Tax Reforms and Tax Compliance among Small and Medium Enterprises in Nyeri County, Kenya.

Abstract

Kenya has had to contend with a consistent imbalance between government revenue and expenditure resulting in large and chronic fiscal deficits. High level of non-compliance by SMEs has continued to deprive the economy the much needed revenue to fill the persistent tax gap. Through a wide range of reforms, the government of Kenya has tried to include SMEs into the tax net. However, compliance among SMEs still remains low. This study sought to determine the effect of tax reforms on tax compliance among SMEs in Nyeri County, Kenya. Specifically, the determined the effect of administrative reforms, technological reforms and policy reforms on compliance among SMEs. The study was premised on the Fiscal Exchange Theory, the Economic Deterrence Theory and the Optimal Theory of Taxation. A descriptive survey research design was adopted. The study considered a ten year period from 2009/2010 to 2018/2019 when a wide range of tax reforms had been instituted by the revenue authority with a view to address numerous compliance shortcomings. The target population was made up of 891 SMEs registered and licensed by the County Government of Nyeri. Proportionate stratified random sampling technique was applied to select a sample of 95 respondents who comprised of SME owners. The study used both primary and secondary data. A semi structured questionnaire was used to collect primary data and was administered through the drop and pick method. Secondary data was gathered from the SMEs books of accounts and records as well as data from Kenya Revenue Authority. Validity of the instrument was tested through expert opinion and pretesting. Reliability was tested using Cronbach Alpha Reliability analysis. The Croncbach’s alpha coefficient stood at 0.793 which indicated a high level of internal consistency of the instrument. Data was analysed using descriptive and inferential statistics. Inferential analysis tools used included the Pearson Correlation Analysis and Multiple Regression Analysis. The regression analysis results provided evidence that all the tax reforms variables; administrative tax reforms, policy tax reforms, and technological tax reforms have a positive and statistically significant effect on tax compliance. The coefficient for administrative tax reforms (β=0.901, p=0.017) shows that administrative tax reforms has a statistically significant effect on tax compliance. The coefficient for policy tax reforms (β=0.801, p=0.002) indicated that policy tax reforms has a statistically significant effect on tax compliance. The coefficient for technological tax reforms (β=0.890, p=0.001) indicates that technological tax reforms has a statistically significant effect on tax compliance. The results of Pearson correlation analysis indicated that administrative tax reforms (r=0.780, p=0.002), policy tax reforms (r=0.603, p=0.001), and technological tax reforms (r=0.704, p=0.011) have a strong positive and statistically significant relationship with tax compliance. The study recommends enhanced adoption and implementation of tax reforms, and particularly the administrative tax reforms which were found to be inadequately entrenched yet had the potential to shape the tax compliance levels of SMEs. The study recommends more regular financial literacy trainings and taxpayer education forums to ensure accurate of financial reporting and timely remittance of tax dues by SMEs. Further, the Kenya Revenue Authority should increase taxpayers’ support desks established to ensure SMEs are well assisted on tax matters. In addition, the study recommends the establishment of more satellite technical centres to assist SMEs in complying. Finally, the study recommends that KRA carries out more regular tax audits to ensure SMEs comply with tax requirements.