Perceived determinants of Tax compliance among Small and Medium Scale Enterprises in Nairobi South Tax region, Kenya. The moderating role of institutional quality

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.