Abstract:
VAT underperformance in the financial years 2018/2019 and 2019/2020 of 12% and
7% respectively, points to challenges that exist in the collection of value added tax,
though an important element of overall tax revenue performance. This challenge
called for the need to investigate the determinants of VAT compliance among small
and medium enterprises, due to their highest interaction with vatable goods and
services. The general objective of this study was to investigate the determinants of
value added tax compliance among small and medium manufacturing enterprises
within the East of Nairobi tax district. The specific objectives included the effect of
taxpayer awareness, cost of compliance, and tax morale on value added tax
compliance. The study further sought to determine the moderating effect of
automation on value added tax compliance. The study was mainly anchored on
economic deterrence theory and supported by fiscal exchange, transaction cost, and
tax morale theories. Explanatory research design was adopted. Target population
included 9,120 SMEs in the manufacturing sector from which a sample of 383 was
derived using Bridget & Lewin formula. Primary data was collected using self-
administered five-point Likert scale questionnaire. Instrument validity and reliability
tested above 0.7 of Cronbach Alpha test attaining the consistencies required. Cost of
compliance showed negative and significant correlation with VAT compliance at -
0.665. Taxpayer awareness and tax morale were all positively and significantly
correlated with VAT compliance at 0.675 and 0.659 respectively while tested at
confidence level of 95%. All the determinants with moderator variable correlated with
VAT compliance up to 82.8%. R 2 caused 68.6% variations across all the determinants
on VAT compliance. The remainder 31.4% could be explained by other factors not
included in the model such as taxpayers’ behavior among others. The model further
revealed a constant of 19.818, a unit change in taxpayer awareness, cost of
compliance and tax morale causes 1.661, -3.394 and 0.646 on VAT compliance
respectively. A comparison between the R 2 without moderation and with moderation
revealed that the R square increased from 53.1% to 68.6%, implying that automation
had a substantially positive moderating influence on the relationship between taxpayer
awareness, cost of compliance, tax morale, and value added tax compliance among
small and medium manufacturing enterprises. The study recommends that; the
Government should formulate policies targeted towards creating taxpayer awareness
on how tax revenue supports provision of public goods and services, KRA should
ensure the cost of complying with applicable tax laws and regulations is not expensive
to taxpayers as this would lead to increased non-compliance. Religious and social
institutions should be activated to help spread the belief that payment of taxes is the
right thing to do. Further studies may be conducted to determine whether other
aspects such as enforcement measures and human factors have significant influence
on VAT compliance.