Influence of Electronic Tax Filing System on Tax Compliance among SMEs in Embu

County
 Abstract

The primary purpose of this study is to determine the influence of electronic tax filing system on

tax compliance amongst small and medium enterprises in Embu County. The goal of this study

will be responded to using four research questions which will revolve around automated tax

registration, electronic tax filing, as well as online tax remittance. In addition, it will also

investigate how each of the online tax processes is affected by the online system to improve

submission. The researcher will use descriptive research methodology to collect data. Survey and

questionnaires are the research instrument used to collect data from the field. The data analysis

was done using SPSS software.

2
Definition of Terms

KRA-Kenya Revenue Authority

E-filing –Electronic filing

SMEs- Small and Medium Enterprises

SPSS-Statistical Package for Social Sciences

VAT-Value Added Tax

3
Table of Contents
CHAPTER 1 ................................................................................................................................................. 6
INTRODUCTION ........................................................................................................................................ 6
1.1 Background of the study ..................................................................................................................... 6
1.1.1 Electronic Filing........................................................................................................................... 8
1.1.2 Tax Compliance ........................................................................................................................... 9
1.1.3 Electronic Tax Filing and Compliance ...................................................................................... 10
1.1.4 Small and Medium Enterprises in Embu County ....................................................................... 10
1.2 Statement of the problem .................................................................................................................. 12
1.3 Research Objectives .......................................................................................................................... 13
1.3.1 General Objective ...................................................................................................................... 13
1.3.2 Specific Objectives .................................................................................................................... 13
1.4 Research Questions/Hypothesis ........................................................................................................ 13
1.4.1 Hypothesis.................................................................................................................................. 13
1.5 Justification of the study ................................................................................................................... 14
1.5.1 KRA Management ..................................................................................................................... 14
1.5.2 SMEs in Embu County .............................................................................................................. 14
1.5.3 Researchers and Academicians .................................................................................................. 15
1.6 Scope of the study ............................................................................................................................. 15
1.7 Limitations of the study .................................................................................................................... 15
CHAPTER 2 ............................................................................................................................................... 16
LITERATURE REVIEW ........................................................................................................................... 16
2.1 Introduction ....................................................................................................................................... 16
2.2 Theoretical review ............................................................................................................................ 16
2.2. 1 Ability to Pay Theory ................................................................................................................ 17
2.2.2 Benefits Theory .......................................................................................................................... 18
2.2.3 Determinants of Tax Compliance among Small Tax Payers ..................................................... 19
2.3 Empirical review ............................................................................................................................... 23
2.4 Conceptual framework ...................................................................................................................... 25
2.5 Critic of past studies.......................................................................................................................... 26
2.6 Summary of the reviewed literature .................................................................................................. 27
2.7 Research gaps.................................................................................................................................... 27
CHAPTER 3 ............................................................................................................................................... 28

4
RESEARCH METHODOLOGY ................................................................................................................ 28
3.1 Introduction ....................................................................................................................................... 28
3.3 Target population .............................................................................................................................. 28
3.4 Sampling frame ................................................................................................................................. 29
3.5 Sample size and sampling techniques ............................................................................................... 29
3.6 Research instruments ........................................................................................................................ 30
3.7 Data collection procedure ................................................................................................................. 30
3.8 Pilot test ............................................................................................................................................ 31
3.9 Data processing and analysis ............................................................................................................ 31

5
 CHAPTER 1

INTRODUCTION

1.1 Background of the study

Taxation is a vital component when it comes to managing national income as well as national

operations used to fund commercial purposes by developed and developing nations. The tax

includes both direct and indirect levies. These taxes are raised to facilitate the development of

programs, which in turn leads to economic development of any nation that mainly relies on

revenue taxes. The enforcement of automated tax filing and imbursement system is a significant

step toward achieving tax objectives for any administration. The automated tax system calls for a

particular infrastructure to run efficiently and realize desirable objectives. On the same note, the

success of the electronic tax system is likely to experience challenges whereby not each person

has access to broadband. Putting into practice of electronic tax filing and imbursement system

has been successfully achieved in both developed and developing countries across the globe

(Muwonge 2011). In the recent past economies of many developing countries have made efforts

to introduce automated systems for filing and paying of taxes. Reports show that more than 50

economies of developing countries have shown efforts to adopt electronic tax filing for the first

time (Lubua, 2014). Indeed, the compliance of taxpayers is essential to collecting finances for a

country to support its economic stability.

An online tax filing system is an electronic application that enables the taxpayer to access online

services through the internet to register and obtain identification credentials. The electronic

platform allows an individual to lodge filed returns, application for, and printing compliance

certificates (Gwaro, Maina, & Kwasira, 2016). An example of a similar system is the automated

taxation package that was introduced by the Kenya Revenue Authority (KRA) in 2013. The

6
Kenya Revenue Authority is a financial authority that has embraced automated tax system

through the Business Process Improvement (BPI) that has helped Kenya to enhance its scope of

electronic interaction with taxpayers. The aim of introducing the electronic tax system by KRA

is to boost the productivity of its staff and taxpayer service. In the modern world, governments

are facing a lot of pressure to advance the conveyance of public services in the most appropriate

manner. In order to counter this challenge, tax establishments are moving towards electronic

government-led solutions such as electronic tax filing also referred to as e-filing (Lubua, 2014).

Up to date, the use of Information Communication Technology (ICT) has become prevalent in

the tax and business arena. Remarkably, tax authorities across the world are embracing the use of

tax filing systems to network with taxpayers in the collection of tax. Tax authorities are using

technology to ensure the efficiency of tax organization that has expanded taxpayer services. In

the process, technology has improved tax compliance in both developed and developing

countries.

