Moderating effect of social norms on the determinants of turnover tax compliance among small and medium enterprises in Kariokor market in Nairobi, Kenya

Abstract

Taxes are one of the main sources of funding for governments worldwide and make up a sizable portion of the budget. Tax evasion of all kinds, including sales tax, salaries, and lowering the tax burden through illicit ways, has resulted in the loss of hundreds of millions of dollars in revenue. Kenyan small and medium-sized businesses (SMEs) have had significant difficulties complying with Turnover Tax (TOT), and tax collection has not reached its goals. This study looks at the moderating effect of social norms and the factors influencing Turnover Tax compliance. With social norms acting as a moderating factor, the particular goals were to evaluate the effects of compliance costs, taxpayer awareness, and system automation on Turnover Tax compliance among SMEs in Nairobi's Kariokor market. The research is guided by Expected Utility Theory, Cost of Service Theory, Social Learning Theory, Unified Theory of Acceptance and Use of Technology, and Behavioral Theory. A sample of 311 SMEs extracted from a sample population of 1382 using a Yamane’s formula sampling technique. The response rate was 245. The data collected in this study were quantitative in nature. The information was primarily based on numerical values and statistical relationships between variables. The study used regression analysis to examine the impact of compliance costs, taxpayer knowledge, system automation, and social norms on TOT compliance. The findings of the study were that Compliance Costs: A unit change in compliance costs results in a significant decrease in TOT compliance (β = -0.870, p = 0.000). Taxpayer Knowledge: A unit change in taxpayer knowledge leads to a substantial increase in TOT compliance (β = 0.934, p = 0.000). System Automation: A unit change in system automation significantly increases TOT compliance (β = 0.741, p = 0.025). Social norms were found to significantly moderate these relationships, positively impacting Turnover Tax Compliance (β = 0.356, p = 0.016). The moderating effect of social norms on relationship between Compliance Costs and turnover tax compliance among, small, and medium enterprises in Kariokor market in Nairobi, Kenya was statistically significant (β = 0.781, p = 0.000). Further there was a significant moderating effect of social norms on relationship between Taxpayer Knowledge and turnover tax compliance among micro, small, and medium enterprises in Kariokor market in Nairobi, Kenya. β= 1.122, p=0.015. Lastly the moderating effect of social norms on relationship between system automation and turnover tax compliance among, small, and medium enterprises in Kariokor market in Nairobi, Kenya was statistically significant (β = 0.351, p = 0.000. KRA should consider simplifying tax procedures for SMEs, particularly those subject to turnover tax. Streamlining compliance requirements and reducing bureaucratic barriers can help alleviate compliance costs and encourage better adherence to tax regulations. KRA should invest in taxpayer education programs to improve knowledge and awareness among SMEs. This would empower business owners to navigate the tax system more effectively and ensure voluntary compliance. It would be valuable to investigate how regional and industry-specific variations influence tax compliance. A study should be conducted on how cost of compliance can be a moderating factor to determinants of tax compliance.