Abstract:
Despite the importance of tax revenue, poor tax compliance among small and medium sized businesses remains a persistent issue for countries around the world. Studies have
revealed an association between perceived tax determinants and tax compliance
behaviours; however, the findings are inconsistent and inconclusive. A strand of
literature further argues that institutional quality has an impact on individuals’ and
corporate entities’ tax compliance. Therefore, this study sought to examine whether
institutional quality moderates the relationship between perceived tax determinants and
tax compliance among small and medium-sized enterprises in Nairobi South.
Specifically, the study examined the effect of perceived tax complexity, perceived tax
deterrence and sanctions, perceived psychological cost perceived tax law and fairness
on tax compliance among small and medium-sized enterprises in Nairobi South. The
study further determined whether institutional quality moderated the relationship
between perceived tax complexity, perceived tax deterrence and sanctions, perceived
psychological cost perceived tax law and fairness and tax compliance among small and
medium-sized enterprises in Nairobi South. The study was grounded on the fiscal
psychology theory, the theory of planned behaviour and the institutional theory. The
study adopted both the cross-sectional and explanatory research design. Data was
gathered from 325 SMEs out of a possible 370 using a close ended questionnaires with
a 1-5 Likert scale to gauge respondents' agreement with statements related to tax
compliance, perceived tax deterrence and sanctions, perceived tax law and fairness,
perceived psychological cost, and institutional quality. The study's findings revealed
that Perceived tax complexity (β= 0. 137, ρ<0.05), perceived tax deterrence and
sanctions (β= 0.161, ρ<0.05), and perceived psychological cost (β= 0.120, ρ<0.05),
perceived tax law fairness (β= 0.201, ρ<0.05) had a positive and significant effect on
tax compliance among small and medium-sized enterprises in Nairobi South. Further,
the findings revealed that institutional quality had an enhancing moderation effect on
perceived tax complexity (β= 0.664, ρ<0.05), perceived tax deterrence (β= 0. 694,
ρ<0.05), while perceived psychological cost (β= -0. 796, ρ<0.05) and perceived tax law
fairness (β= -0.524, ρ<0.05) had a buffering moderation effect on tax compliance.
These findings highlight the important interconnection between taxpayers’ institutional
factors in explaining tax compliance behaviours. In light of these findings, the study
offered targeted recommendations for policy and practice. Policymakers are urged to
emphasize the transparency and fairness of tax systems, develop strategies to reduce
psychological costs associated with compliance, and consider comprehensive
institutional improvements to bolster compliance. These insights provide a foundation
for refining strategies to foster voluntary tax compliance among SMEs, contributing to
sustainable revenue generation and economic growth. Similar study could employ
longitudinal research designs that would unravel the causal dynamics underlying the
relationships identified, offering insights into the evolution of compliance behaviour
over time. Future studies could also consider other jurisdictions as well as other
potential moderators.