Tax authorities are moving toward tax information systems and databases by integrating the

existed tools with the attempt to counter tax non-compliance. The use of tax filing systems

allows for tax compliance and satisfaction of information needs at internal and operational

control heights for active management of new tax management.

Several approaches have been employed today by tax corporations to capture tax return and

payment data electronically. Similarly, electronic methods are increasingly being utilized for

administrative operations like business tax registration, address, and name changes for

individuals and businesses.

7
1.1.1 Electronic Filing

Electronic filing or e-filing is a process whereby tax returns are submitted via the internet in a

paperless manner (Lubua, 2014). The automated filing system entails the use of Worldwide Web,

the internet, and other software applications for different tax administration and compliance

reasons. However, the electronic taxing system is different amongst different countries; thus, the

name of the system is different from one country to another. Vehorn and Ahmad (1997) define

electronic tax filing as an electronic declaration. Similarly, the United Nation describes e-filing

as online taxation payment.

The United States was the first country to come up with the idea of electronic tax filing, with the

Internal Revenue Services (IRS) initiating providing tax return for tax refunds (Cvrlje, 2015).

Consequently, the tax system had advanced to the current level, whereby nearly one out of ten

taxpayers is currently filing their tax electronically. Indeed, this process has been as a result of

several improvements and elements being added into the program over time. Presently,

electronic filing has spread to other developed and developing nations such as the UK, Australia,

Germany, Canada, Italy, Sweden, Netherland, India, Mexico, Brazil, China, Turkey, Malaysia,

Singapore and Finland among many others. Likewise, developing countries in Africa have

started to adopt electronic filing of tax returns as well. Some of the countries in Africa that are

embracing electronic filing include South Africa, Nigeria, Egypt, Nigeria, Kenya, and Rwanda.

The tax setting is transforming rapidly across the world. The advancement in ICT is transforming

the tax revenue systems operations Lubua (2014). Therefore, tax agencies are being challenged

to uphold a modern and responsive tax filing system. Toward the 1990s, a number of tax

agencies, especially those from developed countries, have progressively harnessed the power of

8
ICT by adopting an electronic tax filing system. Electronic filing is a novel approach where tax

agencies interact with taxpayers.

Electronic filing relies on technology. The technology utilized in electronic filing includes

software applications and the internet. Electronic filing is used to ensure that the desired results

and achieved. In accordance to Muwonge (2011), some of the electronic filing measures include

minimizing errors during tax processing, reducing the life of tax, and ensuring tax efficiency and

allowing tax officers to ensure that taxpayers comply with the tax regulations.

1.1.2 Tax Compliance

Tax compliance is the extent to which a taxpayer adheres to with the tax rules of their country by

filing a return and paying the tax due in a timely manner (Muwonge, 2011). On the other hand,

tax non-compliance is any difference between the real amount of charges paid and the tax due.

Such differences occur due to understating or overstating deductions, incomes, and expenses.

Non-compliance comes as a result of a lack of understanding of the tax laws or because of errors

during tax calculation. Tax compliance is the filing of tax returns on time and reporting the tax

information, the accurate self-assessment of taxes owed, and timely payment of taxes without

enforcement actions (Muita, 2011). Based on this tax definition, it reveals that tax compliance

has three dimensions: reporting, filing, and payment compliance. Filing compliance is the

process where a taxpayer submits the correct forms to the revenue authority. A taxpayer is said

to be non-compliant when one fails to accomplish the three dimensions properly. It has been the

target of any government to see its citizens pay tax willingly without hissing. However, this has

never been easy, forcing many governments to introduce technology in collecting tax.

9
1.1.3 Electronic Tax Filing and Compliance

The goal of electronic filing is to allow taxpayers to accomplish their tax obligations

conveniently without visiting tax offices. However, tax compliance has been a significant

concern to tax administrators and policymakers. Tax compliance influences the collection of

revenue and the capacity of the government to realize its social and fiscal goals. The measure is,

therefore put in place to enhance tax compliance that will lead to long-term significance like

deducing tax gaps and higher tax collection. The objective of tax reforms by most countries is to

realize greater tax compliance through introducing of electronic filing system (Franzoni, 1999).

In Kenya, several taxes are filed and remitted by a specified date that is compulsory for a tax

return, and that is paid to KRA. Conversely, failure to file and remits taxes it results in non-

compliance that may attract penalties. For instance, In Kenya, the due date for Pay as you earn

(PAYE) has to be remitted by the latest the ninth day of the month following the payroll month.

Filing taxes using paper is tedious to the taxpayer; thus, KRA has opted for electronic filing with

the aim to ensure timely reconciliation and accuracy of data.

1.1.4 Small and Medium Enterprises in Embu County

The focus of this study is for small and medium businesses (SMEs) in Embu County that is

characterized by small business owners who are tasked with collecting and remitting taxes to the

county government. These businesses are essential to the county's tax system. Across the world,

tax authorities have categorized taxpayers into small, medium, and large. Generally, the

classification depends on the complexity level, turnover, and other specific groupings according

to each authority. Small and medium taxpayers are categorized with the traditionally “hard-to-

tax” category that could also include big entities. With the recent changes in the tax

administration reforms in developing nations’ medium bodies are equated to value-added tax

10
(VAT) as registered taxpayers and small taxpayers also automatically fall under VAT registered

verges. Generally, medium taxpayers fall in the formal sector; hence, they are structured and

have the ability to keep records which conform to the accounting standards and tax laws.

