Determinants of consumption tax compliance among micro and small enterprises in Ruiru Town

Abstract

Micro and small enterprise sector is the largest employer in Kenya accounting for over 80% of all employment. The sector also contributes significant proportion of the national GDP estimated to be over 20%. However, tax revenue contribution from this sector is below expectation and accounts for less than 3% of all tax revenue collected. This study was conducted to establish the determinants of consumption tax compliance among micro and small enterprises in Ruiru town. The specific objectives of the study were to determine the effect of tax administration on consumption tax compliance among micro and small enterprises in Ruiru town, to establish the effect of the size of enterprises on consumption tax compliance among micro and small enterprises in Ruiru town and to determine the effect of taxpayer education on the level of consumption tax compliance among micro and small enterprises in Ruiru town. The study was founded on social contract and ability to pay theories which express tax as a contractual obligation payable according to taxable capacity of taxpayers. The study targeted micro and small enterprises in Ruiru town in Kiambu County and adopted an explanatory research design to understand what, why and by how much, aspects of micro and small enterprises determine consumption tax compliance among these enterprises. A pilot study was conducted in Juja town to test the validity and reliability of the research instruments that were used for the study. A structured questionnaire was used to collect primary data from a sample of 127 enterprises which were selected through random sampling from a population of 161 micro and small enterprises licensed by Ruiru Sub-county Business Licensing Department. The data collected was tested for validity and reliability and analyzed. Tax administrations, size of enterprise and taxpayer education were found to have significant effect on consumption tax compliance with p<0.05 for all the variables. Tax administration was found to have a Beta coefficient of 0.363, 0.223 for size of enterprise and 0.636 for taxpayer education against consumption tax compliance respectively. The independent variables were found to cause 36.9% change of compliance tax compliance when combined with R Square of 0.369 at p<0.05. Multiple regression analysis was performed and yielded the regression equation of the study. The study then made conclusions on tax administration, Size of the enterprise and taxpayer education that all the independent variables were found to play a significant role in the consumption tax compliance among micro and small enterprises in Ruiru town. The study found that tax compliance checks and tax audits have a significant effect on consumption tax compliance and recommended that KRA should employ qualified staff who will be able to conduct comprehensive tax audits and those found to be non-compliant should be encouraged and assisted where necessary. The study also recommended that KRA should simplify the procedures and processes involved in filing of returns and payment of taxes and make them understandable and executable by all taxpayers including those without special expertise. The study also recommended enhancement of taxpayer education through incorporating it as a subject in school curriculum from lower levels of education. Tax seminars should be made more frequent, free of charge and open for all and properly publicized to reach more people. It was also recommended that KRA focus on all enterprises irrespective of their size to promote tax compliance for all enterprises.