FACTORS AFFECTING PERFORMANCE OF TURNOVER TAX IN KISUMU TOWN

MARTIN OGOLA ALUOCH

REG. NO. D61/28400/2019.

A RESEARCH PROPOSAL SUBMITTED TO THE SCHOOL OF BUSINESS

MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF MASTERS IN BUSINESS ADMINISTRATION (FINANCE)

MBA (FINANCE OPTION), UNIVERSITY OF NAIROBI.

 DECLARATION

This proposal is my original work and has not been presented for a Master’s degree in any other
academic or non-institution

…………………. …………………
Signature Date

This proposal has been submitted for examination with my approval as the Supervisor

……………… ……………….
Signature Date

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 DEDICATION

I dedicate this work to God who has kept me in good health throughout the whole process,
including the development of this research proposal. Secondly I dedicate this research proposal
to my parents who brought me up and educated me

This work is also dedicated to my family that is my beloved wife and children respectively.

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 ACKNOWLEDGEMENT
I acknowledge the power of God, the maker, and the provider of knowledge for enabling me to

pursue this program in the right spirit. Most importantly, I sincerely wish to acknowledge the

support from my supervisor, without whom I could not have gone this far with my academic

work. I owe a great deal of gratitude to my family members for their unfailing moral support

throughout my period of study and for understanding and appreciating the demands of the course.

I cannot forget the positive influence of my classmates as a source of inspiration throughout my

study and for assisting me in sourcing for information and materials for this proposal. To you all,

God bless.

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 LIST OF ACRONYMS
EU European Union
FIRS Federal Inland Revenue Service
KRA Kenya Revenue Authority
NGO Non-Government Organization
OECD The Organization for Economic Co-operation and Development
PAYE Pay as you Earn
SME’s Small Medium Sized
US United States
UK United Kingdom

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 DEFINITION OF TERMS

Fines and penalty gross compliance costs less tax compliance benefits which

include tax deductibility benefits, cash flow benefits, and

managerial benefits.

Turnover tax A turnover tax is similar to VAT, with the difference that it taxes

intermediate and possibly capital goods. It is an indirect tax, typically

on an ad valorem basis, applicable to a production process or stage.

For example, when manufacturing activity is completed, a tax may be

charged on some companies.

Taxpayers A person who pays tax, in this case those earning not more than

5 million

Tax a compulsory contribution to state revenue, levied by the

government on workers' income and business profits, or added

to the cost of some goods, services, and transactions.

Tax compliance the degree to which a taxpayer complies (or fails to comply)

with the tax rules of his or her country, for example by

declaring income, filing a return, and paying the tax due in a

timely manner.

Tax system a legal system for assessing and collecting taxes. legal system -

a system for interpreting and enforcing the laws.

Tax knowledge the level of awareness or sensitivity of the taxpayers to tax

legislation. 

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 TABLE OF CONTENTS
DECLARATION.............................................................................................................................ii
DEDICATION...............................................................................................................................iii
ACKNOWLEDGEMENT..............................................................................................................iv
LIST OF ACRONYMS...................................................................................................................v
DEFINITION OF TERMS.............................................................................................................vi
TABLE OF CONTENTS..............................................................................................................vii
ABSTRACT...................................................................................................................................ix
CHAPTER ONE..............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1 Background of the Study........................................................................................................1
1.1.1 Global Perspective...........................................................................................................1
1.1.2 African Perspective.........................................................................................................2
1.1.3 Kenyan Perspective.........................................................................................................3
1.1.4 Turnover Tax...................................................................................................................3
1.1.5 Kisumu Town..................................................................................................................4
1.2 Statement of the Problem.......................................................................................................4
1.3 Research Objectives...............................................................................................................5
1.4 Value of the Study..................................................................................................................6
CHAPTER TWO.............................................................................................................................7
LITERATURE REVIEW................................................................................................................7
2.1 Introduction............................................................................................................................7
2.2 Theoretical framework...........................................................................................................7
2.2.1 The Economic Theory of Tax Performance with special Reference to Tax Performance
Costs.........................................................................................................................................7
2.2.2 Benefit Received Taxation Theory..................................................................................8
2.2.3 The Ability to Pay Theory of Taxation...........................................................................8
2.3 Tax Payer Level of Education and Performance of Turnover Tax........................................9
2.4 Business Turnover and the Performance of Turnover Tax..................................................10
2.5 Enforcement Effort by Revenue Authority and Performance of Turnover Tax..................12
2.6Tax Base Expansion and the Performance of Turnover Tax................................................13

