FACTORS INFLUENCING RENTAL INCOME TAX COMPLIANCE

(A CASE OF WEST OF NAIROBI REGION)

ALICE KARONGA

POSTGRADUATE DIPLOMA

(Tax Administration)

JOMO KENYATTA UNIVERSITY OF

AGRICULTURE AND TECHNOLOGY

2020
 Factors Influencing Rental Income Tax Compliance
(A Case of West of Nairobi Region)

Alice Karonga

A Research Project Submitted to the Kenya School of Revenue

Administration in Partial Fulfillment of the Requirement

for the Award of the Postgraduate Diploma in Tax

Administration in the Jomo Kenyatta University of

Agriculture and Technology

2020
 DECLARATION

This research project is my original work and has not been presented for a post
graduate diploma in any other university.

Name……………………… Signed: ......................................Date: ........................

Alice Karong’a

This project has been submitted for examination with my approval as the university
supervisor

Signature ……………………………… Date………………………………

John Khamila.

ii
 DEDICATION

I dedicate this project work to my children Alfred,Kerina,Zuwena and my husband for

their patience and support throughout my period of studies

iii
 ACKNOWLEDGEMENT

I had the opportunity to have Mr. John Khamila as my supervisor. He patiently went

through my research project with great skills, steadiness and his invaluable assistance

has enhanced the success of this project my special thanks to him.

I thank my lecturers and colleagues for giving me materials that were useful to this

project. Thank you all!

iv
 TABLE OF CONTENTS

DECLARATION........................................................................................................ ii

DEDICATION...........................................................................................................iii

ACKNOWLEDGEMENT ........................................................................................ iv

LIST OF TABLES .................................................................................................... ix

LIST OF FIGURES ................................................................................................... x

LIST OF APPENDICES .......................................................................................... xi

LIST OF ACCRONYMS AND ABBREVIATIONS ............................................ xii

DEFINITION OF TERMS.....................................................................................xiii

ABSTRACT ............................................................................................................. xiv

CHAPTER ONE ........................................................................................................ 1

INTRODUCTION...................................................................................................... 1

1.1 Background of the Study .................................................................................... 1

1.1.1. Global perspective .......................................................................................... 1

1.1.2 Kenya perspective ........................................................................................... 4

1.1.3 Rental Income Tax compliance in Kenya ....................................................... 5

1.2 Statement of the Problem ................................................................................... 6

1.3 Objectives of the Study ...................................................................................... 7

1.3.1 Main Objective ................................................................................................ 7

1.3.2 Specific objectives ........................................................................................... 7

v
 1.4 Research Questions ............................................................................................ 7

1.5 Justification of the study .................................................................................... 7

1.5.1 Kenyan Government .................................................................................... 7

1.5.2 Landlords ..................................................................................................... 8

1.5.3 Kenya Revenue Authority (KRA) ............................................................... 8

1.5.4 Academicians and Researchers.................................................................... 8

1.6 Scope .................................................................................................................. 8

1.7 Limitations ......................................................................................................... 9

CHAPTER TWO ..................................................................................................... 10

LITERATURE REVIEW ....................................................................................... 10

2.1 Introduction ...................................................................................................... 10

2.2 Theoretical Background ................................................................................... 10

2.2.1 Fiscal Exchange Theory ............................................................................ 10

2.2.2 Social Influences Theory ........................................................................... 11

2.2.3 The Allingham-Sandmo (AS) Theory ....................................................... 12

2.3 Conceptual Framework .................................................................................... 14

2.4 Empirical Review ............................................................................................. 15

2.4.1 Effects of Penalties and interests. .............................................................. 15

2.4.2 Effects of Tax Knowledge and Education ................................................. 16

2.4.3 Effects of Taxpayer’s Attitude & Perception ................................................ 18

2.5 Critique of the study ......................................................................................... 19

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 2.6 Research Gaps .................................................................................................. 20

2.7 Summary .......................................................................................................... 20

CHAPTER THREE ................................................................................................. 22

METHODOLOGY .................................................................................................. 22

3.1 Introduction ...................................................................................................... 22

3.2 Research Design ............................................................................................... 22

3.3 Target Population ............................................................................................. 22

3.4 Sampling Frame ............................................................................................... 23

3.5 Sample and Sampling techniques ..................................................................... 23

3.5.1 Sample Size ............................................................................................... 24

3.6 Data Collection Instruments ............................................................................. 24

3.7 Data Collection Procedure ............................................................................... 25

3.8 Pilot Study ........................................................................................................ 25

3.8.1 Validity and Reliability.............................................................................. 26

3.9 Data Analysis ................................................................................................... 26

CHAPTER FOUR .................................................................................................... 28

DATA ANALYSIS AND INTERPRETATION .................................................... 28

4.1 Introduction ...................................................................................................... 28

4.2 Data Presentation.............................................................................................. 28

4.2.1 Demographic information.......................................................................... 28

4.3 Descriptive Statistics ........................................................................................ 31

vii
 4.3.1 Penalties and interests ................................................................................ 31

4.3.2 Tax Knowledge & Education ........................................................................ 32

4.3.3 Attitude & perception ................................................................................ 33

4.4 Inferential Statistics .......................................................................................... 34

4.5 Discussion ........................................................................................................ 38

4.5.1 Interests and Penalties and residential rental income tax compliance ........ 38

4.5.2 Tax knowledge and residential rental income tax compliance ................... 39

CHAPTER FIVE ..................................................................................................... 41

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ......................... 41

5.1 Introduction ...................................................................................................... 41

5.2 Summary .......................................................................................................... 41

5.3 Conclusions ...................................................................................................... 42

5.4 Recommendations ............................................................................................ 43

REFERENCES ......................................................................................................... 45

APPENDICES .......................................................................................................... 52

viii
 LIST OF TABLES

Table 3.1: Distribution of Target population (landlords in West of Nairobi) ........... 23

Table 3.2: Sample size (landlords in West of Nairobi) ............................................. 24

Table 4.1: Level of education of the respondents ..................................................... 28

Table 4.2 Number of years of being Property owner ................................................ 29

Table 4.3: Property owned ........................................................................................ 29

Table 4.4: Landlord Category. .................................................................................. 30

Table 4.5: Role of interests and penalties on Rental income tax compliance ........... 31

Table 4.6: Effect of Tax knowledge & education on Rental income tax compliance

.................................................................................................................................... 32

Table 4.7: Effect of attitude and perception on rental tax compliance ..................... 33

Table 4.8: Model summary ....................................................................................... 34

Table 4.9: Coefficients .............................................................................................. 36

ix
 LIST OF FIGURES

Figure 2. 1: Conceptual Framework ......................................................................... 14

x
 LIST OF APPENDICES

Appendix I: Questionnaire........................................................................................ 52

xi
 LIST OF ACCRONYMS AND ABBREVIATIONS

GIZ Gesundheits Informations Zentrum

ICT Information Communication Technology

IT Information Technology

KPMG Klynveld Peat Marwick Goerdeler

KRA Kenya Revenue Authority

OECD Organization for Economic Co-operation and Development

SME Small & Medium Enterprises

SPSS Statistical Package for Social Sciences

TV Television

xii
 DEFINITION OF TERMS

Landlord A landlord is any individual or corporate body who receives

any payment/consideration for use or occupation of property
(Ajzen, 2011).

Rental Income Tax Tax on rental income is tax on the gains or profits including
royalty, premium or similar consideration received for the use
or occupation of property (Chapter 470, Income tax Act ,
section 6). Rent income is taxed directly through self-
assessment as opposed to consumption tax on expenditure.

Tax Compliance This is the willingness of taxpayer to pay their taxes (Kirchler,
2009).

