Factors affecting value-added Tax compliance among E-commerce small and medium enterprises in Westlands Nairobi, Kenya

Abstract

Value Added Tax compliance is presently a topical coverage issue, mainly in growing nations, as governments are in search of approaches to enhance performance in tax revenues to finance their budgets. It is a challenging issue to many SMEs, mainly for SMEs engaged in E-commerce businesses hence the focus of this study. Therefore, this study was to determine the factors affecting value-added tax compliance among e-commerce small and medium enterprises in Kenya, a case of small and medium enterprises in Westlands Nairobi County. The specific objectives of this study were to establish the effect of tax knowledge, tax Moral, technological factors and enforcement measures on VAT in SMEs engaged in E-Commerce businesses. The data reviewed that led to the problem statement for the study covered three years between 2018 and 2020. The theories supporting these study variables included the Economic deterrence theory, Fiscal psychology theory, Tax morale theory and Ability to pay theory. This study adopted explanatory research design to determine the causal relationship between tax knowledge, tax Moral, technological factors, and enforcement measures and VAT compliance. The target population of study included 1,223 small and medium enterprises E-commerce businesses in Westlands Nairobi County. Yamane formula was used to determine the sample size selection of 301 respondents for this study systematic sampling technique was used. Piloting of the questionnaire was carried out on SMEs in Nairobi central business district to test its validity and reliability. The study collected primary data through close-ended questionnaire, with a response rate of 83%. The data was analyzed using descriptive and inferential statistics to determine the association between variables, with the measurement of variables based on 5-point Likert Scale. Correlation and regression analysis provided an understanding of the relationship between the study variables. On Regression, tax knowledge, tax Moral, technological factors and enforcement measures had a strong positive correlation with value added tax compliance up to 61.3% or (R= 0.613). (R 2 ) of 0.375 reveal that when other factors are held constant, tax knowledge, tax Moral, technological factors and enforcement measures caused a variation of 37.5% on VAT compliance. The study findings indicated that tax knowledge, tax Moral, and enforcement measures had a statistically positive significant effect on VAT compliance as per Beta coefficients of tax knowledge (β1=- 0.220, p=0.000<0.05), tax Moral (β2=0.449, p=0.000<0.05) and enforcement measures (β4=0.221, p=0.003 <0.05). However, technology factor showed no significant relationship with VAT compliance (β3= 0.075, p=0.302>0.05). The study results concluded that tax knowledge, tax Moral, and enforcement measures affect VAT compliance. Based on the findings, the study recommended that the government should adopt modern tax remittance platforms for ease of value added tax remittance. The study further recommends future studies can be conducted on different variables such as on effect of administrative reforms on VAT compliance among E-commerce large taxpayers to provide additional insights and add to the existing understanding of issues explored in this study.