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 2.6 Summary of literature review..............................................................................................14
2.3 Conceptual Framework........................................................................................................15
Figure 1: Conceptual Framework..............................................................................................15
CHAPTER THREE.......................................................................................................................16
RESEARCH METHODOLOGY..................................................................................................16
3.1 Introduction..........................................................................................................................16
3.2 Research Design...................................................................................................................16
3.3.1 Sample and sampling frame..........................................................................................17
3.4 Data Collection Instruments and procedures.......................................................................17
3.5 Data Collection Instruments.................................................................................................17
3.6 Data Analysis.......................................................................................................................18
References......................................................................................................................................20
Appendix 1: Questionnaire............................................................................................................22
APPENDIX 11: BUDGET............................................................................................................26
Appendix 111: Work Plan.............................................................................................................27

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 ABSTRACT
Taxpayers’ behavior toward the tax system has drawn considerable attention from revenue
authorities around the world, especially in developed countries. The main objective of the study
is to establish the factors affecting turnover tax collection in Kisumu. The study will be guided
by specific objectives that include; to establish the influence of tax payer level of education on
the performance of turnover tax, to establish the influence of business turnover on the
performance of turnover tax, to establish the influence of enforcement effort by revenue
authority on the performance of turnover tax and to establish the influence of tax base expansion
on the performance of turnover tax in Kisumu town. The study will adopt a descriptive research.
A descriptive research determines and reports the way things are. Descriptive data is typically
collected through a questionnaire survey, an interview or by observation. Registered business
within Kisumu County during the study period makes up the target population for this study. For
stratified random sampling, the sample size will be determined on the basis of those variables in
the sample that was likely to have the greatest variability and where the likely proportion will not
be known, it assumed that 50% of the sample have the specified attribute. A sample of 147 will
be adopted for the study. The study will collect primary data with the help of a questionnaire.
The data to be generated by the study after fieldwork will be edited, coded then entered into a
computer for processing using the Statistical Package for Social Sciences (SPSS v.21.0). A
master codebook designed to ensure that all the questionnaires are coded uniformly will be used.
Consequently, data will be edited for completeness and consistency before analysis.

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 CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
Individuals (sole proprietors), partnerships, corporations, firms, and co-operatives are eligible for

turnover tax. Qualifying small enterprises can choose to register for the conventional tax system

or turnover tax. Unlike the income tax system, which employs broad inclusion rules and a

reduction procedure that necessitates preserving proof of expenditure, the Turnover Tax will be

determined by simply applying a tax rate to a "taxable turnover." Countries that utilize a turnover

tax have parameters to decide when and at what rate such taxes should be assessed. A value-

added tax requires a small amount of additional tax to be paid at each stage in order to collect the

necessary amount. On the other hand, Cascade taxes do not account for previously paid taxes,

instead of collecting a new tax at each phase (Antonides & Robben, 2015).

Turnover Tax is determined by applying a tax rate to a "taxable turnover." Turnover taxes have

rules in place to decide when and at what rate they should be charged (McCuskey, 2011).

Turnover tax is a beneficial tax that was created to simplify extremely complex tax rules and

regulations. The fact that a turnover tax is believed to be easier to comply with does not always

imply that the related tax is fair, and the tax system could potentially burden the taxpayer much

more than the complicated income tax system (Hassan, 2011).

1.1.1 Global Perspective

Governments throughout the world are concerned about tax performance. Nonperformance is

predicted to cost the federal government about $300 billion per year in the United States (US).

On the other hand, traditional economic models of tax performance, which focus primarily on

enforcement and detection variables, are unable to explain current performance levels. In fact,

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performance is substantially higher than these economic models would predict, notably in the

United States. Tax evasion is a global problem affecting all communities and economic systems,

including industrialized and developing nations. In the United States, the tax gap (the difference

between taxes owed and taxes submitted) was estimated to be US$ 353 billion in 2001. Given

the rapid development of investment in their economies and their lack of experience in dealing

with this problem, this concern is especially acute for developing countries. Multinational

corporations in China evade taxes, resulting in a revenue loss of US$ 3.88 billion per year (Asia

Times, April 11, 2007). In Hong Kong, the Inland Revenue Department reported collecting

around the US $ 1.15 billion in overdue taxes and penalties from 2003 to 2007. (IRD, 2007).

1.1.2 African Perspective

Africa has numerous issues, including poor administration, a failure to collect sufficient tax

revenues, tax structures that do not incorporate tax horizontal and vertical fairness

considerations, and a lack of government and economic stability. Furthermore, demographic,

individual, social, economic, and institutional issues influence tax performance in most

countries. Because each country has its strategy to control tax performance attitudes and its own

set of tax rules and regulations, the factors influencing tax performance attitudes appear to differ

(Ghoni, 2011).

In the Ethiopian context, government Proclamation No. 308/2002 states that Turnover Tax

(TOT) applies to any resident whose annual business turnover does not exceed 500,000. The

supply of taxable goods and services by persons not registered for VAT is subject to turnover

tax. It is imposed at a rate of 2% on locally sold goods and services (including grain milling,

tractor, and combine harvester services) and 10% on all other services. Unlike VAT, TOT paid

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on inputs cannot be applied to TOT paid on outputs. Therefore, firms are not eligible for a refund

(Kasipillai & Jabbar, 2013).