Taxes It is the ways by which governments impose charges on its

citizens and corporate entities to finance their expenditures
(Lymer & Oats, 2009).

xiii
 ABSTRACT

The main issue faced by all tax authorities is that it has never been easy to persuade
all taxpayers to comply with the regulations of a tax system. Rental income is one of
the fastest growing income generating sectors of the economy in Kenya yet taxes
collected from this sector have continually been on decline for the last five years. The
sought to examine the factors influencing rental income tax compliance in West of
Nairobi region. The study was guided by the following specific objectives: to establish
the effects of penalties and interests, tax knowledge & education and attitude &
perception of taxpayers affects rental income tax compliance. The study was guided
by two theories; fiscal exchange and social influence theories. The study adopted
descriptive research designs. This design enabled the researcher to collect data from
caretakers, employees, landlords, agencies such as auditing firms, accounting firms
and tax agencies. The target population was drawn from the landlords of West of
Nairobi region taxpayers who are registered as taxpayers. Simple random sampling
method was employed to choose 10% of the landlord from a target population of 500
landlords. Sample size was 50 respondents. Data was collected using structured
questionnaire, which was simple, clear and well linked to the objectives of the study.
The questionnaire was dropped to the rental premises, collected after a week. The data
collected was analyzed using both descriptive and inferential statistics with the help
of Statistical Package for Social Sciences version 21 for evaluation of relation between
dependent and independent variables. The study established that there was a greater
deviation in rental income tax compliance in West Nairobi region was accounted for
as a result of changes in penalties and interests, tax knowledge & education and
attitude & perception. The study also established that there is a strong relationship
between rental income tax compliance in West Nairobi region and penalties and
interests, tax knowledge & education and attitude & perception. The study established
that holding penalties and interests, tax education & knowledge and attitude &
perception, rental income tax compliance would stand at 0.458, a unit increase in
penalties and interests would lead to an increase in rental income tax compliance by a
factor of 0.413, a unit increase in tax knowledge and education would lead to an
increase in rental income tax compliance of taxpayers in West of Nairobi region by
0.298 and finally a unit increase in attitude and perception would lead to an increase
in rental income tax compliance of taxpayers in West of Nairobi by a factor of 0.017.
the need for Kenya Revenue Authority to carry out public education and sensitize
taxpayers of various sectors in the economy on different obligations to enable them
assess their correct tax liability and to file their tax returns on time.

xiv
 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is the major source of government revenue in developed and developing

economies. It also gives a significant avenue for monetary objective of nations from

peripheral assistance (OECD, 2009). According to Pope and Abdul-Jabbar, (2008),

states that are unable to clearly develop the encouraging factors for their tax payers to

completely comply with the tax desires and ensure they pay their taxes excellently. If

this dilemma could be fixed, then many states that are struggling financially will gain

their financial independence. This will ultimately lead to an efficient way of raising

the countries revenue point which in turn raises the financial aptitude of the country

in financing the countrywide development.

1.1.1. Global perspective

According to Gcabo and Robinson (2007), tax collection is serious matter to any

nation even though it is understood or ostracized by the residents. They went on to

arguing that, even though the residents recognizes the need to pay taxes and raise the

value of the welfares offered by the government in the civic service, tax compliance

is not liked by the majority .It is critical that the importance of tax compliance is

understood because it determines how the government shapes lives of

citizens(Oberholzer,2008)

Martin, Wanjohi, Magutu and Mokoro, (2010) noted that, it is the duty of the tax

officials to make efforts in enhancing the systematic and dynamic way for the tax

payers to participate in the fulfillment of tax obligations. It is a high time that the actual

1
payers of tax must be actively involved in the process of awareness towards tax

compliance in their life because this will determine the countries tax revenues size

which is influenced by the tax compliance.

Martin, Wanjohi, Magutu and Mokoro, (2010) observed that the budgetary deficits

that are pushing developing countries into high levels of public debt might be

attributed to the high gap between the expected tax targets and the actual tax

collections . This drives the budget into constant deficits that are slowing down the

extent of economic development in these countries. They further indicate that

developing countries must come up with strategies that will improve on policy

development and implementation in order to reduce prevailing shortfalls and

unhealthy dependence on donor funds.

Rental income taxes are a fundamental source of revenue to government in both

developing and developed countries. However the amount of revenue to be generated

from these sources for its expenditure program depends among other things, on the

willingness of the individuals to comply with tax laws of a country (Kirchler, 2007).

With regard to rental income tax payers, (Rizal, 2011 & Kuria, 2013) found that there

is attitudinal and knowledge difference, unfair tax rate, dishonesty of rental tax payers,

lack of awareness, complexity of tax law and regulation and inadequacy of

government spending. According to Desta (2010), taxpayers perceive that tax evasion

as a crime and as it indicates that there is an attention towards taxation by taxpayers.

But the problem here is that there is poor compliance even though tax evasion is

considered as crime by the taxpayers because they think unfair and less transparent

system and tax rate used and also non-believing on government spending on public

2
services. In several developing countries, it is observed that there is low capacity of

tax administration to monitor compliance among rental taxpayers. Tax compliance is

defined as the act of filing tax returns by individuals, where they correctly assert all

taxable income, and pay them within the given timeframe (Singh, 2003). Furthermore,

it has also been divided into two standpoints including compliance on administration

and completing the tax returns (Chow, 2004). It is a mandatory duty for citizens to pay

taxes whether corporate or natural citizen. As a civil responsibility, citizens are

supposed to voluntarily adhere with such requirement without fail (Alm & Schneider,

2003)

According to Otieku (2008), a nation cannot have any significant economic

development without optimistic spur from intellectual governments’ .Though,

development goals and programs of a nation can merely be conveyed to certainty by

the accessibility of finances. One of the most reliable sources of government revenue

is through taxation. Several researchers on tax submission have conversely revealed

that compliance on rental income tax leaves much to be desired.

Birds (2012), Reveals that most developing countries are no able to collect all the

potential tax revenues. Furthermore, he accredited this to the high volume of informal

sector, conquered by small business owners. Kenya is regarded as one of the countries

with low income and tax compliance of Kenya Revenue Authority conducts monthly

education to freshly registered tax payers so as to educate them on the significance of

tax compliance (KRA, 2011).

3
1.1.2 Kenya perspective

KRA (2012) report recognized that less than 40 per cent of the rental landlords and

developers had abided by tax requirements, and government went in to reinforce the

rental income tax provisions. Rental income tax by the KRA has been existing since

enactment of income tax Act of 1973. Though, most of landlords have not been

abiding by the Act due to insufficient government mechanisms to ascertain and bring

landlords into the tax net. Most of the landlords have also been collecting rent by

themselves or using unregistered agents making it problematic to trace their revenue

for the purpose of taxation. The move by Authority to tighten law on rental income

taxation amidst raising cost of undertaking business in Kenya has acknowledged

mixed reactions from rental owners due to their influence on business. This calls

attention to the need to establish the factors influencing rental taxation compliance by

rental owners of West of Nairobi region.

Under Income Tax Act rental income is taxable in the country, Property-owners are

supposed to make rent schedules for the rented premises where they demonstrate

aggregate of rent received and earned per property. Furthermore, they show costs

incurred on each property. Therefore, such expenses must be totally and exclusively

earned in the production of the rental revenue and must be reinforced. Computation of

tax is calculated at a rate of 30% net basis. Regardless of these requirements, KRA

has not collected the expected revenue from the increasing real estate sector.

(Thananga et al,2013).

4
1.1.3 Rental Income Tax compliance in Kenya

Ever since income received from renting a property is legally chargeable to

income tax, the owners and investors of the property are required to declare this

income on their tax return. This income could be from renting out land or buildings

(Berhane & Yesuf, 2013). Tax on rent income is at the rate of 10% on gross rent of

property-owners whose yearly turnover is less than Kshs.10 Million took effect on 1st

January 2016. The rent owners who fall in that category are required to file their return

via I Tax System (KRA, 2015). The 10 percent tax rate on gross of rental income is

payable by a resident individual whether person or an corporate and applies to

rental income that has accumulated or is derived from Kenya for the use of

residential property where the rent income does not exceed KShs.10 million per

annum (The Finance Act, 2015).

This change is part of the KRA determinations to encourage property landlords to be

tax compliant. The tax is easy to calculate since it is based on a percentage of gross

rentals and is less than the standard rate of 30% to show the fact that the property

owners don’t receive any deduction for expenditures incurred to generate the income

(KPMG, 2015). Some of the benefits of residential rental income tax include

simplified tax computation at 10% flat rate on gross rent and not at 10% to 30% rates.

