingness and ability of SMEs to comply with the VAT regulations
properly.

4. The null hypotheses related to sources of advice and information, taxpayers' attitudes and norms toward VAT
compliance, and perceptions of fairness are rejected. In contrast, those associated with the use of a tax adviser, non-
hiring of a tax adviser, and the relationship between tax officials and taxpayers are accepted.

5. There is no significant difference between the SMEs' responses concerning the association of VAT compliance and
the factors affecting it when grouped based on the company background and VAT status, except in terms of the way of
registration of the SMEs for VAT purposes.

6. The proposed methods and strategies to mitigate the impact of complying with VAT laws on SMEs in Batangas City
have been presented.
 RECOMMENDATIONS

1. Current VAT-registered and VAT-registrable SME owners must know the tax regulation and carefully plan tax compliance. Meanwhile,
prospective SME owners, who plan to register for VAT, must be intellectually prepared to ensure that they can comply with the former.

2. To the SME owners and prospective owners, who cannot afford to have a permanently hired VAT compliance officer, it is recommended
to outsource VAT compliance to an accounting firm.

3. To SME owners and prospective owners, the use of cloud-based enterprise resource planning (ERP) system can be recommended.

4. To the taxing authority, improve the VAT's design by reducing filing and payment frequency and simplifying liability calculation
methods.

5. To the government, urge the legislators to prioritize and pass House Bill 8492 or the “Ease of Paying Taxes Act.

6. To future researchers, studies of similar nature of research in other types of business taxes are highly encouraged.
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