An investigation on causes of low tax compliance among Small and Medium Enterprises (SMEs) In Nairobi County, Kenya

Abstract

The main objective of this study was to investigate on the determinant of tax compliance among small and medium enterprises (SMEs) in Nairobi County, Kenya. In its methodology. the study utilized a quasi experimental survey design of all the SMEs in Nairobi. The survey aimed to provide detailed data for the entire population under investigation. The population of the study consisted of all the SMEs in Nairobi County. A total of 686 SMEs in Nairobi County were targeted for this study .The reason for selecting the Nairobi County is its proximity to the research and other relevant firms targeted for the study have head offices mostly based in Nairobi. Every fifth firm from each of the stratum key sectors of Agriculture, manufacturing, Transport, Tourism, and Telecommunications was picked to form the sample population. The study used stratified sampling technique where firms were sampled in groups of five in every key sector. Every fifth firm in every cluster was selected and information gathered on the same firms. The study therefore had 138 companies which formed the sample frame. A total of 138 finance managers, 1 manager each from each of the firms were selected purposely to provide adequate responses to causes of low tax compliance. Methods of data collection that were used involve both primary and secondary data. Primary data was derived from questionnaires distributed to those targeted in this study. The data collected was analyzed using descriptive statistics, correlations, and linear regression analysis. This was achieved through the use of statistical packages for social scientist (SPSS) and MS Excel to generate frequency distributions and percentages to assist the researcher in answering the research questions. The output was presented in form of tables and figures and Multivariate regression analysis resulted in a prediction equation that describes the relationship between the dependent variables and independent variables. The key results indicate that majority of those who responded were from the telecommunications sector. Those who agreed that tax compliance was influenced by some factors they stated the following as the factors they thought influenced tax compliance. First there was the issue of taxpayers' behavior towards tax system; the tax payers have a negative attitude towards the payment of taxes. Secondly, there was the issue of hostility between the taxpayers and tax collectors. Other factors were outward resistance from taxpayers for example the protest by taxpayers over implementation of Electronic Tax Registers, taxpayers' willingness to pay taxes, the tax morale of society that fosters self-enforcement of tax compliance which did not exist among SMEs. The researcher concludes that lack of transparency and accountability in the use of public funds contributes to public distrust both with respect to the tax system as well as the government. Shortfalls in tax collection procedures, weak capacities of tax administrations to detect and prosecute tax violators are both factors that contribute to a low enforcement of tax legislation which leads to low tax compliance rates. There is also a lack of a well-functioning body of tax investigation which is essential for the detection and prosecution of cases of tax fraud is another determinant of tax compliance. As well as lack of sufficient capacities in tax administrations and the use of family and unpaid labor by SMEs. This reduces the probability of detection that again influences the decision of a taxpayer as to whether evade or not this in most cases leads to low tax compliance. It can also be concluded that factors for tax non-compliance among the tax payers are the inability to understand tax laws, a feeling that they are not paying a fair share of tax, positive peer attitude, rewarding taxpayers, and motive for low profits.