Property owners won’t be required to give records to account for expenditures. In

addition to simplifying the rental income taxation, Finance Act provides for an

amnesty on taxes, penalties and interest on rental income for the period prior to 2014

(KPMG, 2015). KRA for example give out a public statement to all income earners

and relevant players including developers and property owners to take initiatives and

willingly make the right affirmations as well as remitting appropriate taxes. With this

5
development, collection and administration of tax on rental income, KRA continued

in collecting additional taxes from rent mainly from the essentially unexploited low-

end market sections. New strategies where the Authority’s anticipations will increase

proceeds earned have been projected by Finance Bill (KRA global tax alert, July

2015).

1.2 Statement of the Problem

Regardless of the level of awareness amongst the tax payers on rental income tax, the

tax revenue from some of the sectors has not been appropriate. In the course of the

2016/2017 financial year, the annual collection according to KRA statement stood at

Ksh.707.4 billion contraries to a target of Ksh.717 billion (KRA, 2017). According to

a previous report by KRA rental income tax collection reduced from 5 Billion in 2015

to 1 Billion in 2016.The report indicated that a further collection of Kshs.1.5 billion

was recovered from non-compliant property owners and their developers. This is an

sign that when the level of compliance is low, government revenue collections always

fall behind targets (KRA ,2017). The Act states that for rental income taxation the

profits realized should include rent, royalty, and premium among other consideration

gotten for occupation or use of the property. The issues leading to the high level of

non-compliance among the rental income earners in Kenya and other developing

countries have not clearly been addressed in literature. The lack of government

mechanisms to address the issues of compliance not only among the rental income

earners might only be one among the many challenges in tax compliance. Looking at

the growth rate of upcoming buildings in Nairobi has necessitated the need to carry

out the research with a focus on factors influencing rental income tax compliance with

a major focus on the Nairobi West Region.

6
1.3 Objectives of the Study

1.3.1 Main Objective

The main objective of the study was to establish the factors influencing rental income

tax compliance in West of Nairobi Region.

1.3.2 Specific objectives

The study was guided by the following objectives:

i. To find out the effects of penalties and interests on rental tax compliance in

west of Nairobi region.

ii. To examine the effect of tax knowledge and education as a factor influencing

rental income tax compliance

iii. To find out the effect of attitude and perception of taxpayers on rental income

tax compliance

1.4 Research Questions

i. What is the effect of penalties and interests on rental tax compliance in West

of Nairobi region?

ii. What is the effect of tax knowledge and education on rental income tax

compliance in West of Nairobi region?

iii. What is the effect of attitude and perception of taxpayers on rental income tax

compliance in West of Nairobi region?

1.5 Justification of the study

1.5.1 Kenyan Government

The research will aid in policy making by the government which will increase

compliance levels of tax payment by the Kenyan property owners. This will assist the

7
government increase domestic revenue from tax collection which would be used in

realizing the government objectives in Vision 2030.

1.5.2 Landlords

The Kenyan property owners would recognize the critical role of voluntary tax

compliance as an instrument to economic growth and reduce noncompliance costs.

This in return is going to increase the performance of the government and they would

enjoy the low cost of doing business due to improved services by the government.

1.5.3 Kenya Revenue Authority (KRA)

The study would add to the body of knowledge of attention to both researchers and

academicians who pursue to discover or examine the factors influencing tax

compliance on rental income among the landlords in Nairobi or any other area. It

would lay the basis of other studies to be carried on the same topic.

1.5.4 Academicians and Researchers

The study would add to the body of knowledge of attention to both researchers and

academicians who pursue to discover or examine the factors influencing tax

compliance on rental income among the landlords in Nairobi or any other area. It

would lay the basis of other studies to be carried on the same topic.

1.6 Scope

The study would focus on the Kenya Revenue Authority taxpayers on individual

income tax and particularly the income on rental income. Geographically, the study

would focus on the landlords in West of Nairobi region. Justification of why the focus

was on this area was that the area is in the capital city and its expected to have the

highest level of buildings and hence individual taxpayers should contribute a large

8
portion of the revenue collected on rental income in the country. The study would

focus on the effect of penalties and interests, knowledge and education of taxpayers

and finally the effect of attitude and perception of the taxpayers with regards to rental

income tax compliance.

1.7 Limitations

It is acknowledged that this study would have a number of limitations. The aim of this

study would be to examine the factors influencing rental income tax compliance in

West of Nairobi region. However, despite the study being detailed and specific,

several limitations were anticipated. First, the researcher had limited access to vital

information due to the confidential nature of the information. However to mitigate

this, researcher categorically elaborated the main purpose of conducting the research

and endeavored to obtain permission from the landlord/landlady to carry out the study.

Secondly, due to the expensive nature of research the researcher is deemed to incur

costs to facilitate travelling from apartment to another, stationary expenses, typing and

printing expenses and binding expenses. To overcome this limitation, the researcher

obtained financial support from her friends and family members. Lastly, due to the

demanding nature of research, collecting, interpreting and analyzing data, it was a time

consuming affair. To handle this challenge the researcher got time off from her

employer during which it enabled her to comfortably collect, interpret and analyze

data.

9
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter reviewed available literature on tax compliance as investigated by various

scholars around the world. The chapter presented the theoretical literature review, the

empirical literature review and finally a summary of literature review.

2.2 Theoretical Background

This section discussed the fiscal exchange theory, social influence theory, Allingham-

Sandmo (AS) theory and their influence on tax compliance.

2.2.1 Fiscal Exchange Theory

This theory is acclaimed to have evolved from the economic deterrence and social

psychology models. It is premised upon the existence of a social, relational

or psychological contract between the government and the taxpayers (McKerchar &

Evans, 2009). This theory suggests that government expenditures are the main

motivators of tax compliance and the government has the ability to ensure that its

citizen comply by offering more improved public goods and services with the little

they collect in form of tax (Ali, Fjeldstad & Sjursen,2013). Another major proposition

of this theory is that of tax bargaining between taxpayers and the government, which

is considered as fundamental to building a relation of accountability and obligations

between state and society.

This theory affirms that government expenditures serve as a motivating factor for

taxpayer compliance, especially when the taxpayers value the goods and services they

perceive to be receiving from the government (Bello & Danjuma, 2014). Thus, the

taxpayers will be more willing to comply when they are satisfied with provision of

10
services from government, even in the absence of detection and punishment.

Conversely, they are also likely to adjust their terms of trade, by reducing compliance

when they are dissatisfied with services provision from the government, or even when

they dislike the way their taxes are spent (Torgler, 2003). The relevance of this theory

is that property owners may be willing to pay residential rental income tax since they

value public goods and services being offered by their government and believe that

the more, they pay taxes, they will be offered more improved and better goods and

services. Conversely, the property owners may not be willing to comply if they feel

that they do not derive any benefit from the taxes collected by the government or that

there is wasteful spending and looting in public coffers.

2.2.2 Social Influences Theory

This theory affirms that, tax compliance by citizens is specifically influenced by their

individual behavior and social norms. The theory assumes that individual behavior in

taxation is basically influenced by social interactions like other forms of behavior (Ali,

Fjeldstad & Sjursen, 2013). The theory follows that an individual is most likely to

comply with tax requirements if he believes members of his reference groups also

comply, just as he is also likely not to comply if he believes that members of his

referent group do not comply (Walsh, 2012).

The social influence theory presupposes that individual behavior in taxation is

basically influenced by social interactions like other forms of behavior (Bello &

Danjuma, 2014). The theory also presupposes that the fear of social stigmatization as

one of the possible deterrent factors to tax compliance (Kirchler, 2007), and that

existence of the social norms effect on compliance behavior. The relevance of this

theory is that property owners are likely to be influenced by social groups, family

11
members, friends and other property owners whether to comply or not on payment of

rental income tax.

2.2.3 The Allingham-Sandmo (AS) Theory

The Allingham-Sandmo (AS) theory is also known as the economic deterrence

theory emanated from the seminal work of Allingham and Sandmo (1972). This

theory affirms that the behavior of a taxpayer is usually influenced by the factors

which determine the benefits and cost of tax evasion (Allingham & Sandmo, 1972).

