Journal of African Development

Tax non-compliance remains a significant challenge in India, particularly among Small and Medium Enterprises (SMEs), despite continued tax reforms, digitalization initiatives such as the Goods and Services Tax (GST), and taxpayer awareness programs. Understanding the behavioral and institutional determinants of tax compliance among SMEs is therefore critical for improving voluntary compliance and strengthening revenue mobilization. This study investigates the influence of financial literacy and perceived fairness on tax compliance behavior, with trust in tax authorities acting as a mediating variable. Grounded in the Theory of Planned Behavior and the Slippery Slope Framework, the study employs Partial Least Squares Structural Equation Modelling (PLS-SEM) to analyses primary survey data collected from 600 SMEs across different sectors in India.

The findings indicate that both financial literacy and perceived fairness have a significant positive effect on tax compliance behavior among SMEs. Furthermore, trust in tax authorities partially mediates these relationships, suggesting that voluntary compliance is enhanced when regulatory enforcement is supported by perceptions of institutional legitimacy, transparency, and fairness. The results underscore the importance of strengthening taxpayer education, simplifying tax procedures, and ensuring equitable tax administration to foster trust and promote sustainable tax compliance. This study contributes empirical evidence from the Indian SME context and offers practical insights for policymakers and tax authorities seeking to improve compliance in the SME sector