Determinants of Tax Compliance Among Small and Medium Enterprises in Kenya: a Case of Nairobi County

Abstract

Tax is an important stream of revenue for government’s development projects and therefore all efforts must be made by governments to ensure that it is accurately and efficiently collected so as to facilitate the government’s operations. In an effort to maximize collection of revenue and efficiency in tax administration, key changes to tax policy evolving around ensuring equity, further widening the tax base, promoting increased investment and in so doing, reducing the tax compliance burden, have in the recent past been made by the Kenyan government. The main objective of this study was to determine the factors influencing tax compliance among SMEs in Nairobi County. The researcher outlined a detailed literature review and identified the independent variables for this research to be detection and penalties; tax information and complex filing procedures; value of tax and trust in government while the dependent variable was tax compliance. The research used a quantitative research design. Given the large population of registered SMEs as taxpayers in Nairobi County, a sample size of 398 was picked as representative, to be the focus of this study out of which 120 of them were returned and analyzed. To ensure that various diverse categories of taxpayers and business entities were included in the survey, stratified sampling technique was adopted. Data was collected using self-administered questionnaires. The collected data was consequently analyzed using Statistical Package for Social Scientist software and then transferred to STATA for further analysis. Using binary probit regression model, the study findings revealed that an increase in the perception of individuals about the difficulty of evading taxes is found to increase the likelihood of being tax compliant among SMEs in Nairobi County. The findings also revealed that individuals who are more satisfied with public service provision; have enough tax information; trust government officials in handling their taxes; and have the perception that tax filing procedures are less complex are more likely to be tax compliant. By gaining an understanding of these underlying factors, the KRA and the government will be able to make changes that will greatly improve taxpayers’ tax compliance level. Improved tax compliance will result into increased government revenues thus reduced budget deficits. Accordingly, the tax authority will provide quality services to taxpayers and the government as a whole will finance its expenditure and improve on provision of public goods thus leading to the growth of the Kenyan economy.