The economic deterrence model in its basic form views the individual taxpayer as a

rational economic agent, who assesses the costs (determined by probability of

detection and penalties or a fine for the fraud) and benefits (determined by tax rate)

of evading taxes, and thus chooses not to pay, if the benefit of non-compliance

outweighs the costs (Walsh, 2012). The theory assumes taxpayer maximizes

expected utilities of noncompliance tax gamble. That is, balancing between tax

cheating benefits against detection and sanctions (Sandmo, 2005). The basic premise

is that individual usually takes part in activities which have the potential of

maximizing their returns or rewards as well as minimizing their costs, tax amnesty

being one of those activities. If sanctions are probable enough, and the costs severe

enough to outweigh the rewards of an act, the act will not be performed (Mengere,

2014).

This theory concludes that tax compliance depends more on tax audit and the

penalties or interests. This implies that, all taxpayers only pay their taxes because

they fear being sanctioned. Thus, an increase in sanctions or penalties and interests

will increase tax revenue (Awa & Ikpor, 2015). It is on the basis of this assumption

that the model advocates stricter audit and heavy penalties for offenders as a basis

12
for reducing non-compliance (Fjeldstad, Schulz-Herzenberg & Sjursen, 2012). The

relevance of the AS model in residential rental income tax compliance is that when

there are low probability of audit and penalties, tendency for evasion by property

owners will be higher, while if there is a high tendency for detection and penalties

are severe, fewer property owners will evade residential rental income tax.

13
2.3 Conceptual Framework

A conceptual framework is a set of broad ideas and principles taken from relevant

fields of enquiry and used to structure a subsequent presentation. A conceptual

framework is also defined as a hypothesized model identifying the model under study

and the relationship between the dependent and independent variables (Kombo &

Tromp, 2009). The conceptual of this study will be made of independent variables

which will include penalties and interests, taxation knowledge and education, attitudes

and perception. The dependent variable on the other hand will be rental income tax

compliance as diagrammatically depicted by figure 2.1

Independent variables Dependent variable

Penalties and interests

• Late filing of tax returns

• Not filing tax returns Rental income Tax compliance

• Timely registration of
Tax Knowledge & Education rental income tax

• Knowledge of tax laws

• Knowledge of tax systems

Attitude & Perception

• Perceived benefits
• Perceived insecurity

Figure 2. 1: Conceptual Framework

14
2.4 Empirical Review

2.4.1 Effects of Penalties and interests.

The increasing tax avoidance and tax resistance due to an increase of penalties and

interests puts into question how penalties should be assessed to be effective. On the

one hand, penalties should be high enough to decrease the expected value of tax

evasion and to assure its deterrent effect on taxpayers. On the other hand, if penalties

are too high, the tax system would be perceived as unjust and unfair and taxpayers

would use any possibility to legally avoid their taxes. In most countries, penalties are

relative to the evaded tax. However, depending on the income of the accused such a

system might yield too low penalties to have deterrent effects. An alternative would

be to adjust the penalties to the income of taxpayers. In an experimental survey study

by Muehlbacher, Holzl and Kirchler,(2008) income-adjusted penalties had more

impact on the sentenced taxpayer's intention to commit the same offense again than

penalties which were solely adjusted to severity of evasion fact (Kirchler et al., 2008).

The structure of penalty system may be different in the countries: can be various types

of penalty rate by the different tax subjects or different structure of penalty rates by

the types of taxpayer. So, penalty rates have been separately applied by the different

tax subjects like the individual income tax, capital income tax, value added tax etc.

Furthermore, the penalty rates for each tax subject are differentiated by the different

types of evasion, like non-filing, timely filing but under-reporting, no bookkeeping of

invoices, receipts etc. Or, the penalty rates are differently applied to the types of

taxpayers, depending upon their evaded behaviours. If some taxpayers had the

intentional evasions, the penalty rate is much higher than that of unintentional evasions

(Hughes, 2014). As two kinds of evaded behaviour are most common in analyse of

tax compliance and are timely filing but underreporting, and non-filing. If the
15
countries have the same system that tax authority prosecutes some intentional and

malicious tax evaders for criminal responsibility, after tax audit. This system might

play an important role in increasing the level of penalty rates for the behaviour of tax

evasion. The number of prosecuted cases by tax authority might be an important

indicator to compare an additional penalty rate between countries.

Thuo (2004) carried out a study on how landlords in Nakuru Muniipality responded

to new taxation measures, and factors which influence compliance. The study used a

sample of 94 respondents and questionnaires for data collection. The findings of the

study revealed that compliance level to provisions of rental income tax policy by

landlords was very low and non-compliance was due to expenses overstatement and

deductions which would in turn reduce taxable pay.

2.4.2 Effects of Tax Knowledge and Education

According to KRA (2010), the property developers in Kenya and Nairobi in particular

has rapidly been growing for the past five years. Estates, apartments and office block

for either sale or rent has surged but there has been no reflection in tax revenue. The

rental sector according to KRA (2010) is notoriously difficult to taxation especially in

developing countries due to most of the construction are informal, limited registration

and rental payment is basically in cash. It for this reason that the KRA opt to focus

some of its resources in educating and sensitization the taxpayers with the

main focus on the landlords. Facilitating taxpayers through automation, education

and sensitization, continuous auditing of the system is being done to boost the level of

tax compliance among the taxpayers on rental income in Kenya. ICT Excellence,

voluntary disclosure of income encourages taxpayers to voluntary comply with tax

authority (KRA, 2010).

16
The influence of knowledge on compliance behaviors has been assessed

in various researches. Knowledge as one of the factors in compliance is related to

the taxpayers' ability to understand taxation laws, and their willingness to comply. The

aspect of knowledge that relates to compliance is the general understanding about

taxation regulations and information pertaining to the opportunity to evade tax

(Kasipillai, Norhani, & Noor, 2003). Greater education is directly linked to a

likelihood of compliance. Educated taxpayers may be aware of non- compliance

opportunities, but their potentially better understanding of the tax system and their

higher level of moral development promotes a more favorable taxpayer attitude and

therefore greater compliance (Chan, 2000). He also suggested that those with a higher

education level are more likely to have a higher level of moral development and

higher-level attitudes toward compliance and thus will tend to comply more. One of

the measures to increase voluntary compliance is by assuring that taxpayers have a

certain level of qualifications, ability and confidence to exercise their tax

responsibility (Mohani, 2001).

Berhane and Yesuf (2013) assessed the challenges and opportunities of house rental

income business tax in Regional state of Tigray in Ethiopia. The study collected data

via a survey questionnaire. The study findings established that there exists

inefficiency and insufficient number of business house rent tax assessment and

collection officers in the regional state of Tigray. Moreover, the study found that most

taxpayers lack sufficient knowledge of tax assessment and collection procedures.

Thus, most of business house rent taxpayers do not know the existing applicable rules

and regulations. Further, the study found that due to negligence, delay in tax payment

17
and evasion are taken by taxpayers as solution to escape from payment of proper

business house rental income taxes.

2.4.3 Effects of Taxpayer’s Attitude & Perception

Attitudes represent the positive and negative evaluations that an individual holds of

objects. It is assumed that attitudes encourage individuals to act according to them.

Thus, a taxpayer with positive attitudes toward tax evasion is expected to be less

compliant than a taxpayer with negative attitudes. Attitudes towards tax evasion are

often found to be quite positive (Kirchler, 2008). Many studies on tax evasion found

significant, but weak relationships between attitudes and self-reported tax evasion

(Trivedi, Shehata, & Mestelman, 2004). The attitudes are important for both the power

and the trust dimension. On the one hand, favorable attitudes will contribute to trust

in authorities and consequently will enhance voluntary tax compliance. On the other

hand, attitudes towards the authorities will be relevant for the interpretation of the use

of power as benevolent or malicious. Tax attitudes in general also depend on the

perceived use of the money collected and therefore are connected to knowledge

(Kirchler, 2008) compliance, this view of individual choices within a social

environment is missing, only the threat of external sanction e.g. audits and penalties

generate compliance.

Kasipillai and Jabbar (2006) assessed whether gender and ethnicity differences occur

in relation to tax compliance attitude and behavior. The results of t-test established

that both male and female had similar tax compliant attitude and for ethnicity, similar

result were also observed. In addition, regression results established that gender,

education, and individual tax return preparation were statistically significant as the

main determinants of non-compliant attitude.

