Effect of Taxation on Profitability of Small and Medium Sized Enterprises in the Nairobi Central Business District, Kenya

Abstract

Taxation is the backbone of the rise and fall of many small business enterprises in developing countries. Taxation lowers business financial performance as high tax rates reduce the profit margins of firms and SMEs hardly get enough to re-invest. With Kenya being a developing country, SMEs are the accelerators of economic growth through providing employment opportunities to young people. In comparison to big corporations though, these SMEs face adversely many challenges in financing, competition and changes on government policies like tax policies and tax reforms. The objective of this study was to explore the effects of taxation to profitability of SMEs in the Nairobi Central Business District. The target population was 155 SMEs located within Nairobi CBD. The study utilized primary data that was collected using a questionnaire administered to owners of the SMEs. The study employed regression analysis to establish the effect of taxation on profitability of SMEs located in Nairobi CBD. Stata version 20 was used for analysis and the results presented in tables. The findings of the study were used to make policy recommendations to both SME owners and the government.