Conversely, small taxpayers mainly fall in the informal sector. Small taxpayers are not structured

well; hence, they can have genuine challenges in keeping correct records primarily through the

electronic filing of tax returns (Gwaro, Maina, & Kwasira, 2016). According to Eissa, Jack, and

Gordon (2010) claim that in Kenya, an individual who has registered and obtained a personal

identification number (PIN) technically qualifies as a small taxpayer. In Kenya, small taxpayers

were brought to the tax bracket in 2006 through the Finance Bill of 2006 that initiated Turn Over

Tax (TOT). The current TOT in Kenya is a tax on the income on small businesses that have an

annual income of less than 5 Million turnovers and over 500,000 turnovers. The turnover tax

does not apply to all people with less than 5 million. Before that time, small taxpayers used to

register as taxpayers voluntarily. However, in 2019, after the treasury reviewed the presumptive

tax pegged on county license fees and thus, SMEs are required to pay 3% of the turnover (Daily

Nation, 2019).

In order to improve tax compliance in Kenya, KRA has considerably been investing in

information technology since 2000. Additionally, to realize this, KRA has categorized its

taxpayers into small, medium, and large by creating different departments for every group

(Muwonge, 2011). In Kenya, electronic filing was established in 2007. Initially, e-filing was

voluntarily used by all income taxpayers' categories through an online system referred to and

KRA online. Nevertheless, in 2013, a new online system referred to as iTax was initiated with

improved features and qualities to make the taxpayers' tax filing easier. Most of the Small and

Medium Enterprise taxpayers in Embu County are direct taxpayers to the Kenyan government.

11
1.2 Statement of the problem

World over the reluctance, resistance and underutilization by taxpayers to use electronic filing

system stand as a significant concern and a big problem faced by tax authorities that are

embracing electronic tax filing systems (Lubua, 2014). It is vital to understand and influence

taxpayers to accept and embrace the automated filing system since it is a technology with the

potential to save on cost. Despite the call to increase the enforcement and collection of revenue

to provide public services, most of the developing countries are still facing significant challenges

of low tax compliance and tax administration. Research has shown that small taxpayers are

essential to the growth of a country’s economy because it creates jobs and aid in fighting

poverty. The Kenyan government recognized the potential among small and medium taxpayers

through the introduction of the turnover tax in the Finance Act 2006 by providing Income Tax

Act Cap 470. These sectors have, for a long time, operated without formal structures.

Nonetheless, since the initiation of small taxpayers’ tax bracket, there are no recorded and

empirical studies existent on tax compliance behavior among these taxpayers, particularly the

effect of electronic filing on their level of tax compliance. Therefore, this casts doubts on the

country’s capability to improve its revenue collection and tax enforcement efforts. According to

statistics, Kenya has approximately 25 million registered taxpayers (Maisiba & Atambo, 2016).

Out these number, nearly seven million taxpayers consisting of large taxpayers and medium

taxpayers are active taxpayers. Most of the taxpayers fall under small taxpayers where each

person has been registered for and obtained KRA PIN, for instance, students and small business

owners. It is evident that in Kenya, small taxpayers carry the burden of tax payment.

Nevertheless, no empirical studies have been carried out to determine the effect of electronic

12
filing on tax compliance among taxpayers in Kenya. In this sense, it is significant to study the

manner in which KRA intends to attain tax compliance amongst small taxpayers.

1.3 Research Objectives

1.3.1 General Objective

The general objective of this research is to explore the effects of electronic tax filing systems on

the compliance of taxpayers.

1.3.2 Specific Objectives

i. To determine the impact of the electronic tax filing system on the ease of filing taxes in

Embu County.

ii. To determine the extent of the willingness to adopt electronic systems among residents of

Embu County.

iii. To establish the number of people conversant with an electronic filing system in Embu

County.

1.4 Research Questions/Hypothesis

i. What is the impact of electronic filing systems on the ease of filing taxes in Embu

County?

ii. What is the level of willingness to adopt electronic systems on tax filing among residents

of Embu County?

iii. What is the number of people conversant with an electronic tax filing system in Embu

County?

1.4.1 Hypothesis

H0: Electronic filing systems have no impact on the ease of filing taxes in Embu County

13
H1: Electronic filing systems have an impact on the ease of filing taxes in Embu County

H0: The residents of Embu County are less willing to adopt electronic tax filing systems

H1: The residents of Embu County are more willing to adopt electronic tax filing systems

H0: A small number of people in Embu County are conversant with the electronic tax filing

system

H1: A high number of people in Embu County are conversant with the electronic tax filing

system

1.5 Justification of the study

The findings of this study will be significant to the following stakeholders:

1.5.1 KRA Management

This research will shed light to KRA on the progress that has so far been made in bringing on

board the electronic filing system on taxpayers to ease the delivery of services and enhance tax

compliance. The study will improve the understanding of the revenue authority of the SMEs

sector to allow it to develop effective strategies to improve compliance. In addition, it will

unmask the challenges facing taxpayers, thus offering guidance on matters to deal with greater

adoption of the electronic tax system.

1.5.2 SMEs in Embu County

This study intends to act as an inspiration for the SMEs in Embu County, not on the electronic

platform to register for online services for ease of tax compliance in regard to paying taxes and

filing tax returns. The electronic tax system will save time that could have been otherwise spent

14
on long queues waiting for delivery of services at the KRA offices and avoid penalties of non-

compliance.

1.5.3 Researchers and Academicians

The findings of the study will add to the body of knowledge to researchers and readers seeking

knowledge and pursuing the aspects that influence the support of technology to access tax

services to realize tax responsibilities as demanded by tax regulations. Therefore, the study will

form a foundation for further studies of adopting technology as an approach to improve tax

compliance.

