Effect of Withholding Value Added Tax on Tax Compliance in Kenya

Abstract

The tax collection bodies across the world have advocated for withholding of taxes due to the benefits that come with it. Withholding has also been found to increase compliance and decreases evasion and underpayment because people don’t notice how much tax they are paying in a withholding system hence there is less sense of anger. However, while this is the case, the Kenya Revenue Authority has been missing VAT targets thus raising questions over efficiency of Withholding VAT. Due to this, this study seeks to establish the effect of withholding VAT on tax compliance in Kenya. The study is anchored on the following theories; Ability to Pay Theory, Equal sacrifice Theory, Economic-based Theory and Psychological Theory. The research design that was employed is explanatory study design considering a population comprising taxpayers in Kenya as categorised by KRA that Large Tax Payers (LTO), Medium and Small TaxPayers (MST) in Kenya. Data was compiled for a period spanning 7 years from the year 2011 to 2017 on Withholding VAT Revenue growth and VAT revenue growth as well as economic growth which is a control variable in the study. Data was compiled from the Kenya Revenue Authority and Kenya National Bureau of Statistics. SPSS (V21) was used for data analysis to produce both descriptive and inferential statistics. A regression model was also used for establishing the relationship between the study variables. The one-way Anova was performed on the average figures for all the measures of performance. The results for the three categories of taxpayers revealed that there was a significant difference in the one-way Anova. From the results, the research concludes that there was significance improvement in tax compliance after the enforcement of withholding VAT tax policies in Kenya. The key restraint of this research was the focus of only one constituent of the tax compliance, that is, the withholding VAT revenue. The study identifies areas of further studies including, finding out the impact withholding VAT tax on the country’s economic growth, similar study in other countries in East Africa also there is a need for further studies to carry out similar tests for a longer time period.