18
Musau (2015) assessed factors influencing tax compliance among SMEs in Nairobi

County. The study picked a sample of 398 respondents and collected data using

questionnaires which was analyzed using the binary probability regression model. The

study findings revealed that when an individual perception about difficulties of

evading taxes increases, the high likelihood of being tax compliant among SMEs in

Nairobi County. The findings also revealed those individuals who are satisfied with

what the government is offering as public goods and service from taxes; have enough

tax information; trust government officials in handling their taxes; and have the

perception that if tax filing procedures are less complex, tax payers are likely to

comply with tax payment.

Karanja (2014) examined factors affecting voluntarily tax compliance in Kenya by

landlords in Nairobi County. The study adopted a descriptive research design and a

sample of 50 respondents was selected and questionnaire used for data collection. The

findings of the study established that attitude and perception that politicians misuse

taxes, financial and family obligation had strong positive responses. The study

findings also revealed that social norms and respondent’s income levels strongly

influenced tax non-compliance level among the Kenyan taxpayers on rental income.

The study concluded that attitude factors, high tax rate, unfair tax system, social

norms, gender and education level factors are significant and play a great role towards

the compliance or non-compliance of Kenyan taxpayers.

2.5 Critique of the study

Allingham and Sandmo (1972), were contrasted by Yitzhaki (1974) on the

relationship between tax rate level and compliance. This therefore means that the

matter was therefore not concluded. Opoku and Abdul-Muhmin (2009), never
19
explored other possibilities as to why many people are tenants. It’s possible that a

person may be a landlord but due to some issues like proximity to social amenities

he/she is forced to be a tenant.

Existing literature from researchers in the empirical review and literature have proven

more research was necessary as the researchers dealt with mostly with rental income

compliance in the perspective of the tax collector other than the policies in place.

Therefore, this proved there is gap leading to more non-compliance. This research will

be able to ensure more compliance by finding out factors affecting collection of rental

income tax by KRA in West of Nairobi region. According to the Kenyan laws, any

income generated from any investment in Kenya is subjected to taxes inclusive of

rental income taxation. This research to prove its viability will objectively describe on

attitudes and perception of tax payers, effects of tax knowledge and perceptions, and

the stakeholders hence proving fully involvement of all the players to improve tax

collection in rental income which expected result is increased revenue collection for

the government.

2.6 Research Gaps

Through an intensive research on previously done research works, it is evident that

only a few studies have been carried out to document the various factors affecting the

collection of rental income tax by KRA. The researcher will also determine the factors

affecting collection of rental income tax laws by Kenya Revenue Authority.

2.7 Summary

The literature review has provided a clear indication regarding the factors influencing

tax compliance in real estate sector. Both the theoretical literature and empirical

literature have shown that the emphasis of tax compliance can be used to regulate the
20
overheated real estate and monitor the effect of tax collection on revenue growth and

performance of ever-growing Kenyan real estate sector. Since the tax is levied on

property, any investment that increases the value of the property will subject it to a

higher tax. For this reason, higher penalties and interests on property taxes are

expected to discourage density. If, on the other hand, landlords and agents have a

positive attitude and perception towards property tax, then this will encourage them to

pay property taxes faithfully as expected, and the reverse is true. Existing empirical

studies were insufficient in helping to explain the property/rental tax financing

behaviour of the real estate firms and a specific study on the factors influencing rental

income tax compliance, which is the centre of this study.

21
 CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter described the research design and research methodology that were

employed in this study. This is set out under the sub-headings containing, research

design, target population, data collection instruments and procedure, and finally, the

data analysis and presentation methods used in the study.

3.2 Research Design

A research design is a plan, structure and strategy conceived in order to obtain answers

to research questions and control variables. It helps to control the experimental,

extraneous and error variables of a particular research problem being investigated

(Cooper & Schindler 2011). This study employed qualitative and quantitative

research design that enabled it to collect requisite information about the factors

influencing rental income tax compliance in West of Nairobi region. Such a design is

a systematic empirical inquiry in which the researcher does not have direct control of

independent variables because they cannot be manipulated (Cooper & Schindler

2011). As this design does not allow the researcher to manipulate either the

independent variables or the research setting, it is apt, because of its higher external

validity and less cost. This allowed the study to be completed within the constraints

imposed by limited time and financial resources.

3.3 Target Population

A population is the entire gathering of elements about which extrapolations are made

(Cooper & Schindler 2011) or is a group of the variables that is being studied

(Chandan, Singh & Khanna 2010). The study focused on a total of 500 taxpayers

22
according to data obtained from KRA report on rental income returns for west of

Nairobi region 2019. Geographically, the study focused on the landlords in West of

Nairobi region. Justification of why the focus was on this area was that the area is in

the capital city and its expected to have the highest level of buildings and hence

individual taxpayers should contribute a large portion of the revenue collected on

rental income in the country.

Table 3.1 Distribution of Target population (landlords in West of Nairobi)

Landlords (categories) Target population

Individual 250

Company 150

Agents 100

Total 500

3.4 Sampling Frame

According to Schindler and Cooper (2001), a sampling frame comprises of a list of

people from which the researcher uses to obtain information about the study. The

sample frame is clearly defined as landlords of West of Nairobi region whose tax

compliance on rental income is under review by KRA officers (KRA 2018).

3.5 Sample and Sampling techniques

Sampling techniques are considered to be the strategies used by researchers in the

statistical sampling process (Cooper & Schindler, 2001). The researcher used random

23
sampling techniques. The adoption, of the sampling technique is to ensure fair and

objective distribution of the population for better representation.

3.5.1 Sample Size

For the nature of this research, a non-probabilistic sampling technique was employed.

The sample enabled the researcher to study a relatively small number of units in place

of the targeted population in order to obtain data that is representative of the whole

target population. According to Mugenda and Mugenda (2003), a sample size of 10%

of the population is considered adequate for descriptive study. Therefore, 10% of the

researcher’s population sizes (500) are 50 respondents, who are picked from registered

property owners within West of Nairobi region which has the same characteristics of

respondents as the ones were used in the actual study.

Table 3.2 Sample size (landlords in West of Nairobi)

Landlords (categories) Target population 10% of target

population

Individual 250 25

Company 150 15

Agents 100 10

Total 500 50

3.6 Data Collection Instruments

The nature of data used in the study was primary data. The data was obtained using

questionnaires distributed to the property owners via hand delivery. The use of

questionnaires enhances the expository system, as the data that is amassed utilizing

24
the instruments were changed over into quantitative data easily (Backlund & Suikki,

2005). The questionnaires had questions framed in structured (closed) and open and

ended. The questionnaire was divided into two parts, the first part contained

demographic information, this includes age, gender, education level and the second

part addressed the three research questions. Respondents were asked to rank the

factors in part two as to how they agreed or disagreed with the statements.

3.7 Data Collection Procedure

The questionnaires were given to some research expert for critical review. Pre-testing

was done to ascertain the validity and suitability of the questionnaires. To carry out

the study, structured questionnaires were used. The questionnaires were designed

using the research questions. Structured questions were designed because they were

easy to administer and collect a wider section of respondents, and since it will also be

cheaper and takes shorter time. Approximately 50 questionnaires were issued to the

targeted population of property owners whose tax compliance is under review by the

tax authority. The respondents were asked to mark where appropriate in the

questionnaire. The respondents were expected to take about ten minutes to complete

filling the questionnaire. The questionnaires were distributed in person to the

respondents. The questionnaires were coded so as to ensure easy analysis.

3.8 Pilot Study

A pilot study was embraced to pretest data collection instruments for validity and

reliability. According to Sekaran (2006), a pilot study is important for testing the

validity and reliability of data collection instruments. Pilot study is consequently

directed to recognize shortcoming in design and instrumentation and to give exact data

to determination of a sample (Cooper & Schindler, 2003). Validity alludes to the

25
degree to which an instrument measures what should gauge. Data need to be solid as

well as genuine and precise (Dempsey, 2003). Here, construct validity was tested.

Pilot study was done on 20 property owners of West of Nairobi region where they

were relied upon to tick if the item in the questionnaire addresses to the factors

influencing rental income tax compliance.

3.8.1 Validity and Reliability

The reliability of the instrument provides information about how free it is from random

errors or to what extent it provides consistent results on repeated measurements

(Kombo & Tromp, 2009). To address the reliability of the data collection instrument

for the study, questions will be adopted from previous studies. To test reliability of

research instrument the Cronbach Alpha Coefficient was employed. The Cronbach

alpha provides a coefficient of inter-item correlations. The Cronbach alpha ranges

between 0 and 1 and a value of 0.7 or more is considered as an indication of reliability.