1.6 Scope of the study

The study will be restricted to Small and Medium Enterprises (SMEs) within Embu County. The

population of Embu County is approximately 700,000 people. The target population for this

study will involve taxpayers that dead with Small and Medium business within Embu County.

The reason for basing the research on Embu County is because it is my county of residence;

hence, it will be more comfortable and timely conducting the study here. The population of small

and medium taxpayers in Embu County is managed as opposed to a large community that if

opted for could consume more resources and take more time in drawing a conclusion.

1.7 Limitations of the study

Just like any other research, this study was faced with various limitations.

 The sample size was relatively small, having only 100 participants. A bigger sample size

could have enhanced the dependability and reliability of the study.

15
  The period for data collection was little such that it could not allow the researcher to

extensively reach out to all the registered small and medium business operators in the

entire Embu County.

CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

This chapter deals with literature that is relevant to the study of the influence of electronic tax

filing systems on SMEs. The relevant literature will be obtained from past research, the internet,

and scholarly journals on the study topic. These sources will provide the necessary information,

which will allow the researcher to carry out the study effectively.

2.2 Theoretical review

There are several aspects responsible for the taxpayer's compliance behavior that is supported by

certain theories.

16
2.2. 1 Ability to Pay Theory

This theory was advanced by Smith and Pigou in (1903) “The subject of each nation should

contribute to the support of its administration, as much as possible in a proportion that is

equivalent to their capabilities; which means that in proportion of the revenue that is enjoyed

respectively under the protection of the country.” Accordingly, the ability-to-pay principle

demands that the collective tax burden shall be distributed amongst all people in accordance with

their ability to bear it, by considering all applicable personal aspects. Indeed, this is the most

common and often accepted principle of equity when it comes to taxation of citizens of a nation

since they pay taxes based on their capabilities. A recent study by Atawodi & Ojeka, (2012)

found that when taxes are levied based on the ability-to-pay principle justice can be realized;

hence the most appropriate taxes based on this point of view are personal levies such as

consumption, income net worth and inheritance taxes. However, economist is not unanimous

regarding the path that should be undertaken to exactly measuring an individual's capability to

pay. The primary standpoint developed in this relation is as follows:

Property ownership: A number of economists argue that property ownership is a good base of

measuring an individual's capability to pay tax. However, this concept is outrightly rejected

based on the ground that if an individual earns huge income but does not expend on purchasing

any property, they are likely to escape the taxation. On the contrary, another person individual

earning less income but purchased property shall be subjected to taxation. As a result, this is

irrational and unjustifiable such that an individual earning huge income will be exempted from

paying taxes while one with small income is taxed.

Tax based on the expenditure: It is suggested by some economist that the capability to pay tax

ought to be judged according to the expenditure incurred by a person. Therefore, the higher the

17
expenditure, the greater the tax should be and vice versa. However, this perception is unfair and

unsound in all aspects. An individual with a big family to support will spend more as compared

to a person with a small family. Consequently, if the expenditure is made the test for an

individual's capability to pat tax, then the person supporting a big family who is burdened with

many dependents will end up paying more tax unlike that with a small family; hence this makes

this type of tax unjustifiable (Gilligan & Richardson, 2005).

Income as the basics: A majority of the economist has the view that income ought to be the basis

of measuring a person's capability to pay. Indeed, it appears fair and just when the income of an

individual is greater than that of the other. An individual with a bigger should be asked to pay

more toward the support of the government, unlike the one with a small income. This is the

reason as to why the modern tax system of many countries across the world income has been

accepted as the best approach for measuring a person’s ability.

2.2.2 Benefits Theory

In regard to the benefit theory, Li, Zhang, & Sarathy (2010) argue that the government should

levy taxes on its citizens based on the benefit convened to them. The greater the benefits an

individual derives from the government activities, the more the citizens should pay the

government. Nonetheless, this principle has been subjected to a number of criticism based on the

following grounds:

The government upholds a certain link between the benefits conferred and the benefits derived. It

will be antagonistic to the basic principle of the tax since tax a compulsory contribution made to

the public authorities for the government to attain its expenses as well as general benefit

provisions. In the case of a tax, there is no direct quid pro quo. Most of the expenses incurred by

a country are for the general benefit of its inhabitants. Therefore, it is not easy to approximate the

18
benefit received by a particular person each year (Torgler, 2007). However, if this principle is

applied, then lower income class people will have to pay the highest tax since they are the people

who benefit most from state services. If it is realized that much of the taxes is gained from the

poor, which is contrary to the principle of justice. The impact of this theory is that small

taxpayers could have to pay more taxes compared to medium and large tax payments.

2.2.3 Determinants of Tax Compliance among Small Tax Payers

Tax compliance depends on several aspects, such as economic factors, political factors, and

socio-psychological factors. These factors are discussed below.