1.1.3 Kenyan Perspective

Turnover Tax (TOT) collection in Kenya is hampered by a variety of internal and external tax

administration obstacles and issues. Since the introduction of TOT, an affirmative step aimed at

bringing the SME sector into the national revenue system, Kenya has had a budget deficit every

year. However, TOT's performance has been unsatisfactory, and TOT revenue has been below

average. Total income received from the TOT is less than target collection each year. In terms of

TOT recruiting, the average performance has been below 70% (Simiyu, 2010).

Kenya's Income Tax Act, Cap. 470, and its subsidiary legislation, Turnover Tax Rules 2007,

apply the turnover tax. Starting January 1, 2008, the rule was to apply to any resident person

whose income is accumulated in or generated from Kenya and whose annual revenue does not

exceed five million shillings. Rental income, the management or professional fees or training

fees, incorporated firm income, or income subject to a final withholding tax under the Act are all

exempt from the turnover tax (Ngungi, 2011).

1.1.4 Turnover Tax

Turnover taxes are multistage sales taxes imposed at a set rate on transactions at all stages of

manufacturing. The number of stages of manufacturing influences the effective tax rate on

various commodities and services. Turnover taxes can sometimes be punitive, aimed to

discourage people from purchasing certain things. The turnover tax encourages enterprises to

vertically integrate to reduce the number of production steps and inter-firm transactions. The tax

is frequently reflected in higher-end consumer pricing (Bird, 2013). The turnover tax is a highly

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productive charge that generates large, consistent yields at very low rates. The high yield is due

to the large number of transactions taxed and the pyramiding of tax rates for multistage

production, which significantly increases the ultimate effective rate of taxes. The turnover tax

would be levied on goods sold and services performed by people who aren't registered for VAT.

The gross proceeds in respect of goods delivered or services performed are used to calculate the

turnover tax. A person who sells goods or services owes it to the customer to collect the turnover

tax and remit it to the tax authority. As a result, the seller is primarily responsible for the

payment of the tax.

1.1.5 Kisumu Town

After Nairobi, Kenya's capital, and Mombasa, Kenya's coastal metropolis, Kisumu is the

country's third-largest city. It is the third-largest city in the Lake Victoria Basin (after Kampala,

Uganda, and Mwanza, Tanzania). Kisumu is close to Kogelo, a community most known as the

birthplace of Barack Obama Sr., the 44th president of the United States. Kisumu serves as the

cultural capital of East Africa's Luo-speaking people. It was the most significant urban center for

Kavirondo residents in the pre-colonial, post-colonial, and modern eras (Maingot, & Zeghal,

2011). The historic political quarrel between Kenya's founding president Jomo Kenyatta and

founding vice president Jaramogi Odinga during the Jaramogi Oginga Odinga Teaching and

Referral Hospital in 1969 is one of the most significant political events that have defined the

country's destiny. In addition to being an important political center, it is also one of Kenya's most

prominent industrial and commercial centers.

1.2 Statement of the Problem

Revenue collection enables the government to acquire debt-free assets and that it may employ to

expand its economy. As a result, tax administration should strive to improve registration rules,

assessment, revenue collection, and fully utilize a country's taxation capacity (World Bank,

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2015). Previous studies carried by Ngungi,(2011); Meena,(2013); Ndungu,(2013) indicated that

service delivery, staff motivation, legislation, public participation, employee competency, and

integrating information and technology were recognized as the primary issues that impede

revenue collection. Simiyu (2013) says that obstacles such as taxpayers' ignorance of their

obligations, the excessive rate of turnover tax, and the rate of payment impact tax collection.

Other studies (Tigistu, 2014; Tadele, 2015) suggested that taxation could still fail to produce the

desired results due to a variety of factors such as taxpayers' lack of understanding of the tax

system, their failure to comply with their tax obligations, hostility between taxpayers and tax

officials, economic factors, tax payers' hostile attitude toward the tax system, and so on. Because

of these factors, the correct amount of tax could not be collected. 2011 (McCluskey). However,

these studies were carried out in Nairobi County thus creating a contextual gap that will be

addressed by this study. The studies further did not address how taxpayer level of education,

business turnover, and enforcement effort by revenue authority and tax base expansion, this

conceptual gap will be further addressed by this study.

This study will, therefore; bridge the research gap through discovering factors, which affect TOT

performance by taking the case of Kisumu city through answering the following research

questions. What are the factors affecting performance of turnover tax in Kisumu town.

1.3 Research Objectives

The study will be guided by the following specific objectives;
i. To establish the influence of tax payer level of education on the performance of turnover
tax in Kisumu town
ii. To establish the influence of business turnover on the performance of turnover tax in
Kisumu town

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 iii. To establish the influence of enforcement effort by revenue authority on the performance
of turnover tax in Kisumu town
iv. To establish the influence of tax base expansion on the performance of turnover tax in
Kisumu town
1.4 Value of the Study
This study aims to produce relevant insights that the government, the tax authority can use, and

other stakeholders to increase tax performance among small taxpayers subject to turnover tax

and general tax collection in our country, hence boosting economic growth. To taxpayers, the

study aims to illustrate the obstacles that Kenyan turnover taxpayers have in trying to comply

with tax rules and initiatives that the revenue authority might take to alleviate these challenges.

