The Effect of Financial Education on Tax Compliance: A Case Study of SMEs in Kano State
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Background of the Study
Tax compliance remains a significant challenge for many small and medium enterprises (SMEs) in Nigeria, with issues such as tax evasion, underreporting of income, and non-registration being prevalent. A contributing factor to these challenges is the low level of financial education among SME operators, which limits their understanding of tax regulations, procedures, and benefits (Okonkwo & Adeola, 2023).
Kano State, one of Nigeria’s economic hubs, hosts a substantial number of SMEs that play a crucial role in employment and economic growth. However, these businesses often struggle with tax compliance due to limited financial literacy, which impedes their ability to navigate complex tax systems and obligations. Financial education, which includes knowledge of tax policies, bookkeeping, and financial planning, has the potential to enhance compliance by increasing awareness and reducing errors in tax submissions (Usman & Ibrahim, 2024).
This study investigates the impact of financial education on tax compliance among SMEs in Kano State, highlighting the relationship between financial literacy and adherence to tax regulations.
Statement of the Problem
Despite efforts by tax authorities to improve compliance among SMEs in Nigeria, the rate of compliance remains low. In Kano State, tax evasion and noncompliance persist due to limited financial literacy and a lack of understanding of tax obligations. This not only reduces government revenue but also undermines the ability of SMEs to benefit from government programs tied to tax compliance, such as grants and incentives (Abdullahi & Sani, 2023).
Existing studies have primarily focused on tax enforcement mechanisms rather than the role of financial education in fostering voluntary compliance. This gap in research necessitates an investigation into how financial education can address compliance issues, particularly among SMEs in Kano State.
Objectives of the Study
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To assess the impact of financial education on tax compliance among SMEs in Kano State.
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To analyze the relationship between financial literacy and tax awareness.
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To identify challenges SMEs face in achieving tax compliance and propose financial education strategies to address them.
Research Questions
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How does financial education impact tax compliance among SMEs in Kano State?
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What is the relationship between financial literacy and tax awareness?
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What challenges do SMEs face in achieving tax compliance, and how can financial education address these challenges?
Research Hypotheses
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H₀₁: Financial education does not significantly impact tax compliance among SMEs in Kano State.
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H₀₂: There is no significant relationship between financial literacy and tax awareness.
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H₀₃: Financial education strategies do not significantly address the challenges SMEs face in achieving tax compliance.
Scope and Limitations of the Study
The study focuses on SMEs in Kano State, evaluating the role of financial education in improving tax compliance. Limitations include potential variations in tax compliance behaviors across industries and the reliance on self-reported data, which may be prone to bias.
Definitions of Terms
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Financial Education: The process of acquiring knowledge and skills to effectively manage financial resources, including understanding tax obligations.
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Tax Compliance: The adherence of taxpayers to tax laws and regulations, including accurate and timely filing of returns and payment of taxes.
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Financial Literacy: The ability to understand and apply financial principles in personal and business financial management.
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SMEs: Small and medium enterprises that contribute significantly to economic growth and employment.
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