Effects of Turn Over Tax on Financial Performance of Small and Medium Enterprises in Central Business District, Nairobi County

Abstract

Tax payment is a civic duty and an imposed contribution by the government to contribute to her principle source of revenue to provide public goods and services to its citizenry. It is a compulsory unrequited payment to the Government. In an effort to maximize collection of revenue, the Government introduced Turn Over Tax through the finance Act of 2007 aimed at bringing more SMEs to the tax bracket. The Purpose of the study was therefore an attempt to establish the effect of Turn Over Tax on the financial performance of Small and Medium Enterpises in Nairobi CBD. The study employed descriptive research design. A stratified sampling was used to collect primary data from a sample size of 56 SMEs in Nairobi CBD. The study applied regression and correlation statistical models to analyse the data. The results were presented in tables. The findings indicated that the model had accounted for 88.6% of the total variance in financial performance (ROA) of the SMEs. From the findings 11.4% of Nairobi CBD SMEs financial performance was accounted for by other factors (variables ) that were not tested in the study s model. Findings also indicated that there was sufficient evidence that the model was useful in explaining the financial performance (ROA) of SMEs in Nairobi CBD; as it was significant at the 95% confidence level (p = 0.000). The study revealed that there is a significant negative relation between Turn Over Tax and financial performance. On the other hand, firms Size, Liquidity, Age and Growth show a significant positive relationship with financial performance. The study recommended that businesses should employ the services of tax experts to aid them in tax planning in order to reduce the net tax payment so as to increase their financial performance. Again they should increase their asset size and ensure efficient use of those assets to reflect in the turnover of the businesses. KRA should enhace capacity of SMEs by reducing tax rates and penalty rates among other incentives aimed at assisting their business to flourish and in turn, drive economic growth.