Abstract:
After 1994 genocide perpetrated against the Tutsi which destroyed the country socially and
economically, tax revenues have played a major role in country reconstruction process by
financing the national budget up to 49 per cent in the fiscal year 2012/2013 compared to 35 per
cent in 1995. Despite this significant share of tax revenue in total government revenues, the tax
ratio to Gross Domestic Product is still low amounting to 12.5 per cent in 2012/2013, compared
to the average of 18 per cent in some developing countries. In addition to this low tax to Gross
Domestic Product ratio, the informal sector which accounts for 44 per cent of Gross Domestic
Product, also contributes to government revenue losses. The low ratio of tax revenues to Gross
Domestic Product is explained under self assessment system by economic and non economic
factors. Therefore; the objective of this study was to analyze the factors affecting tax compliance
in Rwanda. This study employed diagnostic research design to investigate associationship among
study variables. The research has relied on primary data collected using questionnaires and
secondary data collected from National Accounts Reports and revenue collections performance
reports done by Rwanda Revenue Authority. The population of the study was individuals
registered to Personal Income Tax and informal sector business operators. The sample under
study was made up by 793 respondents. To achieve the above objectives, the study used a
univariate regression and Multinomial Logistic Regression models to evaluate the relationship
among the variables. To estimate the tax gap, tax revenues were regressed on Gross Domestic
Product and the study covered a period from 1995 to 2012. EVIEWS 6 and SPSS 20 softwares
were used to analyze the data. The results indicated that tax revenue has a positive relationship
with Gross Domestic Product, and there was tax gap for each and every tax year. The regression
results indicated that the model is a good fit, meaning that the Gross Domestic Product in the
model account for the variation in tax revenue. The variables were cointegrated; implying that
there was a long-run relationship among them. The study also revealed that the level of income,
compliance costs, penality rate, attitudes towards taxes, equity and fairness of the tax system and
social norms are statistically significant to affect tax compliance levels in formal sector. For
informal sector, only, attitude towards taxes and perception of government spending were found
statistically significant to influence tax compliance behavior. The coefficients of tax audit rate,
audit probabilities, tax knowledge, were found statistically insignificant. The study
recommended: first, further simplification of compliance process by reducing compliance costs.
Secondly, the review of penalty rates and introduction of new techniques of enforcing
compliance like tax amnesty. Thirdly, enforcing tax morale among citizens, and fourthly, Tax
authorities should avoid unreasonable, intrusive tax audits and unfair penalties because this may
lead to negative attitudes towards the tax office and taxes in general.