Effect of digitalization on value added tax compliance among small and medium entreprises in Embakasi Central Subcounty, Nairobi County, Kenya

Abstract

Technological advancement is a key driver that builds efficiency in organizational processes as it offers cost cutting opportunities. The spread of digital services through capabilities of the internet and Information and Communication Technology has created an opportunity to save on costs of transactions. The motivation of this research lied in the contrasting result and the need to document the Kenyan case in respect to digitalization of a tax system and its effect on tax compliance. Hence, the general objective was to investigate the effect of digitalization on value added tax compliance among Small and Medium Enterprises in Embakasi Central Sub-County, Kenya. The specific objectives were: To establish the effect of online filing procedure on Value Added Tax compliance in Kenya, to determine the effect of use of electronic tax registers on Value Added Tax compliance in Kenya, investigate the effect of digital payment systems on Value Added Tax compliance in Kenya and to determine the effect of Value Added Tax automated assessment system on Value Added Tax compliance among small and medium enterprises in Embakasi Central Sub-County. The study was anchored on these theories: Innovation Diffusion Theory, Technology Acceptance Theory and the Economic Deterrence Theory. This study used explanatory research design. The population of this study was 190 VAT registered taxpayers at Embakasi Central Sub County and sample size of 129 VAT taxpayers. In this study, primary data was obtained through issuance of a questionnaire. To elucidate on interdependence of variables, descriptive and inferential statistics were undertaken. The study findings indicated that online filing, electronic tax registers, digital payment systems, VAT automated assessment systems signficantly affects value added tax compliance with evidence of beta and ρ values of (β1) of 0.286, ρ<0.001 for online filing, while electronic tax register had a beta coefficient (β2) of 0.329, ρ<0.000, digital payment systems had a beta coefficient (β3) of 0.311, ρ<0.000. Lastly, VAT automated assessment had a beta coefficient (β4) of 0.296, ρ<0.000. The study results concludes that online filing, electronic tax registers, digital payment systems, VAT automated assessment systems had influence on VAT compliance. In light of the statistical results and conclusions, it is recommended that digitalization components can be further enhanced to achieve higher levels of VAT compliance. KRA should revamp digitalization to improve capabilities such as widening digital payment systems to include online cheques remittance, real time ETRs and improve the VAT automated assessment systems. More studies may be done in this area to offer more insights on other factors such as Taxpayer behavioral tendencies on tax revenue performance.