2.2.3.1 Economic Determinants of Tax Compliance

With regard to neoclassical economic theory that utilizes the Smithian concept of homo

economicus taxpayers are selfish rational utility maximizers who based on the optimal strategy,

attempt to avoid taxes as a means to obtain maximum returns. Beginning with Atawodi & Ojeka

(2012) circumventing taxes is no more seen as a criminal practice per se but a rational utility-

maximizing strategy used by taxpayers when the benefits of the successful evasion value are

more than the costs of being fined, detected and audited. As a result, Li, Zhang, & Sarathy

(2010) advanced a model of tax evasion built on Backer’s theory whereby the taxpayer is

provided with two strategies: paying tax based on the real income or declaring a small amount of

income to pay less tax. The choice between these two strategies depends on the possibility of

being audited. The rational maximizers conform to the von Neumann-Morgenstern axioms,

where people are assumed to opt for the strategy that yields the greatest expected utility within

certainty conditions, hence evades taxes if it pays. It can be noted that one a taxpayer is not

audited the second strategy generates greater profit, while in case of an audit, fine or detection,

the first strategy could be preferred by the rational taxpayer. The classical economic model of tax

19
circumvention assumes that there are four dissimilar determinants which shape the behavior of

the taxpayer: fines, income, audit probability, and tax rates. With regard to this model, tax

evasion declines when audit probability and fines increase since the expected utility of evasion

shifts as well. As for the other two aspects, their increased results in ambiguous outcomes

regarding compliance. While the researchers acknowledge the existence of other variables that

are likely to influence compliance such as the reputation gained by the taxpayer as a result of

compliance behavior; their model focus on the four parameters stated above.

Basing on the outcome predicted by this model, it can be stated that compliance could be easily

increased across the world if countries simply impose more fines or increase audit probability.

Nonetheless, most of the empirical, as well as theoretical studies, have shifted from this standard

economic model indicating relative inconsistencies to the theoretical assumptions of expressed

by the model, in other words, compliance cannot be easily increased. The identified

inconsistencies are known as refinements of the model as well as the inclusion of other variables.

Through making the fine proportional to the circumvented tax instead of not declaring income,

solves the inconclusive findings (Chau & Leung, 2009). However, it reports a counterintuitive

outcome where an increase in income tax should boost the declared income. Other scholars, such

as Torgler (2007) have reported a negative correlation between the rate of income tax and

compliance. Also, Richardson (2008) assert that if taxpayers differ based on their honest, a rise

in the tax rate will decline compliance even for those taxpayers that are more genuine. Refining

the suggestion from Chau & Leung (2009), Muwonge (2011) also foresees a negative influence

of tax rate on compliance provide the taxpayer are capable of determining their desired level of

compliance.

20
2.2.3.2 Political Tax Compliance Determinants

Tax compliance is determined by three political determinants which include the complexity tax

system, tax law and fiscal policy. Prior to making compliance decisions, the taxpayer has first to

confront elements of the tax law. The level of complexity can turn a well-intentioned taxpayer

into becoming an evader. In addition, the tax structure system can act as a hindrance hindering

the willingness by the taxpayer to comply if it is perceived that the structure is extremely

bureaucratic, increased taxes and high tax burden. On the same note, a fiscal system that is not

efficient where it is characterized with recklessly using public funds and low quality of public

goods makes the taxpayer develop doubts when it comes to paying the whole share of their tax

liabilities.

Individuals understanding of tax law is an essential element that shapes their disposition to

comply. With the complication of the law, it makes taxpayers reluctant to making attempts to

understand the provision contained in the tax law. Taxpayers often find tax law a burden because

of its scheming wording which is perceived as a foreign language. Many studies have found that

individuals who are educated have a better understanding of the tax liabilities as well as the

target of the government policies as the repercussions hence they comply more (Atawodi, &

Ojeka, 2012).

The lack of understanding of tax law creates distrusts and non-compliance. In this regard, many

countries both developing and developed such as New Zealand, France, Australia, Kenya,

Nigeria and Brazil have taken long and extensive endeavors to simply the tax law by rewriting

the tax laws using plain language by use of logical structures. However, regardless of the many

attempts to simplify the relevant tax laws research has shown that little effect on the

enhancement of the tax law has been grasped by business people, ordinary peoples and even tax

21
authorities. As a result, there is almost no significant impact on tax compliance. According to

Hai & See (2011), the scholar assert that complex tax law creates uncertainty in the mind of the

taxpayer hence raising tax compliance levels. Also, it has been reported by Torgler (2007) that

tax compliance increases with income uncertainty. In this regard, Kogler et al. (2013) concluded

that tax compliance levels rise when taxpayers become uncertain about the number of non-

compliance acts can be detected by an audit. It is, however, ironical that tax law is challenging to

understand which give rise to uncertainty to both ordinary people as well as tax authorities.

In a research carried out to determine the level of compression of fiscal policy issues among

German politicians, it was found that most respondents indicated a low level of understand and

knowledge of fiscal policy (Cvrlje, 2015). Accordingly, due to lack of tax knowledge and the

uncertainty of the tax law provides authorities with inappropriate conditions to decide the level to

which taxpayers’ behavior can be termed legal and the exact boundary between right and wrong

towards the application of tax law provisions. Additionally, various studies support this ideology

arguing that it is difficult to exactly outline a behavior that is line with the tax law (Franzoni,

1999).

2.2.3.3 Social Psychological Determinants of Tax Compliance

Feld & Frey (2007) argue that evaluation taxpayers compliance behaviors should start from the

answer to the question “How is the state reflected in the mind of the taxpayers?” Furthermore,

assert that “consciences regarding the government results in residents’ tax and civic sentiments

and to a fundamental attitude about problems of ‘their’ country”. This means that the manner in

which individuals express their feelings, attitudes, and reactions and their general behavior is

based on how they think. Therefore, things that happen in the minds of the inhabitants while

22
dealing with matters related to tax regulations, public good and tax policy, among others

comprise the social-psychological determinants of tax compliance performance.