3.9 Data Analysis

The utilization of close end and open-end questions contributed towards gathering of

both quantitative and subjective data. Descriptive analysis technique was connected

to break down quantitative data where data was scored by calculating the mean,

percentages and standard deviations. This was done using Statistical Package for

Social Sciences (SPSS, Version 21) software. SPSS was viewed as proper since it

permits the researcher to take after clear arrangement of quantitative data analysis

systems that led to increased data validity and reliability and exhibited the relationship

between the research variables.

Qualitative data was drawn from open-ended questions in the questionnaire. This was

analyzed through summarizing the set of observations drawn from the respondents
26
using content analysis. Common set of observation was assigned numerical value and

entered into the SPSS computer system. The analyzed findings were then be presented

inform of tables. Qualitative data was drawn from open-ended question in the

questionnaire. This was analyzed through summarizing the set of observations drawn

from the respondents using content analysis. Regression analysis was applied to show

the relationship between the research variables.

The study will use the following regression model:

Y = β0 + β1X1 + β2X2 + β3X3 +ε

Where

Y is the dependent variable (Tax Compliance);

β0 is the regression constant;

β1, β2 and β3 are the coefficients of independent variables;

X1 is penalties and interests;

X2 is knowledge and education;

X3 is attitude and perception; and

ε is the error term.

27
 CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 Introduction

This section discusses data presentation and interpretation of the findings from the

data gathered from the field. This study used both descriptive and inferential statistics

to interpret and present the findings of the study. The study - Factors influencing rental

income tax compliance in West of Nairobi Region- targeted 50 respondents who were

property owners, agents and companies. All the 50 of the respondents filled a response

that represents a 100%. This response rate was satisfactory to make conclusions for

the study.

4.2 Data Presentation

4.2.1 Demographic information

Table 4.1: Level of education of the respondents

Level Frequency Percent

Certificate 5 10
Diploma 12 24
Degree 20 40
Masters 9 18
Others 4 8
Total 50 100
Source: Researcher, 2020

From table 4.1 - Level of education of the respondent - it was established that most

of the respondents shown by 40 percent hold bachelor’s degree, those with Diploma

were represented by 24 percent, and Masters are presented by 18 percent, those with

certificate 10 percent and others displayed by 8 percent. This is an indication that most

of the respondents are well-educated thus data gathered from them was relied upon.

28
Table 4.2 Number of years of being Property owner

No. of Years Frequency Percent

Below 3 years 4 8
3 – 5 years 7 14
6 – 10 years 9 18
11 – 15 years 11 22
Above 15 years 19 38
Total 50 100
Source: Researcher, 2020

From the findings of table 4.2 on number of years being property owner, it was

revealed that most of the respondents have been property owners for more than 15

years represented by 38 percent. Those between 11 – 15 years were represented by

22 percent, those who have been for 6 – 10 years represented by 18 percent, those

between 3 – 5 years were represented by 14 percent and finally those below 3 years

were presented by 8 percent. From the findings this was an indication that

respondents were well circulated in terms of number of years they have been

property owners.

Table 4.3: Property owned

Kind of property Frequency Percent

Commercial 34 68

Residential 16 32
Total 50 100
Source: Researcher, 2020

From table 4.3 on property owned it was established that most of respondents were

commercial property owners with 68 %. Those who own residential property were

29
32%. This is an indication that most of these property owners are involved in

commercial buildings in west Nairobi region.

Table 4.4: Landlord Category.

Category Frequency Percent

Individual 6 12
Company 21 43
Agency 23 46
Total 50 100
Source: Researcher, 2020

From the findings of the study as shown in table 4.4, the researcher established that

most of the respondents chose rent collection services from Agencies with 46%, those

who preferred registered companies were 43% and those who rather chose to collect

individually were 12%. This was evident that many of the respondents prefer rent

collection to be carried out by registered agencies and companies.

30
4.3 Descriptive Statistics

4.3.1 Penalties and interests

Table 4.5: Role penalties and interests on Rental income tax compliance
Std.
Statement N Mean Deviation
Use of penalties and interests can lead to increase in
the level of tax compliance 50 4.18 0.981
I fully understand why penalties and interests are
imposed by KRA 50 3.94 1.815
The use of penalties and interests can influence more
people in the sector to pay taxes on time 50 4.31 1.728
Use of penalties and interests lead to a good tax
paying culture for the country at large 50 3.51 1.751
Penalties and interests facilitate the good relationship
between tax payers and the tax agents 50 3.75 1.775
Use of penalties and interests has minimized tax
avoidance 50 4.21 1.719

Source: Researcher, 2020

From the findings, the study revealed that majority of the respondents were in

agreement that use of penalties and interests leads to increased level of tax compliance

shown by a mean of 4.18 with a standard deviation of 0.981, most of the respondents

also agreed that they fully understand why penalties and interests are imposed by KRA

as shown by a mean of 3.94 with a standard deviation of 1.815, majority of them

agreed that use of penalties and interests can influence more people in the sector to

pay taxes on time as shown by a mean of 4.31 with a standard deviation of 1.728, most

of the respondents strongly agreed that use of penalties and interests lead to a good tax

paying culture for the country at large shown by a mean 3.51 with a standard deviation

of 1.751, majority also agreed that penalties and interests facilitate the good

relationship between tax payers and the tax agents as indicated with a mean of 3.75

31
with a standard deviation of 1.775 and that most respondents strongly agreed that use

of penalties and interests has minimized tax avoidance as shown by a mean of 4.21

with a standard deviation of 1.719.

4.3.2 Tax Knowledge & Education

Table 4.6: Effect of Tax knowledge & education on Rental income tax
compliance

Std.
Statement N Mean Deviation
Knowledge on taxation enables landlords and their
agents to assess their tax liability correctly and to file
tax returns on time 50 4.35 1.368

Inadequate knowledge on tax systems hinders tax

compliance 50 4.10 1.518

Taxation knowledge enables fast assessment of tax

liability 50 3.85 1.637
Kenyan tax authority needs to emphasize on taxation
training 50 4.89 1.578

Landlords and their agents have adequate knowledge on

incomes to include or exclude 50 3.97 1.613

High levels of tax knowledge encourage taxes payment 50 3.51 1.283

Education level affects the understanding of tax laws. 50 4.24 1.629

Source: Researcher, 2020

From table 4.6 it was established that majority of the respondents strongly agreed that

knowledge on taxation enables landlords and their agents to assess their tax liability

correctly and to file tax returns on time as indicated by a mean of 4.35 with a standard

deviation of 1.368, respondents also strongly indicated that inadequate knowledge on

tax systems hinders tax compliance as shown by a mean of 4.10 with a standard

deviation of 1.518, majority also indicated that taxation knowledge enables fast

32
assessment of tax liability as shown by a mean of 3.85 with a standard deviation of

1.637, other respondents agreed that Kenyan tax authority needs to emphasize on

taxation training as shown by a mean of 4.89 with a standard deviation of 1.578,

respondents also agreed that Landlords and their agents have adequate knowledge on

incomes to include or exclude as shown by a mean of 3.97 with a standard deviation

of 1.613, majority of the respondents agreed that high levels of tax knowledge

encourage taxes payment as shown by a mean of 3.51 with a standard deviation of

1.283 and majority of the respondents strongly agreed that education level affects the

understanding of tax laws as shown by a mean of 4.24 with a standard deviation of

1.629.

4.3.3 Attitude & perception

Table 4.7: Effect of attitude and perception on rental tax compliance

Std.
Statements N Mean Deviation

Collected taxes are used for the uplifting of the welfare of

citizens 50 4.54 1.706

Tax officers are approachable, honest and helpful to

landlords 50 3.86 1.638

Tax administration and collection is transparent and

openly done 50 3.95 1.981

KRA is able to detect people not paying the right amount

of tax 50 4.21 1.204

Tax evasion should attract a long jail sentence 50 4.32 1.334

Source: Researcher, 2020

Table 4.7 shows that most of the respondents indicated that collected taxes are used

for the uplifting of the welfare of citizens by a mean of 4.54 with a standard deviation

33
of 1.706, others strongly indicated that tax officers are approachable, honest and

helpful to landlords by a mean of 3.86 with a standard deviation of 1.638, majority

also indicated that tax administration and collection is transparent and openly done by

a mean of 3.95 with a standard deviation of 1.981, others also indicated that KRA is

able to detect people not paying the right amount of tax as shown by a mean of 4.21

with a standard deviation of 1.204 and others also indicated that tax evasion should

attract a long jail sentence as shown by a mean of 4.32 with a standard deviation of

1.334.

