Determinants of Value Added Tax Compliance among Small and Medium Manufacturing Enterprises Within East of Nairobi Tax District, Kenya

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.