Abstract:
Tax compliance is vital to sustainable national tax collection, especially in developing
economies like Sri Lanka. Despite various regulatory reforms, tax compliance among
Small and Medium Enterprises (SMEs) in the Southern Province, particularly in the
Galle District, remains relatively low. This study examines the key determinants of
tax compliance among SMEs, focusing on the impact of tax knowledge, tax rates, tax
penalties, and the cost of compliance. Adopting a quantitative, explanatory, and
deductive research design, primary data were collected from 200 owners & managers
in SMEs through structured questionnaires using convenience sampling. Secondary
data were also used to develop the conceptual framework. The data were analyzed
using SPSS software, employing descriptive statistics, Pearson’s correlation analysis,
and multiple regression to test the hypotheses. The findings reveal that tax knowledge
and the enforcement of tax penalties significantly and positively influence tax
compliance. Conversely, high tax rates and elevated compliance costs discourage
compliance. These results provide valuable insights for policymakers and the Inland
Revenue Department in formulating more effective tax policies and education
programs. Enhancing voluntary compliance can broaden the tax base and stimulate
overall economic growth. The study recommends simplifying tax procedures,
expanding taxpayer education, and streamlining penalty mechanisms to create a more
SME-friendly taxation system in the Galle District.
