System automation, taxpayer perception and value added Tax compliance among small and medium enterprises in Eldoret town, Kenya

Abstract

Tax is an important stream of revenue for government’s development projects and therefore all efforts must be made by governments to ensure that it is accurately and efficiently collected so as to facilitate the government’s operations. The modern organization lies in the middle of these efforts. The Macroeconomic Effects of an Add- on Value Added Tax’; observed that non-compliance is a growing concern in the administration of Value Added Taxes, partly because under a credit-invoice tax the gross amount of taxes paid by firms plus refunds returned to firms is so large relative to the net taxes collected by the government. Underperformance on Value Added Tax, however, denies the government the much-needed revenue for growth and development. Several studies found that there are a number of factors that contribute to underperformance of Value added tax collection among various sectors of the economy. This study looked into the moderating effect of taxpayer perception on the relationship between System Automation and Value Added Tax compliance among small and medium enterprises in Eldoret town, Kenya. The specific objectives were to determine the effect of Digital payment process, Tax invoice management system and Withholding Value Added Tax system on Value Added Tax compliance among small and medium enterprises in Eldoret town, Kenya. Additionaly to determine the moderating effect of taxpayer perception on each effect of the relationship. The study was anchored on the following theories: Diffusion of Innovation (DOI) Theory, Technology Acceptance Model, Ability to pay Theory and Theory of planned behaviour. The research design for this study was explanatory research design. The population of this study was 3872 SMEs in Eldoret town with a sample size of 362 SMEs who are SMEs owners/Managers. A questionnaire was used to collect primary data and analysis included both descriptive and inferential statistics. Descriptive statistics involved the use of mean standard deviation and variance while infrarational statistics included correlation and hierarchical regression. The study found out that digital payment process (β=0.429, P<0.05), Tax invoice management system (β = 0.502, P < 0.05), Withholding VAT system (β =0.553, P <0.05) Tax payer perception (β =0.276 P < 0.05). have a positive and significant effect on Value Added Tax compliance. A unit change in withholding VAT system causes an increase of 0.553 in Value Added Tax compliance. A unit change in taxpayer perception causes an increase of 0.276 in Value Added Tax compliance. Improvement in Value Added Tax compliance is caused by a unit change in Tax invoice management system. The findings also indicated that there is a positive moderating effect of taxpayer perception on relationship between :( Digital payment process (Δ R 2 = 0.005., β =0.109, P value was < 0.05), Tax invoice management system (Δ R 2 =0.002, β =0.041, p value is < 0.05) and Withholding VAT system (Δ R 2 =0.004, β =0.103, p value is < 0.05) and Value Added Tax compliance. KRA is recommended to explore the implementation of Tax invoice management system and provide guidance on their setup and operation. KRA is also recommended to facilitate awareness campaigns highlighting the positive impact of such systems on Value Added Tax compliance. Future research may be concluded to find out whether or not other factors such as tax incentives and compliance cost have influence on Value Added Tax performance.