Effects of Tax Reforms on Compliance of Small and Medium Enterprises in Kenya; Case of Kisumu Town
With increased expenditure there is demand for more tax revenue calling for revenue Enhancement measures. In Kenya the SMEs are non-compliant despite having huge tax Revenue potentials. From mid 1980s the government initiated tax reforms to enhance Compliance by widening tax bases and improve tax administration. Consequently Government reorganized KRA, changed personal relief (by 10%), granted amnesty on non-compliant taxpayers with arrears (up to 11 June 2004) and turnover tax at 3% (from 1 January 2008). However, SMEs sector are characterized with low compliance levels. It Was important establish effects of tax reforms on tax compliance of SMEs in Kenya with use of Kisumu Town. Specifically the study sought to determine effects of turnover tax on compliance of SMEs determine effects the KRA tax administration reforms on SMEs compliance and establish behaviors of SMEs in Kisumu Town which affect tax compliance. The study adopted descriptor-exploratory research design with each Kisumu KRA officer and business constituted one sample unit and respondents. Samples of 275 (involving 219SMEs and 56 KRA officers) were selected from target population of 505 SMEs and 56 Kisumu KRA officers using stratified simple random sampling approach and census for KRA officers. The study used both primary (from questionnaires) and secondary data. These instruments were administered by the researcher with help of research assistants. Data collected were analyzed using both descriptive statistics (frequencies, percentages and means) and inferential statistics (Pearson’s Moment of correlation, regression); using SPSS. The findings revealed that turnover tax system affects and accounts for 28.8% [r (214) =439, p<0.01] SMEs’ tax. KRA administrative reforms affects and accounts 36.8% SMEs tax compliance [r (214) = 617, p<0.01].KRA was effective (mean ratting of 3.869) butt ineffective in facilitating SMEs to voluntarily comply. KRA was effective in providing taxpayers information and guidance. KRA was Effective in use of technology and in data warehousing. There is a fair rating of reducing compliance burden of the SMEs (mean responses being 3.562). SMEs tax behaviors negatively affects tax compliance [r (214) =-542, p<0]. There was negative influence from the referent groups and SMEs (68%; 146) do not use tax agents. The turnover productivity for the last six year has been increasing from the time of start of tax reforms targeting SMEs in Kenya. This is based on the efficiency ratio of 0.35 percent in the year 2008 which has increased to the current 0.4. From the findings, the study concludes that the tax reforms and tax behaviors significantly affect tax compliance of the SMEs in Kisumu Town. The study recommends that continuous emphasis on creation of awareness and monitoring of the compliance of the SMEs. Review the tax laws and more enforcement of the SMEs tax laws. KRA should carry out more profiling of the SMEs and research more on the SMEs to understand the SMEs. Publicize prosecution non-compliance; provide incentives for compliance and opportunity to voluntarily disclose before the application of penalties. There is need for the government to enhance SMEs’ Trust with the tax reforms for voluntary compliance.