Socio-Economic Determinants of pay as you earn tax compliance among small and medium enterprises in Ruiru Municipality, Kenya.

Abstract

In Kenya, research indicates that many small and medium businesses are not fully compliant to the existing tax regulations; those who do register often fail to keep adequate records, file tax returns, and settle their tax liabilities promptly. The Pay As You Earn (PAYE) system was introduced in Kenya in 1986 with the objectives of speeding up the collection of tax revenue, reducing administrative collection cost and more importantly introducing convenience into the tax system. For the purpose of ensuring compliance with the PAYE system, rules were appended to section 37 of the Income Tax Act which should be observed by employers whenever they make payments to employees in the form of emoluments. Despite Small and Medium Enterprises tax reforms, most developing countries where Small and Medium Enterprises sector account for such a significant percentage of GDP (average 41%) continue to be tax non-compliance. Therefore, the purpose of carrying out this study was to examine the effect of socio-economic determinants of pay as you earn tax compliance among small and medium sized enterprises in Ruiru municipality, Kenya. The study specifically sought to determine the effects of compliance cost, taxpayer education and Peer influence on Pay as You Earn Compliance among Small and Medium Enterprises in Ruiru Municipality. The study was anchored by the following supporting theories: Economic theory of tax compliance being the main theory followed by, the ability to pay theory, Psychology theory, and optimal tax theory. Target population was 1,478 registered Small and Medium Enterprises in Ruiru Municipality in Kiambu County and a sample of 314 was selected using stratified sampling method. The study used explanatory research design. Data was collected through the use of close-ended questionnaire; The data was analyzed using descriptive and inferential statistics. The study results showed that compliance cost had a negative and significant effect with β1 = -.305 p = 0.004<0.05 taxpayer education had a positive and significant effect β2 = .328 p = 0.001<0.05 peer influence had a positive and significant effect β3 = .290 p = 0.000<0.05. The study concludes that: compliance cost, taxpayer education, and peer influence affect PAYE Compliance among SMEs in Ruiru Municipality.The study recommends that KRA should pay more attention on taxpayer education and peer influence since it‟s statistically significant with PAYE compliance. KRA should also focus more on compliance cost to enhance taxpayer satisfaction and compliance. Therefore, further studies need to be done on effect of taxpayer perception on pay as you earn tax compliance as well as the effect of behavioral factors on PAYE compliance.