Factors Affecting Residential Rental Income Tax Compliance by Landlords

in Machakos County, Kenya

Caroline Murugi Kinyua

A Research Project Submitted in Partial Fulfilment of the Requirements

for the Post Graduate Diploma in Tax Administration, Jomo Kenyatta

University of Agriculture and Technology

2022
 DECLARATION

Declaration by the candidate

This research project is my original work and has not been presented for a post graduate

diploma in any other academic or non-academic institution.

Sign ……………………………. Date…………………

Caroline Murugi Kinyua

HDB336-C016-2137/2016

Supervisor’s Approval

This is to confirm that this research project has been submitted for examination with my

approval as the institute supervisor.

Signed ………………………… Date ……………………

Mr. Felix Nicholas Bukachi

Kenya School of Revenue Administration (KESRA)

iii
 ACKNOWLEDGEMENT

This work has been a result of collective efforts of many stakeholders ranging from institutions

to individuals. I may not mention all of them but through this sentence I wish to appreciate

their support without apportioning the level of appreciation. But my supervisor cannot go

without my special acknowledgement for his relentless support and guidance. My lecturers

who imparted cutting edge knowledge and skills during the course also deserve a special

mention on this page.

iv
 DEDICATION

I dedicate this work to my family members who have continually been instrumental,

inspirational, understanding and the sacrifice they have towards starting my course. I also

dedicate this paper to my late daughter (Nikita Makena), the experience has taught me to keep

moving even when everything seems dark.

v
 TABLE OF CONTENT
DECLARATION..................................................................................................................... iii
ACKNOWLEDGEMENT ...................................................................................................... iv
DEDICATION.......................................................................................................................... v
LIST OF TABLES .................................................................................................................. ix
LIST OF FIGURES ................................................................................................................. x
ABBREVIATIONS AND ACRONYMS ............................................................................... xi
DEFINITION OF TERMS.................................................................................................... xii
ABSTRACT ........................................................................................................................... xiii
CHAPTER ONE ...................................................................................................................... 1
INTRODUCTION.................................................................................................................... 1
1.1 Background ...................................................................................................................... 1
1.2 Statement of the Problem ................................................................................................. 3
1.3 Objectives ......................................................................................................................... 5
1.3.1 General Objective ................................................................................................... 5
1.3.2 Specific Objectives ................................................................................................. 5
1.4 Research Questions .......................................................................................................... 5
1.5 Justification of the study .................................................................................................. 6
1.6 Scope of the study ............................................................................................................ 7
1.7 Limitations of the study.................................................................................................... 8
CHAPTER TWO ..................................................................................................................... 9
LITERATURE REVIEW ....................................................................................................... 9
2.1 Introduction ...................................................................................................................... 9
2.2 Theoretical Literature Review .......................................................................................... 9
2.2.1 Intrinsic Motivation Theory ................................................................................... 9
2.2.2 Economic Theory ................................................................................................. 10
2.2.3 Fiscal Exchange Theory ....................................................................................... 11
2.2.4 Theory of Crime ................................................................................................... 12
2.3 Conceptual Framework .................................................................................................. 12
2.4 Empirical Literature Review .......................................................................................... 13
2.4.1 Tax Knowledge and Residential Rental Income Tax Compliance....................... 13
2.4.2 Penalties and Interest on Residential Rental Income Tax Compliance ................ 16
2.4.3 Tax Rates and Residential Rental Income Tax Compliance ................................ 18
2.4.4 Modes of Payment and Residential Rental Income Tax Compliance .................. 19

vi
 2.5 Study Gaps ..................................................................................................................... 21
2.6 Summary of the Literature Review ................................................................................ 22
CHAPTER THREE ............................................................................................................... 23
RESEARCH METHODOLOGY ......................................................................................... 23
3.1 Introduction .................................................................................................................... 23
3.2 Research Design ............................................................................................................. 23
3.3 Population....................................................................................................................... 23
3.4 Sample and Sampling technique .................................................................................... 24
3.5 Data Collection Instruments ........................................................................................... 26
3.6 Data Collection Procedure ............................................................................................. 26
3.7 Pilot Test ........................................................................................................................ 26
3.7.1 Reliability of the Data Collection Instrument ...................................................... 27
3.7.2 Validity of Data Collection Instrument ................................................................ 27
3.8 Data Processing and Analysis ........................................................................................ 28
3.9 Data Analysis ................................................................................................................. 29
3.9.1 Analytical Model .................................................................................................. 29
3.9.2 Test of Significance .............................................................................................. 30
CHAPTER FOUR .................................................................................................................. 31
DATA ANALYSIS, FINDINGS AND DISCUSSION ..................................................... 31
4.1 Introduction .................................................................................................................... 31
4.2 Response Rate ................................................................................................................ 31
4.3 Reliability Test ............................................................................................................... 31
4.4 Demographic statistics ................................................................................................... 32
4.4.1 Gender statistics ................................................................................................... 32
4.4.2 Duration of ownership .......................................................................................... 33
4.4.3 Age ....................................................................................................................... 34
4.5 Descriptive Statistics ...................................................................................................... 34
4.5.1 Taxpayers Tax Knowledge on residential rental income tax compliance in
Machakos County .......................................................................................................... 35
4.5.2 Fines, penalties and interests effect on residential rental tax ............................... 36
4.5.3 Tax Rates .............................................................................................................. 38
4.5.4 Modes of payment ................................................................................................ 39
4.5.5 Tax compliance levels by landlords in Machakos County ................................... 40
4.6 Inferential Statistics ........................................................................................................ 41
vii
 4.6.1 Correlation Analysis.................................................................................................... 41
4.6.2 Regression Analysis and Results on Taxpayers Tax Knowledge ............................... 43
4.6.3 Regression Analysis and Results Tax Penalties and Interests .................................... 45
4.6.4 Multiple Regression Analysis ..................................................................................... 47
4.7 Discussion of the Study Findings ...................................................................................... 49
CHAPTER FIVE ................................................................................................................... 53
SUMMARY, CONCLUSION AND RECOMMENDATIONS ......................................... 53
5.1 Introduction ................................................................................................................... 53
5.2 Summary of the Findings .............................................................................................. 53
5.2.1 Taxpayers Tax knowledge .......................................................................................... 53
5.2.2 Fines, Penalties and Interests ...................................................................................... 54
5.2.3 Tax Rates ..................................................................................................................... 54
5.2.4 Modes of Payment ....................................................................................................... 54
5.3 Conclusion ..................................................................................................................... 55
5.4 Recommendations ......................................................................................................... 56
5.5 Suggestion for Further Research ........................................................................................ 57
REFERENCES ....................................................................................................................... 58
APPENDICES ........................................................................................................................ 65
APPENDIX I: Questionnaire ................................................................................................ 65
APPENDIX II: LETTER TO RESPONDENTS ................................................................. 69