The government is unable to collect the required taxes from the taxpayers who have been

identified. Tax evasion is often driven by a feeling that the tax burden is too high from the

perspective of small businesses. This creates many issues for tax systems, including challenging

concerns about how tax rules and administration affect tax compliance incentives and behavior.

The informal sector may face a more considerable compliance tax burden than large corporations

(higher unit cost about turnover).

This research looked at the impact of social, cultural, and personal factors on tax compliance.

The findings of this study are expected to provide concepts and foundations for the development

of a framework. The knowledge gained from this study could help the Kenyan government and

its revenue collection agency, the Kenya Revenue Authority, create appropriate tax policies for

SMEs. This research has presented principles for developing a framework to investigate tax

compliance behavior among small businesses. It has revealed the fundamental elements that help

people comply with their tax obligations. The study's findings will be valuable to the business

community and management teams in understanding tax compliance environmental elements and

how they can be addressed or dealt with. Finally, scholars and researchers who need to grow

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and/or advance their expertise in the field of tax compliance and administration will be interested

in the study.

CHAPTER TWO

LITERATURE REVIEW
2.1 Introduction
This chapter outlines several theories from different school of thought regarding turnover tax

compliance. This chapter analyses factors related to the study objectives.

2.2 Theoretical framework

This study borrows heavily from existing research that is increasing day by day. It is influenced

by the following theories, which have been put across by various scholars with regard to

adoption of tax performance in society:

2.2.1 The Economic Theory of Tax Performance with special Reference to Tax Performance Costs

A virtuous but risk-averse taxpayer with actual income Y chooses the fraction of income to

disclose to tax authorities to maximize her expected utility of income in the classic Allingham

and Sandmo (1972) study. The legally mandated income tax function, T(Y), the penalty rate on

detected but unpaid taxes, p, and the chance of tax audit and detection contribute to the policy

environment. For the sake of simplicity, we'll use a proportional tax function with a tax rate. X

represents the percentage of income submitted voluntarily to tax authorities (or the level of

compliance). MaxE(U) = (1-p)U[YN] + pU[YC] = (1-p)U[YN] + pU[YC] = (1-p)U[YN] +

pU[YC] = (1-p)U[YN] + pU[Y

Suppose the projected additional payment on detection p(1+p)tY is smaller than the tax payable

when income is declared honestly (tY). In that case, this model predicts that the taxpayer will not

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fully comply, opting to disclose less than 100% of her income. However, tighter enforcement,

such as raising p, will result in higher compliance.

According to research aiming to test the AS model empirically, taxpayers would always avoid

taxes if they behaved according to the AS model since predicted additional payments if evasion

is caught in practice are always less than taxes due. Tax evasion is not used by all taxpayers, as

evidenced by countries such as the United States. Over the last 30 years, this has resulted in an

immense number of additions to the AS model, leading to the identification of many of the

performance factors discussed above (Das-Gupta 2004).

2.2.2 Benefit Received Taxation Theory

The benefit received principle contends that the means of supporting government-provided

goods and services should be related to the benefits citizens receive from the government. Fees

and levies are perfect means of government finance from individuals who advocate the benefits

method. Charges, like pricing, are used to divide the costs of goods and services among

consumers. Individual people are induced to vote for the efficient output of a pure public interest

when the distribution of tax shares per unit reflects marginal benefits received by taxpayers

(Jaidi, Noordin, Ahmad, & Kassim, 2013). This approach has been criticized since, for starters, if

the government maintains a relationship between the benefits supplied and the benefits received,

it will violate the tax's fundamental basis. According to this view, people who pay the TOT

should receive some help.

2.2.3 The Ability to Pay Theory of Taxation

According to this theory, the tax burden is a mandatory and unconditional payment to the

government in its purest form. According to the notion, the state and its inhabitants have no

commercial or semi-commercial connection. A citizen must pay taxes simply because they are

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capable of doing so, and their relative part of the total tax burden is determined by that capacity.

For at least as long as the benefits theory, this idea has been widespread. The primary concept of

this theory is that the tax burden should be shared by society's members based on principles of

justice and equality. These values dictate that the tax burden be apportioned based on their

relative ability to pay. According to this theory, TOT payers should pay unconditionally and

according to their ability to pay (Chigbu, Eze, & Ebimobowei, 2012).

