Effect of Taxation on Financial Performance of Telecommunication Companies in Kenya

Abstract

This study delved into a comprehensive analysis of the influence of taxation on the financial performance of telecommunication companies in Kenya. Its overarching goal was to determine the effects of corporate income tax, liquidity, and other pertinent factors on financial performance within this sector. The study was grounded in well-established economic theories, including Allingham and Sandmo Theory, taxation morale theory, and the ability to pay theory. Employing a descriptive research design, this investigation utilized a dataset spanning seven years, from 2016 to 2022, encompassing data from five major telecommunication firms operating in Kenya. Both descriptive and inferential analyses were meticulously conducted using the statistical software SPSS. The study's findings illuminated significant and meaningful insights. It unveiled robust positive correlations between financial performance and total corporate income tax, as well as total excise duty. These correlations were not only statistically significant but also indicative of the substantial impact these tax components had on enhancing financial performance. Conversely, an intriguing negative correlation emerged between financial performance and capital structure. While this relationship was observed to be negative, it was deemed non-statistically significant, warranting careful consideration in practice. The regression model applied in this study showcased a commendable R-squared value of 0.860. This value underscored the model's robust predictive power, explaining roughly 86% of the variability in financial performance. Furthermore, the adjusted R-squared value, though slightly lower, hinted at the model's aptitude to capture relevant aspects affecting financial performance within the telecommunication industry. Building upon these findings, the study formulated a series of insightful recommendations for both policymakers and telecommunication firms in Kenya. Policymakers were encouraged to weigh the implications of TCIT and TED, recognizing their positive relationships with financial performance. Policymakers were advised to strike a balance between tax revenue generation and the sustainability of telecommunication companies, ensuring that tax policies do not excessively burden these firms.