4.4 Inferential Statistics

Regression Analysis

Table 4.8: Model summary

Adjusted R Std. error of the

Model R R Square Square estimate
1 .894 .788 .821 .01113

Source: Researcher, 2020

From table 4.8, the value of co-efficient of determination was 0.821, an indication that

there was a deviation of 82.1% on rental income tax compliance due to changes in

penalties and interests, tax education & knowledge and attitude & perception at 95%

confidence level. This shows that 82.1% change in rental income tax compliance of

taxpayers in West Nairobi region was accounted for by the changes in penalties and

interests, tax education & knowledge and attitude & perception. From the findings it

was also established that there is a strong relationship between rental income tax

compliance and penalties and interests, tax education & knowledge and attitude &

perception shown by a correlation coefficient of 0.894.

34
Analysis of Variance

An ANOVA was conducted at 5% level of significance. A comparison of Fcalculated

and Fcritical is shown in Table 4.12 below.

Table 4.9 Analysis of Variance and F-Test Results

Model Sum of df Mean F Sig

squares Square
Regression 15.487 3 3.872 17.133 .000b

1 Residual 6.113 47 .226

Total 21.60 50

Researcher, 2020

a. Dependent variable: Rental income tax compliance

b. Predictors: (Constant), Interests and Penalties, Tax Knowledge, Attitude and perception

From the ANOVA Table 4.12 above, Fcalculated is 17.33 while F critical is

2.72776531, this shows that Fcalculated> Fcritical thus 17.33>2.7277 therefore the

overall regression model was significant in determining the factors affecting

residential rental income tax compliance in West of Nairobi. The p value is 0.000, an

indication that at least one of the independent variables significantly influenced

residential rental income tax compliance in West of Nairobi.

35
Table 4.10: Regression Coefficients

Unstandardized Standardize t Sig.

Model coefficients d coefficients
B Std. Error Beta
1 Constant .458 .163 2.769 .006

Penalties and interests .413 .142 .652 2.102 .003

Tax knowledge & E .298 .134 .408 .091 .048

Attitude & perception .017 .127 .022 .708 .873

Source: Researcher, 2020

The established regression equation was

Y = 0.458 + 0.413 X1 + 0.298 X2 + 0.017 X3

Regression equation of this study shows that holding penalties and interests, tax

education & knowledge and attitude & perception, rental income tax compliance

would stand at 0.458, a unit increase in penalties and interests would lead to an

increase in rental income tax compliance by a factor of 0.413, a unit increase in tax

knowledge and education would lead to an increase in rental income tax compliance

of taxpayers in West of Nairobi region by 0.298 and finally a unit increase in attitude

and perception would lead to an increase in rental income tax compliance of taxpayers

in West of Nairobi by a factor of 0.017.

Pearson Correlation analysis

The Pearson Correlation analysis was also applied to illuminate the magnitude and

direction of relationship between each of the factors affecting residential rental income

tax in West of Nairobi, Kenya. The table that follows presents the Pearson Correlation

Output as derived from SPSS.

36
4.11 Pearson’s Correlation analysis
Rental Interests Tax Attitude
Income Tax and Knowledge and
Compliance Penalties Perception
Rental Pearson 1 .770 .613 -.537
Income Tax Correlation
Compliance Sig. (2- 0.000 0.012 0.023 0.011
tailed)
N 40 40 40 40
Interests Pearson .770 1 0.562 0.420
and Correlation
Penalties Sig. (2- 0.012 0.000 0.000 0.000
tailed)
N 40 40 40 40
Tax Pearson .613 0.562 1 0.523
Knowledge Correlation
Sig. (2- 0.023 0.00 0.000 0.000
tailed)
N 40 40 40 40
Attitude Pearson -.537 0.420 0.523 1
and Correlation
Perception Sig. (2- 0.011 0.000 0.000 0.000
tailed)
N 40 40 40 40
Source: Research data (2020)

All the independent variables and rental tax compliance showed significant positive

associations. The Pearson Correlation Coefficient for Interests and penalties is 0.770

implying that the variable has a positive relationship with rental income tax

compliance. The strength of association between the two variables; Interests and

penalties and rental income tax compliance is very strong since the Pearson

Correlation Co-efficient is above 0.70. Furthermore, the relationship is statistically

significant since the Sig. (2-tailed) value of 0.012 is below the 0.05 or 5% level of

significance.

37
The Pearson Correlation Coefficient for tax knowledge stands at 0.613 which shows

a positive relationship between tax knowledge and rental income tax compliance. The

relationship between the two variables; tax knowledge and rental income tax

compliance is strong since the Pearson Correlation coefficient is greater than 0.50. The

relationship is also statistically significant since the sig (2-tailed) value of 0.023 is less

than 0.05 significance level.

Finally, the Pearson Correlation coefficient for tax rate is 0.537 which indicates a

positive association between attitude and percption and rental income tax compliance

and demonstrates a strong level of association since value is more than 0.5. The

relationship is statistically significant because the Sig. (2-tailed) value of 0.011 is less

than 0.05 level of significance.

4.5 Discussion

4.5.1 Interests and Penalties and residential rental income tax compliance

The study revealed that, majority of the respondents agreed that Interests and penalties

are very punitive to property owners. Further, the respondents agreed that Periodic

waiver of penalties and interests could encourage tax compliance. Additionally, the

respondents further agreed that Property owners file returns on time to avoid penalties

of non-compliance on the iTax system. This finding revealed that property owners are

actually aware of the effect of not complying with their obligation to pay rental income

tax. The study found that interests and penalties positively influence tax compliance

thus the study concludes that interests and penalties have a direct impact on residential

rental income tax compliance by property owners. This is because punitive interests

and penalties encourage property owners to comply tax obligations. These findings

38
are consistent with those of Hughes (2014) who established that, penalties are the most

predominant regulatory mechanism in most of the tax laws worldwide.

4.5.2 Tax knowledge and residential rental income tax compliance

The findings of the study revealed that the respondents agreed that they have adequate

knowledge on tax rate, basis of taxation and compliance requirements under

residential rental income tax regime. Further, the respondents agreed that Knowledge

about tax laws plays a major role in determining property owners’ tax compliance. As

well, the respondents agreed that KRA has created a lot of public awareness on

residential rental income tax. The study findings established that tax knowledge

significantly and positively influences residential rental income tax compliance by

property owners. These findings are consistent with those of Palil (2010) who

established that , knowledge about tax laws also plays a major role in determining

taxpayers’ compliance behaviour. Therefore a step ahead, for example continuous

education programmes and effective monitoring mechanisms must be taken into

account by tax authorities to ascertain that taxpayers have a good and reasonable

knowledge and understanding of tax matters.

4.5.3 Attitude and perception residential rental income tax compliance

The results indicate that taxpayer’s perception has a positive and statistically

significant effect on residential rental income tax compliance. The results indicate that,

improvement in the level of taxpayer’s perception will result to increase in the level

of residential rental income tax compliance tax compliance among landlords in West

of Nairobi, Kenya.

These results are consistent with the findings of Magutu and Wanjohi (2010) who

established that tax compliance may be influenced by the taxpayers’ perceptions of

the tax system and the Revenue Authority. These results are also consistent with the
39
findings of Abubakar and Christopher (2013) who evaluated taxpayers’ attitude and

its effects on tax compliance decisions in Tamale Ghana. The study established that

Individual taxpayers had concern for the amount of taxes of they pay.

A study by Tilahun and Yidersal (2014) argue that taxpayer’s perception did not

significantly relate with tax compliance. Hence, it shows that previous studies have

found controversial results about the association between taxpayer’s perception and

tax compliance.