2.3 Tax Payer Level of Education and Performance of Turnover Tax

Education affects a taxpayer's capacity to grasp and comply (or not) with tax regulations. "The

overall degree of financial knowledge and the degree of knowledge relating to evasion

opportunities" are two components of schooling that have been identified. This knowledge is

thought to be important for tax performance attitudes. Tax education, in general, refers to an

awareness of the most critical tax policy principles used in a given jurisdiction (Fauziati et al.,

2016). SME performance with the tax system is determined by their comprehension of the

country's tax rules. In a voluntary performance tax system, tax education of diverse Small

Medium Enterprises is critical, particularly in assessing an appropriate tax burden (Baru, 2016).

According to studies conducted in Malaysia, tax education is the most influential element in

influencing taxpayers' performance behavior under the self-assessment system (Loo, 2016; Loo

et al., 2014). This has been empirically proven and backed by several additional research,

including Kasippilai and Jabbar (2013), who found that having a good understanding of taxes

leads to higher performance rates. According to their findings, 97 percent of respondents had tax

awareness, and SME's in Malaysia adhere to tax legislation.

Harris (2013), who studied tax education among SMEs in the United Kingdom, separated tax

knowledge into two categories: general or formal education gained as a matter of course and

learning explicitly oriented at potential tax evasion opportunities. His research found that SMEs

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in the United Kingdom are tax-savvy, with nearly all aware of tax legislation. According to

Ritsema et al. (2013)'s research in New Zealand, SMEs have adequate tax knowledge and follow

the country's tax legislation. Saad et al. (2014) also mentioned that tax policies are explained

through free public lectures in Malaysia. Mckerchar and Hansford (2015) stated, in support of

the initial findings, that a lack of tax awareness could contribute to non-performance by

taxpayers, either purposefully or accidentally. This was discovered in Australian research of

small business taxpayers. He concluded that small business taxpayers are unaware of their tax

education gaps, leading to inadvertent non-compliance. Individual Malaysian taxpayers who

unintentionally made mistakes on their tax return forms have also been noted (Loo et al., 2016).

The results of the Bautigam et al. (2015) specification model in examining tax education among

small-medium companies was inconclusive, as their findings suggested an equal number of

SMEs with and without knowledge. Their investigations were conducted in Hungary, Dubai, and

Spain, respectively. Similarly, Adam (2012) found that tax knowledge in Nigeria could not be

effectively quantified based on their findings, which were based on the systematic theory and

assumed that certain people have education while others have tax knowledge. The results of the

one hundred questionnaires sent by the researchers could not determine if the respondents had

only been exposed to tax education or whether knowledge existed among SMEs and thus could

not establish whether knowledge influenced compliance.

2.4 Business Turnover and the Performance of Turnover Tax

Dave (2014) researched the "factors impacting turnover tax performance in Kenya's revenue

authority." This study highlighted business turnover, taxpayer awareness, revenue authority

enforcement activities, and performance costs as critical issues. Tadele's study, "Analysis of Tax

Buoyancy and Its Determinants in Ethiopia," was published in 2015. Taxation could not produce

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the desired results due to a variety of factors, including taxpayers' lack of understanding of the

tax system, their failure to comply with their tax obligations, hostility between taxpayers and tax

officials, economic factors such as individual business turnover, and tax payers' hostile attitude

toward the tax system, to name a few. In general, empirical research conducted in

underdeveloped countries, particularly Ethiopia, was unconcerned about the possible obstacles

businesses and tax authorities face in managing various tax activities such as firm turnover

performance.

Internal tax comparability fees are more significant for more established enterprises than for

younger businesses. This is due to the higher level of tax complexity than enterprises less than

ten years old (Eichfelder & Schorn, 2008). Internal taxation and a company's age are inextricably

linked. With simple business structures, new enterprises tend to create a minimal or low

turnover. Owners want increasingly sophisticated business structures, notably incorporation, as

their enterprises become more successful and their turnover increases to reduce risk and tax.

Both tax and non-tax performance expenses may rise as a result (McGregorLowndes & Ryan,

2009). As a result, the study assumes that the age of a company impacts tax performance

expenses.

According to several research, the size of a company and performance costs negatively associate

with turnover (Slemrod & Venkatesh, 2002; Smulders et al., 2017; Hanefah et al., 2002).

Cnossen (1994) found that the relative performance costs associated with GSTs mostly burden

SMEs in a comprehensive evaluation of administrative and performance expenses of goods and

services taxes (GSTs). Small businesses have higher relative performance costs for various

reasons, one of which is that performance expenses might be regarded as fixed to some extent.

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As a result, large companies may benefit from economies of scale in terms of performance costs.

As a result, the study assumes that the size of a company affects tax performance expenses.

2.5 Enforcement Effort by Revenue Authority and Performance of Turnover Tax

Two types of tax enforcement tactics are employed to encourage tax compliance: forceful and

persuasive approaches. The coercive strategy encourages harsh actions, while the appealing

approach encourages taxpayer collaboration. The cumulative effects of these contradictory

approaches have received little study. Tax authorities in wealthy and developing countries have a

common challenge: encouraging tax performance (Silvani 2008). Tax authorities have developed

various performance procedures and techniques in response to this difficulty, which is primarily

dependent on the type and size of the taxpayer. The approaches employed to handle small and

large business tax performance differ because of the dangers they pose and the money they

contribute to the tax system (Baer 2002; OECD.2009).

