Tax Reforms and Tax Compliance among Small and Medium Enterprises in Nyeri County, Kenya.
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Date
2021
Authors
Mathenge, Eric Muceke
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
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.
Description
A Research Project Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration, School of Business (Accounting Option), Kenyatta University, November, 2021
Keywords
Tax Reforms, Tax Compliance, Small and Medium Enterprises, Nyeri County, Kenya