Determinants of value added Tax Compliance within classified Hotels in Nairobi County, Kenya

Abstract

Taxation is the main instrument through which governments raise finances required to provide public goods. Kenya Revenue Authority does not collect as much revenue from tax as it should as a result of low compliance. Value Added Taxpayers in particular have the potential of generating a lot of revenue for the government but this is not the case Unfortunately, Kenya, like other governments, struggles to achieve its set revenue targets. In relation to its VAT collection, KRA notes a compliance gap as high as 45%. The question of how to narrow the compliance gap is therefore timely. The hotel industry forms an integral constitution of the larger tourism sector, regarded as one of the main economic pillars of the country, with a contribution of 8.2% to Kenya’s GDP and over 1.1 million employment opportunities. This study seeks to determinants the Value Added Tax compliance among the classified hotels within Nairobi County. The objectives of the study were to determine tax compliance costs, tax knowledge, taxpayer perception and tax audit on value added tax compliance among the classified hotels within Nairobi County. The study was supported by four theories namely; The rational choice theory, The Information Asymmetry Theory, The Fiscal Exchange Theory and The Lending Credibility Theory. The study adopted explanatory research design where the target population was 60 classified hotels within Nairobi County. The study had 2 respondents each from the 60 different Hotels thus making a total of 120 respondents. Primary data was used to collect the data using questionnaires. Regression and Correlation analysis was used to determine the significance and relationship of the variables. The data was analyzed using descriptive and inferential statistics. Regression analysis was conducted; the findings revealed that, tax compliance costs had β1 -0.226 =p value of 0.000 which is less than 0.05. Tax knowledge β2 0.218 =p value of 0.000 which is less than 0.05. Taxpayer perception β3 0.302 =p value of 0.002 which is less than 0.05. Tax Audit β4 0.340 =p value of 0.003 which is less than 0.05. significantly affect classified hotels within Nairobi County. The study concluded that indeed tax knowledge, taxpayer perception and tax audit enhance value added tax compliance among the classified hotels within Nairobi County. However, compliance cost affects value added tax compliance negatively. The study recommends that, KRA should step up trainings to sensitize hotel operators on taxation matters, including required documentation and deadlines, train and carry out public awareness campaigns targeted at the hospitality sector on matters relating to taxation as well as conduct record keeping trainings to hotel operators. Further research may be done to examine the effect of tax incentives on tax compliance in the hospitality industryTaxation is the main instrument through which governments raise finances required to provide public goods. Kenya Revenue Authority does not collect as much revenue from tax as it should as a result of low compliance. Value Added Taxpayers in particular have the potential of generating a lot of revenue for the government but this is not the case Unfortunately, Kenya, like other governments, struggles to achieve its set revenue targets. In relation to its VAT collection, KRA notes a compliance gap as high as 45%. The question of how to narrow the compliance gap is therefore timely. The hotel industry forms an integral constitution of the larger tourism sector, regarded as one of the main economic pillars of the country, with a contribution of 8.2% to Kenya’s GDP and over 1.1 million employment opportunities. This study seeks to determinants the Value Added Tax compliance among the classified hotels within Nairobi County. The objectives of the study were to determine tax compliance costs, tax knowledge, taxpayer perception and tax audit on value added tax compliance among the classified hotels within Nairobi County. The study was supported by four theories namely; The rational choice theory, The Information Asymmetry Theory, The Fiscal Exchange Theory and The Lending Credibility Theory. The study adopted explanatory research design where the target population was 60 classified hotels within Nairobi County. The study had 2 respondents each from the 60 different Hotels thus making a total of 120 respondents. Primary data was used to collect the data using questionnaires. Regression and Correlation analysis was used to determine the significance and relationship of the variables. The data was analyzed using descriptive and inferential statistics. Regression analysis was conducted; the findings revealed that, tax compliance costs had β1 -0.226 =p value of 0.000 which is less than 0.05. Tax knowledge β2 0.218 =p value of 0.000 which is less than 0.05. Taxpayer perception β3 0.302 =p value of 0.002 which is less than 0.05. Tax Audit β4 0.340 =p value of 0.003 which is less than 0.05. significantly affect classified hotels within Nairobi County. The study concluded that indeed tax knowledge, taxpayer perception and tax audit enhance value added tax compliance among the classified hotels within Nairobi County. However, compliance cost affects value added tax compliance negatively. The study recommends that, KRA should step up trainings to sensitize hotel operators on taxation matters, including required documentation and deadlines, train and carry out public awareness campaigns targeted at the hospitality sector on matters relating to taxation as well as conduct record keeping trainings to hotel operators. Further research may be done to examine the effect of tax incentives on tax compliance in the hospitality industry.