The Effect of Tax Incentives on Performance of Manufacturing Firms in Nairobi, Kenya

Abstract

The study sought to determine the effect of tax incentives on financial performance of manufacturing firms in Nairobi, Kenya. This inquiry leveraged a descriptive design targeting 95 manufacturing firms registered by Kenya Association of Manufacturers and census was used. Secondary data was collected from financial statements of the respective manufacturing firms and the analysis was supported by the Statistical Package of Social Sciences supported by means and standard deviations, correlation, and regression. The study established that tax credits and double deductions (β=.885, t>1.96 & p<0.05) had the largest significant effect on financial performance of manufacturing firms in Kenya followed by tax holidays (β=.731, t>1.96 & p<0.05), reduction in corporate tax (β=.552, t>1.96 & p<0.05) and exemptions, zero rating and remissions (β=.424, t>1.96 & p<0.05).The study concludes that tax incentives significantly enhance financial performance of the firm. To the management team of the manufacturing firms in Kenya, this study recommends that more emphasis of the tax incentives should be on tax credits and double deductions with least emphasis on exemptions, zero rating and remissions. The management team at the Kenya Revenue Authority should grant more tax credits and double deductions to the manufacturing firms in Kenya since they have the largest contribution towards their financial performance. The policy makers of the manufacturing firms should recommend to the management of these firms to require more tax credits and double deductions from the government as compared to exemption, zero rating & remissions incentives. The study was limited to a five-year period (2016-2020) and it covered 95 manufacturing firms in Kenya. Future studies should be conducted in other firms like the Export Processing Zones or the Foreign Direct Investment (FDI) ventures in Kenya that enjoy tax incentives too apart from the manufacturing firms.