Psycho- economic factors, digitalization and pay as you earn tax compliance among small and medium enterprises in Thika town, Kenya

Abstract

The Kenyan government establishes annual targets for the amount of taxes it intends to collect in order to settle its debt. The Kenya Revenue Authority (KRA) has however not met the treasury's targets for revenue compliance in spite of several restructuring efforts made in recent years to improve revenue compliance. For example, the PAYE tax revenues for the financial year 2022–2023 were Ksh. 441.60 billion, or 96% of the objective of Ksh. 459.26 billion, meaning that the target was missed by 17.66 billion. PAYE tax receipts in 2021–2022 were Ksh. 407.83 billion, similar to the previous financial year, but Ksh. 7.69 billion, or 98% of the total, fell short of the target. Because of this, the government is unable to sufficiently meet the requirements of its people, which include social security, roads, water, healthcare, education, and security. The study examined Pay As You Earn compliance among small and medium-sized businesses in Thika, Kenya, and how it is affected by psycho-economic aspects and the moderating effect of digitalization of tax systems. Specific goals included determining the impact of tax knowledge, compliance costs, taxpayer impression on small and medium-sized businesses in Thika town's Pay As You Earn compliance and to ascertain how the digitalization of tax systems has affected the relationships between taxpayer perception and Pay As You Earn compliance, tax knowledge and Pay As You Earn compliance, and compliance cost and Pay As You Earn compliance. Four taxation theories—the attribution theory, the benefit theory, the Allingham and Sandmo Theory (AS Theory), and the Technology Acceptance Theory—were used to support the study. An explanatory sample design was used in the study. The small and medium-sized businesses with licenses in Thika town were the study's primary focus. In an attempt to obtain respondents from the sample, the study employed the stratified random sampling technique. With a sample size of 301 small and medium-sized businesses, the target population consisted of 1223 small and medium-sized businesses. Primary data were used in the investigation. Structured questionnaires were used to gather primary data. The data was analyzed through descriptive analysis, correlation and regression analysis. Regression analysis was used in the study to validate the psychological, economic, and digitalization of tax systems as well as income (PAYE) tax compliance. The hierarchical regression was used to determine the moderating effect of digitization of tax systems on the relationship between Tax knowledge, Compliance cost Taxpayer’s perception and Pay As You Earn compliance. The study found that there is positive and significant effect of tax knowledge on PAYE tax compliance (β1 =0.543, p<0.05), there is a negative and significant effect of tax compliance costs on PAYE tax compliance (β2 = - 0.244, p<0.05), and there is positive and significant effect of taxpayer’s perception on PAYE tax compliance (β3 = 0.244, p<0.05). The study found that digitization of tax systems moderates the relationship between tax knowledge compliance costs, taxpayer’s perception and PAYE tax compliance (β5 = 0.529, p<0.05). (β6 = 0.079, p<0.05). and (β7 = 0.102, p<0.05). respectively. The recommendations for policy makers and academic institutions were as follows; KRA should work towards simplifying and streamlining the tax compliance processes, reducing unnecessary administrative burdens. This could involve revisiting and simplifying tax regulations, providing clear guidelines, and leveraging technology to automate routine compliance tasks. KRA should explore ways to minimize these tax compliance costs by reviewing and optimizing administrative requirements, providing user-friendly platforms, and offering support services to assist businesses in meeting their obligations more efficiently. Future research should be carried out to determine the effect of tax incentives on tax compliance.