Generally, attitude is assumed to influence compliance behavior since it represents the taxpayer’s

propensity to positively or negatively respond to a specific condition (Richardson, 2008). There

are several ways to measure and operationalize attitudes towards tax compliance ranging from

the general judgements by tax authorities, subjective valuations of tax evasion to moral attitudes

towards tax evasion. Feld & Frey (2007) argue that norms are behavioral standards that are set at

social reference group, personal, and collective level. Norms refer to an internalized standard of

behavior such as religious beliefs, norm-dependency and altruism that normally relate with high

tax ethics and willingness to comply. Social norms represent behavioral patterns judged similarly

by others. In general, if a taxpayer gets reference from the reference group, which signals that

non-compliance is accepted, the compliance level wilted to decline. Also, societal norms

represent cultural standards that have been integrated into the relationship between taxpayers, tax

authorities and tax legislation. In this respect, compliance is achieved by reducing the social

distance between taxpayers and authorities as well as supporting mutual trust and cooperation.

Research has that most of the taxpayers will always mention fairness as a vital issue that

influences tax compliance. When taxpayers perceive fairness in the tax system, they tend to

comply with and vice vasa. Despite the factors assessed by the taxpayer such as tax rate, tax

code, the efficiency of government expenditure and tax burden, a greater perception of fairness

leads to greater compliance level.

2.3 Empirical review

Various studies, both local and internationally, have undertaken research about the role played

by information technology in regards to tax compliance. For example, a study of France and

23
Japan regarding user evaluation of tax filling systems was carried out by Li, Zhang, & Sarathy

(2010), to compare the complexity and design of the websites and the ease with which taxpayers

can file tax returns and queries regarding the tax status. It was found that France had a

sophisticated online system compared to the Japanese users who did not find tax filing system

challenging to use since they relied on accounting professions to perform their tax returns online

(Muita, 2011). On the other hand, France system was regarded as less complicated since it was

being used as expected by a few taxpayers. Indeed, having an online filing system is one thing,

but being able to be utilized by taxpayers is another thing. This has an impact on the present

study in a manner that he ease to use tax website has to be considered prior to rolling out such a

system to the taxpayers. Other elements that should be regarded as include efficiency and

capacity of the system.

Lubua (2014) carried a survey about the integration of ICT skills and tax software in tax

education in Bangladesh. The respondents in this study were tax experts. The objective of this

study was to establish the basic skills needed by taxpayers to use an online tax system fully.

From the study, it was found that there are three basic skills required to interact with technology-

based tax systems which include e-mail, word processing software, and spreadsheet software.

The results of this study have an impact on the present study since analyses the effectiveness of

pf electronic filing systems that a person should not overlook. Failure to consider these skills

could result in failure to meet the intention of the system Muita, (2011). Despite the massive

investment by the Bangladesh tax authority in the novel online system, less than 30% of the

targeted taxpayers were unable to use this system two years after implementation. The problem

was mainly attributed to a lack of necessary user skills such as computer literacy. Additionally,

the taxpayer’s behavior was a contributing factor.

24
In Kenya, particularly in the Kenya Revenue Authority, a number of studies have been

undertaken about technology and tax compliance with reference to tax filing. For instance,

Gitaru (2017) carried out a survey regarding the adoption of technology as a strategic tool for

improving tax compliance in Kenya. The study was grounded on big taxpayers consisting of

organizations which operate with cash flow of more than 500 million, as well as government

corporations and ministries. The goal of this study was to investigate the role played by

technology in Kenya to improve tax compliance among big taxpayers. The study found that with

the rapidly changing business environment, technology has become an integral part of many

businesses. Therefore, KRA and big taxpayers should adopt modern technology to improve tax

compliance. On the same note, Chau & Leung, (2009) performed a study about the elements that

impact the use and adoption of electronic filing system among big taxpayers in Kenya. The

scholar explored the necessary skills needed by users to use e-filing, the required technology and

the preparedness of the tax authority toward improving tax compliance using technology. The

study realized that for effective e-filing to be incepted in Kenya, there is a need to educate the

taxpayer about the basic skills, knowledge, and how to interact with filing system infrastructure.

2.4 Conceptual framework

The conceptual framework is used to measure the influence of electronic tax system on tax

compliance among SMEs in Embu County. In this study, an electronic filing system is an

independent variable. In contrast, ease of filing taxes, willingness to adopt electronic filing

system and awareness with an electronic tax system are the dependent variables. Electronic filing

system education will lead to ease of tax filing, willingness to adopt electronic filing system and

improve awareness with the electronic tax system. The influence of the independent variable on

25
the dependent variables will be measured by evaluating ease of filing taxes, willingness to adopt

electronic filing system and awareness with an electronic tax system.

Ease of filing taxes

Influence of Electronic Filing Willingness to adopt

System

Conversant with the tax system

Figure 1: Conceptual Framework of Influence of Electronic Filing Systems on Tax Compliance

among SMEs in Embu County

2.5 Critic of past studies

Though many studies have been carried out about tax compliance in Kenya, these studies have

mainly focused on large taxpayers who have advanced technologically and are aware of the

implication of noncompliance. However, the majority of taxpayers are small business people.

Yet, little empirical studies have been investigated to establish the effects of electronic tax filing

system in regards to tax compliance.

26
2.6 Summary of the reviewed literature

The usage of the electronic filing system is an integral part of tax authorities to ensure tax

compliance. Nevertheless, the technology should not be viewed as a solution to tax compliance,

but a means towards ensuring effectiveness and efficiency. To attain excellence tax authorities,

the management has to focus on the taxpayer. In this light, the most critical aspect is ensuring the

taxpayer has the necessary skills to interact with the tax filing system. Providing taxpayers with

basic skills and knowledge regarding how the electronic filing system operate with ease the time

spent by the taxpayer to file their tax returns. In Kenya, most studies carried out have focused on

big taxpayers who are considered developed in terms of technology and are conversant with the

repercussion of noncompliance. However, in Kenya, most small and medium enterprise

taxpayers shoulder the burden of tax payment, but little empirical studies have been undertaken

to determine the effects of e-filing on tax compliance among these taxpayers (Muturi & Kiarie,

2015). This study should thus fill this knowledge gap by paying attention to small taxpayers such

as SMEs in Embu County as they are significant taxpayers.

