Socio economic factors affecting value added tax compliance among small and Medium Enterprises in Nairobi north tax station, Kenya

Abstract

Taxation is an important source of income for both the national and county government for its a vital stream of income for government's improvement ventures. Be that as it may, tax compliance among SMEs is poor. The purpose of the study was to determine the effect of socio-economic factors affecting value added tax compliance among small and medium enterprises in Nairobi North tax station, Kenya. The specific objectives were to: determine the effect of taxpayer’s education level, taxpayer’s income level, cost of compliance, taxpayer’s tax knowledge on value added tax compliance among small and medium enterprises in Nairobi North tax station, Kenya and investigate the moderating effect of tax complexity on the relationship between socio economic factors and value added tax compliance among small and medium enterprises in Nairobi North tax station, Kenya. The study adopted explanatory research design. The population of the study comprised of 1700 VAT registered SMEs operating business in North of Nairobi tax station. The specific respondents were managers of the SMEs. Therefore, the sample size was 324 managers of SMEs in Nairobi North tax station, Kenya. Stratified random sampling was used to sample the respondents. Primary data was used in this study. Collection of primary data was aided by the use of questionnaires. The drop and pick later method was used in the study. Quantitative data analysis was done using both descriptive statistics and inferential statistics. Descriptive statistics included mean, standard deviation, percentages, and frequencies. Inferential statistics that were used to show the relationship between variables included regression analysis and correlation analy(β=0.215, p=0.000). The coefficient for the interaction term for cost of compliance and tax complexity (X3M) had a p value of 0.01 which means that tax complexity had a statistically significant moderating effect on the relationship between cost of compliance and VAT compliance. The study concluded that taxpayer’s education level, income level and tax knowledge have a positive and statistically significant effect on VAT compliance among SME taxpayers but cost of compliance has a negative but statistically significant effect on VAT compliance. The study recommends that Kenya Revenue Authority should consider adopting strategies that will lead to more education programs on VAT tax and obligations to SMEs. The management of KRA should come up with strategies that will address the balance on VAT among low-income businesses and high-income ones so that there is be fairness. Management of KRA should consider revising the costs of compliance to VAT in order to bring them to a level that the SME taxpayers will be in a position to incur.sis. The results were presented using charts and tables. Results showed that taxpayer’s education level had a positive and significant effect on VAT compliance (β=0.448, p=0.000). Taxpayer’s education level had a positive and significant effect on VAT compliance (β=0.215, p=0.000). In addition, cost of compliance had a negative and significant effect on VAT compliance (β=-0.261, p=0.000). Further results showed that taxpayer’s tax knowledge had a positive and significant effect on VAT compliance