40
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This section discussed summary, conclusion and recommendations on Factors

influencing rental income tax compliance in West of Nairobi Region. The study used

three independent variables; penalties and interests, tax knowledge and education and

attitude and perception of tax payers affected rental income tax compliance of taxpayer

in West Nairobi Region. The study used inferential statistics in analyzing data

collected. Data collected was presented using tables.

5.2 Summary

The main purpose of this project was to describe the Factors affecting rental income

tax compliance among taxpayers of West Nairobi region. The lead source of data used

was primary info gathered from 50 respondents that comprised specific landlords,

agents and incorporated companies. Both descriptive and inferential statistics were

used to assess data gathered.

The study recognized that penalties and interests greatly affect rental income tax

compliance in West Nairobi region. From the findings it was also established that use

of penalties and interests leads to increase in the level of tax compliance and the

taxpayers completely recognize why penalties and interests are enforced by KRA. The

study also established that use of penalties and interests can `influence more people in

the region to pay taxes on time will increase rental income tax compliance. It was

established that use of penalties and interests led to a good tax paying culture for the

country at large, penalties and interests enable a noble association between tax payers

41
and agents of tax and use of penalties and interests has reduced tax evading hence rise

rental income tax compliance.

It was also revealed that tax education and knowledge significantly affect rental

income tax compliance of taxpayers in West Nairobi Region. The study established

that knowledge on taxation facilitates landlords and their representatives to evaluate

their tax liability appropriately and to file tax returns within the required period; it also

revealed that insufficient knowledge on tax systems hampers tax compliance and

taxation awareness enables fast valuation of tax obligation. The study further

recognized that KRA needs to put emphasis on on tax training, Landlords and their

agents have sufficient knowledge on revenues to include or exclude, High levels of

tax acquaintance inspire taxes payment and that education level affects the

understanding of tax laws. This increases rental income tax compliance.

It was also revealed that attitude and perception of tax payers greatly affects rental

income tax compliance in West Nairobi Region. The study established that Taxes

collected by KRA are used for the elevating of the well-being of tax payers; Collected

taxes are used for the elevating of the wellbeing of citizens; Tax officers are

approachable, candid and supportive to landlords; Tax administration and collection

is crystal clear and responsively done; KRA is capable of detecting tax payers not

remitting the right amount of tax and tax avoidance should draw a long jail punishment

hence lead to improved level of rental income tax compliance.

5.3 Conclusions

From the study it was established that there was a greater deviance in rental income

tax compliance in West Nairobi region due to variations in penalties and interests, tax

education and knowledge and attitude and perception. This was a sign that deviations
42
in rental income tax compliance could be accounted for by the fluctuations in penalties

and interests, tax education and knowledge and attitude and perception. Further the

study established that there was a strong positive relationship between rental income

tax compliance and penalties and interests, tax education and knowledge and attitude

and perception.

It was also established that rise in penalties and interests, tax education and knowledge

and attitude and perception would entirely lead to an increase in rental income tax

compliance.

From the findings, the use of real use of penalties and interests has reduced tax

avoidance hence improved rental income tax compliance. The study also determined

that KRA is required to put emphasis on tax training in order to increase rental income

tax compliance. The study further determined that tax administration and collection

should clearly be done in order to ease rental tax compliance.

5.4 Recommendations

There is need for use of penalties and interests by KRA to improve the level of income

tax rent compliance of all listed Landlords. There is need for sensitization of the

taxpayers as to why penalties and interests are being enforced by the tax man-KRA.

The use of penalties facilitates payment of due taxes on time and impact more

individuals/corporations to conform as per the law. KRA must use well-defined

penalties and interests in order to reduce tax avoidance.

There is need for KRA to carry out public education and sensitize taxpayers of

numerous sectors in the economy on various obligations to enable them evaluate their

correct tax liability and to file their tax returns on time. KRA must also provide

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adequate knowledge on tax systems in order to enable tax compliance. There’s need

for KRA to put emphasis on tax training on a regular basis since tax is dynamic.

KRA needs to administer and collect tax in a crystal clear and an open way. The tax

officers must be approachable and provide adequate information on tax that is helpful

to the taxpayers in order to facilitate tax compliance.

Kenyan government needs to make sure that the collected revenue should adequately

be used in changing the prosperity of the taxpayers and citizens.

KRA needs to put in a mechanism that will facilitate the tax man notice some of the

taxpayers who are not submitting the accurate taxes and also must make sure that those

who deliberately involved in tax avoidance face a long term jail as per the law.

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 APPENDICES

Appendix I: Questionnaire

QUESTIONNAIRE FOR THE FACTORS THAT NFLUENCE RENTAL

INCOME TAX COMPLIANCE: A CASE STUDY OF WEST OF NAIROBI

REGION.

Instructions

This questionnaire is designed to collect information on the factors that affect tax

compliance in real estate sector. The information obtained will be used for academic

purposes only and shall be treated with utmost confidence. You are requested to complete

this questionnaire as honestly and objectively as possible.

Please tick in the appropriate box and also fill in the blank spaces provided for those

questions where elaborate answers are required. Use the space at the back of this

questionnaire if you need more space for your responses.

SECTION A: BACKGROUND INFORMATION

Kindly answer all the questions by ticking in the boxes or writing in the spaces provided.

1. Name of the building? (Optional)___________________________________

2. What is your level of education?

Certificate Diploma Degree Masters Others

3. For how long have you been a property owner

Less than 3 years 3-5 years 6 -10 years

11-15 years More than 15 years

4. What kind of property do you own?

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 Commercial Residential

5. What is the type of landlord category?

Agency Company Individual

SECTION B:

Part A: Penalties & Interests

6. What is your level of agreement with the following statements on tax deterrence
sanctions and tax compliance? Use a scale of 1 to 5 where 1= Strongly Disagree 2=
Disagree, 3=Neutral, 4= Agree and 5 = Strongly Agree.

Effects of Penalties & interests on Rental Tax compliance

Statement 1 2 3 4 5

Use of penalties and interests can lead to increase in the level

of tax compliance

I fully understand why penalties and interests are imposed

by KRA

The use of penalties and interests can influence more people

in the sector to pay taxes on time

Use of penalties and interests lead to a good tax paying

culture for the country at large

Penalties and interests facilitate the good relationship

between tax payers and the tax agents

Use of Penalties and interests has minimized tax avoidance

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Part B: Tax Knowledge & Education

5. What is your level of agreement with the following statements on tax knowledge levels
and tax compliance? Use a scale of 1 to 5 where 1=Strongly Disagree. 2=Disagree,
3=Neutral, 4= Agree and 5 = Strongly Agree.

Statement 1 2 3 4 5

Knowledge on taxation enables landlords and their agents to

assess their tax liability correctly and to file tax returns on time

Inadequate knowledge on tax systems hinders tax compliance

Taxation knowledge enables fast assessment of tax liability

Kenyan tax authority needs to emphasize on taxation training

Landlords and their agents have adequate knowledge on

incomes to include or exclude

High levels of tax knowledge encourage taxes payment

Education level affects the understanding of tax laws.

Part C: Attitude & Perception

6. What is your level of agreement with the following statements on the taxpayer

attitudes and tax compliance? Use a scale of 1 to 5 where 1=Strongly Disagree.

2=Disagree, 3=Neutral, 4= Agree and 5 = Strongly Agree.

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 Statement 1 2 3 4 5
Collected taxes are used for the uplifting of the welfare of
citizens
Tax officers are approachable, honest and helpful to landlords
Tax administration and collection is transparent and openly
done
KRA is able to detect people not paying the right amount of
tax
Tax evasion should attract a long jail sentence

Part D: Rental income Tax compliance

7. What is your level of agreement with the following statements on the rental income

tax compliance? Use a scale of 1 to 5 where 1=Strongly Disagree. 2=Disagree,

3=Neutral, 4= Agree and 5 = Strongly Agree.

Statement 1 2 3 4 5
Filling of returns is time consuming
Payment of rental income tax is an easy process
Registration of rental income tax takes little time
Tax officers are helpful in the process of filing returns
Kenya revenue authority sensitizes landlords regularly on
rental income tax compliance.
Tax evasion should attract a long jail sentence

THANK YOU FOR TAKING YOUR TIME TO COMPLETE THE QUESTIONNAIRE

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