2.7 Research gaps

There various research gaps in relation to the influence of the electronic tax filing system on tax

compliance among SMEs in Kenya, particularly Embu county. These research gaps include:

 Little empirical studies have been undertaken to determine the effects of e-filing on tax

compliance among these taxpayers.

 Lack of skills and knowledge on how to interact with the tax filing system among

taxpayers.

27
 CHAPTER 3

RESEARCH METHODOLOGY
3.1 Introduction

This part of this research will examine the research methodology as well as the designed used.

This will involve research survey, data collection (procedure for the survey, sampling frame, as

well as questionnaire development). In addition, this chapter discusses the details of the research

hypothesis, data input, data processing and presentation. Furthermore this sections look at the

technique used to analyze data, limitations of the study and definition of research variables.

3.2 Research design

The research will embrace a descriptive study design since the objective of this study is to

determine the effect of electronic fax filling systems on tax compliance among SMEs in Embu

County. Descriptive research is defines as a combination of techniques used for collecting data

and receiving responses to a set of questions from study respondents (Maxwell, 2012). Descriptive

research is a method that is suitable for the research for handling self-administered

questionnaires. Similarly, Muita (2011) utilized descriptive research while undertaking a study

on The Taxpayers’ Attitudes Effects on Tax Compliance Behavior amongst Small and Medium

Business Income Earners in Nairobi District.

3.3 Target population

The target population for this study will include 450 SMEs that are businesses within Embu

County. The trading centers that are targeted include Embu town, Runyenjes, Siakago and

Kiritiri towns under the jurisdiction of Embu KRA.

28
3.4 Sampling frame

Acharya, Prakash, Saxena, and Nigam (2013) define a sampling frame as the source of material

through which a sample is drawn. In this sense, the sampling frame will include SMEs operators

within Embu County, which comprise both males and females above eight years of age.

3.5 Sample size and sampling techniques

Sampling is the collection as well as asking individuals a range of similar questions regarding the

influence of electronic tax filing system on tax compliance among SMEs in Embu County. The

collection of data also involves gathering relevant information to the study. To determine the

sample size, Slovin's Formula was used. Slovin's formula is used to calculate the sample size (n)

given the population size (N) and a margin of error (e). Slovin’s is a random sampling technique

formula used to estimate sampling size, which is computed as n = N / (1+Ne2)

Where

n-number of samples

N-total population

e-margin error

A sample of 100 respondents was used. In this sense, this sampling size was sufficient enough to

cover the whole selected period of 3 months of operation. As a result of the homogeneity of the

components, the sample size was kept relatively manageable. Therefore, the researcher embraced

a stratified random sampling to choose respondents from the four towns within Embu County

operating an as small and medium business that are registered taxpayers with the questionnaires

delivered to their enterprises.

29
3.6 Research instruments

A research instrument is a tool that is used to collect, measure, as well as analyze data in relation

to the research topic (Zohrabi, 2013). In this regard, the researcher employed questionnaires and

surveys as the research instruments. What prompted the researcher to use questionnaires as the

primary research instruments are because it is a very helpful survey tool which allows the

researcher to assess a large population with relative ease. Regardless of the broad perception

survey, are easy to conduct to yield results that are meaningful.

3.7 Data collection procedure

The researcher prepared standardized questions, in structured and self-administered

questionnaires and issued them to the selected respondents for a period of one week to disclose

their knowledge regarding how electronic tax filing system has influenced their tax compliance.

The questionnaires comprised a series of structured questions designed to draw information from

the chosen respondents. This procedure of data collection is cost-effective since it only involved

a 'drop and pick later' nature, unlike face-to-face interviews which are costly as it entails

shuttling between respondents.

The survey questionnaire is the primary data collection instrument, which was administered

explicitly to small and medium business operators that are registered taxpayers within Embu

County. Secondary data was collected by reviewing journals and KRA bulletins, published

literatures over the internet. Taxpayer compliance measurement involved consideration of tax

debt, tax lodgment, tax payment promptness.

30
3.8 Pilot test

A pilot survey is a strategy that is used to test the questionnaire using a smaller sample in

comparison to the planned sample size (Yost, Conrad, Watkins, Parr, & Gordon, 2019). Therefore,

the pilot test will be 10% of the total sample size. In this sense, the pilot test will involve ten

respondents. A pilot survey is used to test the correctness of the instructions being measured to

determine if all the respondents in the pilot sample are capable of following the indicated

directions. In addition, it also offers better information regarding whether the kind of survey is

effective in attaining the purpose of the research. The pilot test is significant because it saves on

financial resources since if errors are found in the questionnaire early, there will be lesser

chances of obtaining results that cannot be relied upon.

3.9 Data processing and analysis

The data will be collected and analyzed using the Statistical Package for Social Sciences (SPSS)

version 23 to determine the solution for the problem under investigation. To test the effect of

electronic tax filing system on tax compliance amongst small and medium enterprises in Embu

County regression analysis will be performed on the collected data. A specific tax education

level will be measured in relation to respondents’ capability to compute the tax liabilities on

income as well as wealth for dissimilar tax systems. The researcher will use concretely,

structured questions to address and disclose specific tax knowledge issues. The level of tax

compliance amongst respondents will be measured based on the following components, tax

return filing, registration uptake, tax due promptness and determination.

