Tax compliance cost has become an important aspect of tax policy. This is because of its connection with the tax compliance and the government revenue in turn. Unnecessary burden of compliance cost either on individual or business taxpayer may have negative effect on the tax compliance and eventually reduction in the tax revenue. Tax compliance cost is one of the determinants of tax compliance behavior. Unnecessary high tax compliance cost leads to either intentional or non-intentional non-compliance. In the case of business taxpayer, especially smaller ones, the burden may discourage their growth. Thus, less complex tax laws and simple tax administration is a pre-requisite to reducing their compliance cost and hence, to encourage entrepreneurship and SMEs development.
Empirical studies were conducted all over the world to estimate the compliance cost. Evans (2008) acknowledged that the number of the compliance and/or administrative cost studies conducted and published after the Haig’s (probably first organized compliance cost study) study in 1935 is more than 100. Despite the existence of the large body of literature, the concept of tax compliance cost remain ambiguous. Most of the research narrow the concept to the objective of their research. Therefore, this essay aims at bringing an overview of the concept in single essay. The next section of the essay discusses the definitions of compliance cost, the third section discusses aspects of compliance cost and finally, the last section gives a recap of the essay.
1.2 Definitions of Tax Compliance Cost
Sandford, Godwin and Hardwick (1989); Evans, Ritchie, Tran-Nam and Walpole (1996) acknowledge the difficulty in giving a precise definition of compliance cost. However, some authors define the concept as follows.
“The costs incurred by taxpayer in meeting the requirement laid on them by the tax law and the revenue authority” Sandford (1986).
“They are costs over and above the actual payment of tax and over and above any distortion costs inherent in the nature of tax; costs which would disappear if the tax was abolished”. Sandford (1995)
Ariff and Pope (2002) describe compliance cost as an economic and non-economic costs in the process of complying with tax laws. The economic involves monetary and time costs while the non-economic consists of the psychological cost of stress and anxiety in dealing with tax matters.
As illustrated by the the above definitions, the tax system puts other costs, apart from the tax liability, on either individual or business taxpayers. These costs are categorized into three main categories (Sandford et al., 1989). (1) Monetary costs which involve money spent on tax professionals and costs involving taxation guides, books, communication and other incidental costs. (2) Time costs which are the time spent in completing the tax return, record keeping (for tax purposes), preparing tax information for the tax professionals and dealing with the tax authorities....