Factors affecting value added tax compliance among mechanics in Nairobi County

Abstract

Taxation of the informal economy has been a challenge faced by many countries in various regions of the world. Even, though many countries especially the developing economies struggle with meeting the demand for more revenue generation, the informal economy has been left untapped appropriately. Several studies have been carried in this area and still, there is no better and agreeable way on how to tax the informal economy which seemingly has the potential to plug the revenue gap. For this reason, the study aimed at investigating the effect of value added tax on VAT compliance among mechanics in Nairobi County. The specific objectives of the study were to investigate the effect of VAT knowledge on VAT compliance, the effect of VAT imposition procedures on VAT compliance, and the effect of tools and systems on VAT compliance among mechanics in Nairobi County. The study was anchored on the ability to pay theory and systems theory. The study adopted an explanatory research methodology. The target population was a total of 428 from where a sample of 207 owner mechanic garages was drawn using the Brigit and Lewin formula. Both cluster and systematic sampling techniques were used to reach the target respondents. Primary data was collected using a self-administered questionnaire on a 5-point Likert scale with closed- ended questions. Study instrument was subjected to validity, reliability and statistical assumptions of regression tests before data were analyzed. Descriptive data was then presented in descriptive tables while inferential statistics were analyzed using regression and correlation analysis. Multiple regression analysis was established with a positive insignificant linear relationship between VAT knowledge on VAT compliance among mechanics in Nairobi County with evidence of beta 0.074, p=0.294, ρ>0.05. However, there was a positive significant linear effect of VAT imposition procedures on VAT compliance among mechanics in Nairobi County with evidence of beta -0.235, p=0.003, ρ<0.05 and also a positive significant linear effect of value added tax administration tools and systems on VAT compliance among mechanics in Nairobi County with evidence of beta 0.187, p=0.017, ρ<0.05. The findings further revealed that VAT knowledge, VAT imposition procedures, and VAT tools and systems had a positive effect on VAT compliance up to 24.5% or (R= 0.245). It was also revealed that VAT knowledge, VAT imposition procedures, and VAT tools and systems caused a variation of 6% or (R2=0.060 and adjusted R2 =0.045) on VAT compliance. The study concluded that VAT imposition procedures and VAT administration tools and systems played a significant role in the VAT compliance among mechanics in Nairobi County while VAT knowledge was not found to play a significant role in the VAT compliance among mechanics in Nairobi County. The study recommended that KRA should focus more on VAT imposition procedures and VAT administration tools and systems to achieve tax compliance effectively and efficiently. The study findings could be used by the government to better understand and design strategies that are aimed at bringing the informal sector into the active taxation bracket for improved VAT compliance and revenue performance. Future studies should put more emphasis on social and economic factors that may affect VAT compliance among mechanics and to a wider population.