Large corporate taxpayers (also known as large taxpayers) account for most tax collections and

are critical to the tax system's revenue goals. Large taxpayers vary from regular taxpayers in

terms of the enormous tax revenues they generate and the risks and complications they pose to

the tax system. Tax authorities worldwide to ensure that large taxpayers comply with their

obligations by using a persuasive rather than coercive approach (Donnelly and Heneghan, 2010)

have established large Taxpayer Offices (LTO). The coercive concept, also known as deterrence

or a stick-based strategy is widespread in the small and medium taxpayers division, where

taxpayers comply with their tax duties if penalized for non-compliance.

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Higher audit possibilities and harsh fines, in general, encourage tax compliance. The likelihood

that the tax authorities will uncover an individual's non-performance and seek to rectify the

evasion is the probability of detection. Individuals usually want to avoid paying their taxes

altogether, and the only reason they might not is that there is a non-zero chance of being detected

(Massimo, 1993). Tax performance will increase if the likelihood of discovery increases and tax

audit is one of the most influential detective tactics tax authorities utilize (Alm, 1991). In reality,

tax audits are thought to have a direct deterrent effect on those who are audited and an indirect

deterrent effect on those who are not audited (Alm 2004). However, according to Beron (1990),

tax audits have only a minor positive impact on tax compliance.

The link between tax performance and the harshness of punishments is another central element

impacting tax compliance. The theory is that the threat of fines deters tax evasion. Setting up an

effective mechanism to punish tax evaders is a critical step in encouraging tax compliance. If

non-performance can result in significant penalties, taxpayers are more likely to comply. The

persuasive or collaborative approach believes that treating taxpayers with respect and providing

them with the opportunity to participate in the taxation process will help them comply with the

law. External material, such as a tax penalty, enforces performance with tax obligations, whereas

persuasive tools, such as taxpayer service inspire performance by exerting psychological

pressure on taxpayers. The obvious question is which instruments are more significant for

understanding small and medium-sized tax performance and why.

2.6Tax Base Expansion and the Performance of Turnover Tax

Tax is a vital source of revenue for government development programs; thus, governments must

make every effort to collect it accurately and efficiently to make government operations easier.

The Kenyan government has recently implemented essential reforms to tax policy centered on
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maintaining equity, expanding the tax base, supporting higher investment, and reducing the tax

performance burden to maximize revenue collection and efficiency in tax administration.

The introduction of a consumption tax - the sales tax - in 1973 was the first significant

modification to the tax system following independence. It was the first significant change to the

tax system. Import limits connected with an import substitution industrialization policy harmed

customs duty revenue receipts, which prompted this modification. The establishment of capital

gains tax (C.G.T.) in 1975 was another move to broaden the tax base, as it capitalized on high

property prices resulting from the coffee boom. However, in 1984, to restart economic growth

through the construction industry, GoK halted the C.G.T. and established a commission to

evaluate financial management and recommend future modifications (A.D.B., 2010).

According to research by the Parliamentary Budget Office (2010), the government could have

raised the revenue base by Kshs.79.3 billion in 2008 if tax cheating among S.M.E.s had been

tackled. According to the KRA annual report for the year ended 2012, the amount lost in taxes

was Ksh 108 billion, with the informal sector and S.M.E.s bearing the brunt of the loss. (K.R.A.,

2013 Annual Tax Report) S.M.E.s are constantly increasing and have the ability to generate

revenue streams, but they have been left out of the tax bracket in the past. In general, the

government would continue to lose billions of shillings if the informal economy stays untaxed

and more individuals shift into it. This situation will influence the government's capacity to meet

income projections and, as a result, on its development plan.

The T.M.P.'s (Tax Modernization Program) (1986–2002) thrust was to increase and maintain

revenue as a percentage of G.D.P. at 24 percent by 1999/2000; expand the tax base; rationalize

the tax structure to make it more equitable; reduce and explain tax rates and tariffs; reduce trade

taxes and increase consumption taxes to support investment; and (Moyi & Ronge, 2006).

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2.6 Summary of literature review
From the review of literature, it is clear to date, there has been research-exploring factors that

influence turnover tax performance. The main objective of this study was to identify the factors

that affect tax performance. The research focused on tax rate, tax information, and tax

performance cost and taxpayers attitude.

2.3 Conceptual Framework

The conceptual framework illustrates the dependent and independent variables.

