Abstract:
Taxation of the informal economy has been a challenge faced by many countries in
various regions of the world. Even, though many countries especially the developing
economies struggle with meeting the demand for more revenue generation, the informal
economy has been left untapped appropriately. Several studies have been carried in this
area and still, there is no better and agreeable way on how to tax the informal economy
which seemingly has the potential to plug the revenue gap. For this reason, the study
aimed at investigating the effect of value added tax on VAT compliance among
mechanics in Nairobi County. The specific objectives of the study were to investigate
the effect of VAT knowledge on VAT compliance, the effect of VAT imposition
procedures on VAT compliance, and the effect of tools and systems on VAT compliance
among mechanics in Nairobi County. The study was anchored on the ability to pay
theory and systems theory. The study adopted an explanatory research methodology.
The target population was a total of 428 from where a sample of 207 owner mechanic
garages was drawn using the Brigit and Lewin formula. Both cluster and systematic
sampling techniques were used to reach the target respondents. Primary data was
collected using a self-administered questionnaire on a 5-point Likert scale with closed-
ended questions. Study instrument was subjected to validity, reliability and statistical
assumptions of regression tests before data were analyzed. Descriptive data was then
presented in descriptive tables while inferential statistics were analyzed using
regression and correlation analysis. Multiple regression analysis was established with a
positive insignificant linear relationship between VAT knowledge on VAT compliance
among mechanics in Nairobi County with evidence of beta 0.074, p=0.294, ρ>0.05.
However, there was a positive significant linear effect of VAT imposition procedures
on VAT compliance among mechanics in Nairobi County with evidence of beta -0.235,
p=0.003, ρ<0.05 and also a positive significant linear effect of value added tax
administration tools and systems on VAT compliance among mechanics in Nairobi
County with evidence of beta 0.187, p=0.017, ρ<0.05. The findings further revealed
that VAT knowledge, VAT imposition procedures, and VAT tools and systems had a
positive effect on VAT compliance up to 24.5% or (R= 0.245). It was also revealed that
VAT knowledge, VAT imposition procedures, and VAT tools and systems caused a
variation of 6% or (R2=0.060 and adjusted R2 =0.045) on VAT compliance. The study
concluded that VAT imposition procedures and VAT administration tools and
systems played a significant role in the VAT compliance among mechanics in Nairobi
County while VAT knowledge was not found to play a significant role in the VAT
compliance among mechanics in Nairobi County. The study recommended that KRA
should focus more on VAT imposition procedures and VAT administration tools and
systems to achieve tax compliance effectively and efficiently. The study findings could
be used by the government to better understand and design strategies that are aimed at
bringing the informal sector into the active taxation bracket for improved VAT
compliance and revenue performance. Future studies should put more emphasis on
social and economic factors that may affect VAT compliance among mechanics and to
a wider population.