31
 References

Acharya, A. S., Prakash, A., Saxena, P., & Nigam, A. (2013). Sampling: Why and how of it.

Indian Journal of Medical Specialties, 4(2), 330-333.

Atawodi, O. W., & Ojeka, S. (2012). Factors that affect tax compliance among small and

medium enterprises (SMEs) in North Central Nigeria. International Journal of Business and

Management, 7(12).

Atawodi, O. W., & Ojeka, S. (2012). Factors that affect tax compliance among small and

medium enterprises (SMEs) in North Central Nigeria. International Journal of Business and

Management, 7(12).

Chau, K. K. G., & Leung, P. (2009). A critical review of Fischer tax compliance model: A

research synthesis. Journal of accounting and taxation.

Cvrlje, D. (2015). Tax literacy as an instrument of combating and overcoming tax system

complexity, low tax morale, and tax non-compliance. The Macrotheme Review, 4(3), 156-167.

Daily Nation. (2019). Taxman slaps SMEs with 3pc turnover tax. Retrieved 23 September 2019,

from https://www.businessdailyafrica.com/markets/capital/Taxman-slaps-SMEs-with-3pc-

turnover-tax/4259442-5159496-qdvk93/index.html

Eissa, N. O., Jack, W., & Gordon, R. H. (2010). Tax reform in Kenya: Policy and administrative

issues. Taxation in Developing Countries: Six Case Studies and Policy Implications, 198.

Feld, L. P., & Frey, B. S. (2007). Tax compliance as the result of a psychological tax contract:

The role of incentives and responsive regulation. Law & Policy, 29(1), 102-120.

Franzoni, L. A (1999).Tax Evasion and Tax Compliance, Italy, University of Bologna,

http://spazioweb.inwind.it/franzoni/papers/6020book.pdf.

32
Gilligan, G., & Richardson, G. (2005). Perceptions of tax fairness and tax compliance in

Australia and Hong Kong‐a preliminary study. Journal of financial crime, 12(4), 331-343.

Gitaru, K. (2017). The Effect of Taxpayer Education on Tax Compliance in Kenya. (A case

study of SME's in Nairobi Central Business District).

Gwaro, O. T., Maina, K., & Kwasira, J. (2016). Influence of online tax filing on tax compliance

among small and medium enterprises in Nakuru Town, Kenya. IOSR Journal of Business and

Management, 2(3), 54-65.

Hai, O. T., & See, L. M. (2011). The behavioral intention of tax non-compliance among sole-

proprietors in Malaysia. International Journal of Business and Social Science, 2(6), 142-152.

Kogler, C., Batrancea, L., Nichita, A., Pantya, J., Belianin, A., & Kirchler, E. (2013). Trust and

power as determinants of tax compliance: Testing the assumptions of the slippery slope

framework in Austria, Hungary, Romania and Russia. Journal of Economic Psychology, 34, 169-

180.

Li, H., Zhang, J., & Sarathy, R. (2010). Understanding compliance with internet use policy from

the perspective of rational choice theory. Decision Support Systems, 48(4), 635-645.

Lubua, E. W. (2014). Influencing tax compliance in SMEs through the use of ICTs. International

Journal of Learning, Teaching, and Educational Research, 2(1).

Lubua, E. W. (2014). Influencing tax compliance in SMEs through the use of ICTs. International

Journal of Learning, Teaching, and Educational Research, 2(1).

Maisiba, G. J., & Atambo, W. (2016). Effects of the electronic-tax system on the revenue

collection efficiency of Kenya Revenue Authority: A case of Uasin Gishu County. Imperial

Journal of Interdisciplinary Research, 2(4), 2454-1362.

33
Maxwell, J. A. (2012). Qualitative research design: An interactive approach (Vol. 41). Sage

publications.

Muita, E. W. (2011). Factors that influence the adoption and use of the e-filing system of Kenya

revenue authority among the large taxpayers. Unpublished MBA Project submitted to the JKUAT

Nairobi Central Business District Campus.

Muita, E.W. (2011) Factors that Influence Adoption and Use of E-Filing System of Kenya

Revenue Authority among the Large Taxpayers, Unpublished MBA Project submitted to the

JKUAT Nairobi Central Business District Campus

Muturi, H. M., & Kiarie, N. (2015). Effects of the online tax system on tax compliance among

small taxpayers in Meru County, Kenya. International Journal of Economics, Commerce and

Management, 3(12), 280-297.

Muwonge, H. L. (2011). The influence of electronic tax filing system on tax compliance and tax

collection. Makerere University, Uganda.

Richardson, G. (2008). The relationship between culture and tax evasion across countries:

Additional evidence and extensions. Journal of International Accounting, Auditing and Taxation,

17(2), 67-78.

Torgler, B. (2007). Tax compliance and tax morale: A theoretical and empirical analysis.

Edward Elgar Publishing.

Vehorn, C. L., & Ahmad, E. (1997). Tax administration. Fiscal federalism in theory and

practice, 108-134.

34
Yost, D. M., Conrad, M., Watkins, L., Parr, K., & Gordon, H. R. (2019). A Pilot Survey of a

Self-Efficacy Tool for Career and Technical Education Administrators. Journal of Leadership

Education, 18(3).

Zohrabi, M. (2013). Mixed-Method Research: Instruments, Validity, Reliability and Reporting

Findings. Theory & practice in language studies, 3(2).

35