Figure 1: Conceptual Framework

Independent Variables Dependent Variable

Level of Education
 Understanding of the
essential tax policy
 Understanding the tax
regulations of the country

Business turnover
 Gross profit
 Operating expenses
 Interests from loans TUROVER TAX
COLLECTION IN
KISUMU
 Timely tax payments
 Proper and consistence
Enforcement effort compliance
 Forceful and persuasive
approaches
 Taxpayer collaboration
 Higher audit possibilities
and harsh fines

Tax base expansion

15
 New tax collection bases
 Increase consumption taxes
 CHAPTER THREE

RESEARCH METHODOLOGY
3.1 Introduction

The chapter discusses the research design, the population, the sampling techniques that will be

used in the study, the data collection instruments, and the data collection methods and

procedures. Data analysis and presentation methods are also discussed.

3.2 Research Design

Research design can be described as the plan, structure and strategy of investigation conceived

so as to obtain answers to research questions and control of variance (Kerlinger, 1964). It is a

procedure that provides answers to issues such as techniques to use to gather data, the kind of

sampling strategies and tools used and how time and cost constrain was dealt with (Cooper and

Schindler, 2003).

A descriptive research determines and reports the way things are. Descriptive data is typically

collected through a questionnaire survey, an interview or by observation. On the other hand,

exploration design addresses the need that certain inquiries focus on questions that require

answers in order to understand people, events and situations (Chandran, 2004). The descriptive

research design will be more preferred to other research designs because it reports the status of

study variables.

3.3 Target Population

16
The study will choose KRA staff in the Domestic Taxes Department Small Taxpayers offices in

Kisumu as the main unit of analysis. Numerous studies have dwelt on taxpayer interviews and

not the staff tasked with implementation of the Turn over Tax collections. The KRA staff will be

selected based on their extensive and direct involvement in efforts to implement TOT and their

in-depth practical understanding of the challenges faced in implementing the TOT policy in

Kenya. The sampling frame will be 235 technical KRA staff in Domestic Taxes Department in

Kisumu region.

3.3.1 Sample and sampling frame

Using the Krejcie and Morgan table, which also shared the same formula with Cochran (1967),

the sample size for 235 staff around Kisumu will be 147, allowing a margin of error of 5% and

with a confidence level of 95%. Questionnaires will be distributed to staff within Domestic

Taxes Department region in Kisumu County.

3.4 Data Collection Instruments and procedures

The study will collect primary data with the help of a questionnaire. The questionnaire will have

both open and close-ended questions and employ the Likert scale methodology. In the Likert

scale, the respondents will be expected to either indicate their level of agreement using a five-

point scale namely; Strongly Agree, Agree, Neither Agree or disagree, Disagree and Strongly

Disagree. Secondary data will be obtained from annually turnover tax performance reports of

six-year (2013-2018) revenue authority.

3.5 Data Collection Instruments

The study will rely on both primary and secondary data as they usually reinforce each other

(Stiles & Taylor 2001). The primary data will be collected using questionnaires while the

secondary data will be collected from existing materials within the institutions to be studied.

17
Secondary, means “next after the first” or “derived” (Hart 2005). He defines secondary data as

data previously assembled for some project other than the one at hand.

Primary data, mainly quantitative, will be collected through questionnaires. Questionnaire as data

collection instrument is preferred as it enables the researcher to collect data from all the

respondents within the limited time frame and responses which the respondent could have felt

shy to give in face-to-face interviews (Kerlinger, 2012). Questionnaire has advantages of low

cost, reduction in biasing error, greater anonymity, considered answers and consultations and

finally accessibility to a wide geographical contact at minimal cost (Nachmias & Nachmias,

2005). The questionnaire method has been selected as it allows the researcher to collect data

systematically and address the research issues in the standardized and economical way. In

addition, the questionnaire has been chosen because of the nature of this study which may

require consultation.

3.6 Data Analysis

The data to be generated by the study after fieldwork will be edited, coded then entered into a

computer for processing using the Statistical Package for Social Sciences (SPSS v.21.0). A

master codebook designed to ensure that all the questionnaires are coded uniformly will be used.

Consequently, data will be edited for completeness and consistency before analysis.

Descriptive and inferential statistics will be used to analyse information generated from

respondents. Descriptive statistics refers to, “simple statistical methods, which do not support or

falsify a relationship but help in the description of the data.” Thus, descriptive statistics will

enable the researcher to organize data in an effective and meaningful way. By use of

percentages, frequency distributions, tables, charts, the researcher will categorize the variables.

18
Y = β0 + β1X1 + β2X2 + β3X3 + β4X4 +ε

Whereby: Y = Turn over tax;

X1 = Tax payer level of education
X2= Business turnover;
X3= Enforcement effort by revenue authority
X4= Tax base expansion
Β0, β1, β2, β3, β4=Regression model coefficients.
ε = Error Term.

19
 References

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Ghoni, G. (2011). Effect of motivation and knowledge taxpayers against taxpayer compliance
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21
 Appendix 1: Questionnaire
Please give responses in the spaces provided and tick (√) the box that matches your response to

the enquiries where appropriate.

