Determinants of Tax Compliance Among Small and Medium Enterprises in Nairobi County, Kenya

Abstract

Tax compliance among Small and Medium Enterprises is critical in assuring the government's ability to increase tax income in order to manage the country's development plans. However, such enterprises in Kenya have over the years demonstrated low compliance rates. Currently, the seventh Kenya Revenue Authority corporate plan report indicated that compliance rate is 59% which is below the target rate of 65%. Therefore, this study sought to assess the determinants of tax compliance among small and medium enterprises in Nairobi County, Kenya. Basing on the theory of Planned Behavior, Deterrence Theory and Tax Moral Theory, the study interrogated the influence of Tax Education, Legal Enforcement Measures, Tax Audits and Tax Compliance Cost on tax compliance among the Small and Medium Enterprises based in Nairobi County. Based on a descriptive research design, the study focused on the 43,432 enterprises based in Nairobi County across the 17 sub counties where the proprietors of these businesses were the respondents. Through Fisher formula, a sample size of 96 was obtained. After clustering, the sample size in each Sub-County was sampled through random sampling procedure where the SMEs were sampled randomly until the required number in each Sub County was obtained. The data collection instrument adopted was a questionnaire issued to the owners who are the tax payers. The data collected was analysed through descriptive statistics, correlation as well as binary logit regression model. It was established that tax education significantly increases the odds of tax compliance among SMEs by 4.591 times (Odds Ratio = 4.591; Sig < 0.05); legal enforcement measures significantly increase the odds of tax compliance among SMEs by 5.496 times (Odds Ratio = 5.496; Sig < 0.05). In regard to tax audits, the results showed that an increase in tax audits increases the odds of tax compliance among SMEs by 1.444 times (Odds Ratio = 1.444; Sig > 0.05) though insignificantly. On the contrary, an increase in tax compliance costs significantly decreases the odds of tax compliance among SMEs by 0.208 times (Odds Ratio = 0.208; Sig < 0.05). Given its importance on enhancing tax compliance, the study recommends KRA to increase adoption of tax education practices, that is, tax clinics, seminars, media campaigns and social media campaigns. There is also a need to increase legal enforcement measures such as departure prohibition orders, agency notices, revocation of licences and prosecutions as well as arrests so as to increase tax compliance among SMEs. The study also recommends a need to increase the rate of tax audits practices such as examination of tax reports, confirmation of tax returns filed and audit of related transactions which are currently being conducted to a low extent by KRA. This can lead to a significant impact on tax compliance among SMEs. Given that an increase in tax compliance costs is associated with a significant decrease in tax compliance among SMEs, the study recommends KRA to consider revising the tax filing procedures to be even simpler so as to reduce the costs involved in it.