Factors Influencing Tax Compliance Among Small And Medium Enterprises In Nairobi’s Industrial Area, Kenya

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. This study sought to identify the factors that influence tax compliance in Kenya, specifically focusing on SME’s operating within Nairobi’s Industrial Area. The researcher outlined a detailed literature review and identified the variables for this research to be tax rate, availability of tax information, tax compliance cost and attitude of SME’s. The research was a descriptive survey. Given the large population of registered taxpayers in Nairobi, a sample size of 150 was picked as representative, to be the focus of this study. 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 and an interview guide. The collected data was consequently analyzed using Statistical Package for Social Scientist software and the findings of the research presented using tables. The findings of the study revealed that with regard to tax rate as a factor influencing SMEs compliance, the majority view that Kenya has high tax rates with several different tax heads and this consequently hinders their level of compliance. The lack of readily available information relating to tax matters accounted to a great percent as a reason for non-compliance. The lack of information contributed to the inability of the taxpayers to correctly calculate the taxes payable; another form of non-compliance. The SMEs view that if more information would be availed to them in form of tax seminars and literature, this would demystify the complex concept of tax and greatly motivate them to be compliant. The findings of this study further revealed that 47% of the SMEs interviewed incur more than Ksh.50, 000 monthly, as costs of tax compliance. Some of these costs include bookkeeping, installation of software and internet costs, additional cost of hiring professional staff such as auditors and tax experts, accounting for the largest proportion of these costs. With regard to SMEs attitude as a factor affecting tax compliance, the respondents do agree and feel that they do have access to public utilities which are made available by the taxes paid to the government; hence they enjoy benefits of the taxes they pay. These organizations do value the payment of taxes to the government to a great extent, which affects their level of tax compliance. The findings of the study further revealed that the respondents do feel that their counterparts, fellow SMEs, also value the payment of taxes to the government to some extent. However, the taxpayers do feel and strongly agree that the taxation system in Kenya is in great need of improvement. By gaining an understanding of these underlying factors, KRA and the government will be able to make changes that will greatly improve taxpayers’ tax compliance level, with the end result being increased government revenues, allowing the tax authority to give quality service to taxpayers and the government as a whole providing more and improved utilities to the public.