SECTION A: BACKGROUND INFORMATION

1. Age bracket: (Tick whichever is applicable)

Below 20 Years [ ] 21 – 30 Years [ ]
31 – 40 Years [ ] 41 – 50 Years [ ]
51 - 55 Years [ ] Above 55 Years [ ]

2. Marital Status: (Tick whichever is appropriate)

Single [ ] Married [ ] Widowed [ ] Divorced/Separated [ ]

3. What is your main business activity?

Boutique [ ] Beauty [ ] Groceries [ ] Repairs Retail [ ]

4. Does your business have a Personal Identification Number (PIN)?

Yes [ ] No [ ]

5. If yes, what are your obligations?

VAT [ ]

PAYE [ ]

Income Tax [ ]

TOT [ ]

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SECTION B: SPECIFIC INFORMATION

1. To what extent do you agree with the following statements in regard to extent to the
influence of tax payer level of education on the performance of turnover tax in
Kisumu town

Statement 1 2 3 4 5

There are adequate supplies of explanatory and

information pamphlets, guides, return forms,
applications for registration, and other materials are
available in public access offices
have been fully trained and have a working manual on
procedures of the new KRA approach to handling
taxpayers through trust and facilitation
Taxpayers receive guidance and support from officers
when they appear not to have done the right thing
The due dates are effectively communicated to
taxpayers
Tax payers have adequate knowledge on tax rate, basis of
taxation and compliance requirements under TOT
Lack of proper records on expenses incurred greatly
contributed to non-compliance by tax payers
Effective tax education can change the attitude and
perception of tax payers towards tax compliance
Majority of tax payers are familiar with the I Tax system
Knowledge about tax laws plays a major role in
determining tax payers’ tax compliance

2. To what extent do you agree with the following statements in regard to extent to the
influence of business turnover on the performance of turnover tax in Kisumu town

Statement 1 2 3 4 5

The study assumes that the size of a company affects

tax performance expenses
The business pays the right amount of taxes on time
The business files its tax returns on time
I believe that the penalty is lower than my tax saving
due to not complying with tax laws.

23
 3. To what extent do you agree with the following statements in regard to extent to the
influence of enforcement effort on the performance of turnover tax in Kisumu town

1. Have you ever been audited on tax issues?

Yes [ ] No [ ]
2. If yes when?
…………………………………
3. How regularly do you think KRA should visit your business?
Weekly [ ] Monthly [ ] Annual [ ] Never [ ]
Other (specify)
………………………………………………………………………………………………
………
4. How much has your business committed in an effort to be compliant?
……….………………………
5. The benefits of tax avoidance and evasion outweigh the cost of paying taxes
Strongly Agree [ ] Agree [ ] Strongly Disagree [ ] Not Sure [ ] Disagree [ ]

6. Which ways have you found to be mostly used by KRA in an effort to enforce tax
compliance?
………………………………………………………………………………………………
……………………………………………………………….
……………………………………………...
4. To what extent do you agree with the following statements in regard to extent to the
influence of tax expansion on the performance of turnover tax in Kisumu town

Statement 1 2 3 4 5

the failure rate of small businesses is extremely high, with

a large proportion of these small businesses not developing
into established firms
A small business would be required to pay tax on its
income even if the company was making losses and many
start-up companies remain in a loss making position for
the first two to three years

24
at small and medium enterprises should be levied lower
amounts of taxes and the government should increase tax
incentives and exemptions, as this will assist businesses so
that they will have enough funds for other activities which
that may lead to business growth and assist in surviving in
a competitive market.
Fixing, developing, and effective tax system for small
businesses is of paramount importance to any government.
Tax systems should be developed and designed in order to
minimize the costs of compliance.
A good tax system should have contain characteristics of
simplicity, certainty, fairness and the tax compliance
burdens should be proportionate to the size of the business

25
 APPENDIX 11: BUDGET

Article Kshs

Suggestion growth
1.

(i) Capturing and printing 13,000

(ii) Compulsory 6 copies 1,500

(iii) Cyberspace services 2,000

(iv) Matter 4,000

(v) Eventuality expenses 5,000

Sub total 25,500

Information group, analysis and account writing

2.

(i) Fuel and net expenses 15,000

(ii) Material for research helpers (lunches + breakfast) 10,000

(iii) Data examination and computer facilities 10,000

(iv) Notepaper and typewriting services 10,000

(v) Production and imitation of copies (6) 5,000

(vi) Compulsory expenses 1,500

(vii) Eventuality expenses 5,000

Sub – total 61,500

Grand total 87,000

26
 Appendix 111: Work Plan
ACTIVITY

April-Sept.

Dec 2021
Nov2021
Oct 2021
2021
Coming up with a research topic

Writing chapter one

Writing chapters two and three

Finalizing on the research project and approval

by supervisor
Submission of research project to school of
business.
Defense of research project to school of business
/approval
Data collection

Data Analysis and report writing

Presentation of research project finding’s to

school of business for examination.

27