viii
 LIST OF TABLES

Table 4.1 Response Rate .......................................................................................................... 31

Table 4.2 Reliability Test ......................................................................................................... 32

Table 4.3 Gender ...................................................................................................................... 33

Table 4.4 Ownership duration.................................................................................................. 33

Table 4.5 Age of Respondents ................................................................................................. 34

Table 4.6 Descriptive statistic on Taxpayers Tax Knowledge ................................................ 35

Table 4.7 Descriptive statistics on Fines, penalties and interests ............................................ 37

Table 4.8 Descriptive statistics on Tax rates ........................................................................... 38

Table 4.9 Descriptive statistics on Tax Payment modes.......................................................... 39

Table 4.10 Descriptive statistics on Tax compliance............................................................... 40

Table 4.11 Pearson Correlations Analysis ............................................................................... 42

Table 4.12; Model Summary for Taxpayers Tax Knowledge. ................................................ 43

Table 4.13: ANOVAa for Taxpayers Tax Knowledge ............................................................. 44

Table 4.14; Coefficientsa for Taxpayers Tax Knowledge........................................................ 44

Table 4.15; Model Summary for Tax Penalties and Interests. ................................................. 45

Table 4.16: ANOVAa for Tax Penalties and Interests ............................................................. 46

Table 4.14; Coefficientsa for Tax Penalties and Interests ........................................................ 46

Table 4.15 Model Summary .................................................................................................... 47

Table 4.16 ANOVAa ............................................................................................................... 48

Table 4.17 Coefficientsa .......................................................................................................... 48

ix
 LIST OF FIGURES

Figure 1.1 Conceptual Framework (Source: Author, 2021) .................................................... 13

x
 ABBREVIATIONS AND ACRONYMS

GDP: Gross Domestic Product

IEA: Institute of Economic Affairs

OECD: Organization for Economic Cooperation and Development

SAPs: Structural Adjustment Programmes

SPSS: Statistical Package for Social Sciences

USA: United State of America

KRA: Kenya Revenue Authority

xi
 DEFINITION OF TERMS

Integrity: The quality of being honest and having strong moral principles. The

state of being whole and undivided. (Collins English Dictionary, 2003)

Landlord: One that owns and rents land, buildings, or dwelling units. A man who

owns and leases property. (Collins English Dictionary, 2003)

Non-Resident Landlord: In this study refers to those landlords who own commercial

buildings in Machakos County but they do not reside in those

buildings or within their vicinity. (Adams & Ferreira, 2009)

Taxation: is a compulsory payment or transfer of resources from private to public

sector levied on the basis of the determined criterion and without

reference to specific benefits received in order to accomplish some of

the nation's economic and social objectives (Azmi & Barret, 2014).

Tax evasion: is defined as a deliberate and willful practice of not disclosing full

taxable income in order to pay less tax. It is a violation of tax laws

whereby the tax due by a taxable person is unpaid after the minimum

specified period (Bello & Danjuma, 2008)

Tax compliance: can be defined as an ability of a tax liable body to submit accurate,

complete and satisfactory returns in conformity with tax laws and

regulations of the state to the authority for the purpose of tax

assessment (Kircher 2008).

Rental Income Tax: can be defined as the amount of tax one pays to the government for

income that is derived from the use of residential property (Surrey,

2014).

xii
 ABSTRACT

The study sought to investigate factors affecting residential rental income tax compliance
among landlords in Machakos County in Kenya. The study specifically sought to find out
whether knowledge of the tax system and tax laws influences compliance on rental income tax
compliance among landlords in Machakos County, investigate the effect of penalties and
interests on rental income tax compliance among landlords in Machakos County, ascertain the
effect of tax rates of the revenue authority on rental income tax compliance among landlords
in Machakos County and establish whether modes of payment influence rental income tax
compliance among landlords in Machakos County. This study adopted a descriptive survey
design. The target population of this study was all landlords in Machakos County while the
accessible population were those landlords residing within the County. Simple random
sampling and convenience sampling was used to identify individual respondents. Primary data
was collected using questionnaires. The collected data was consequently analyzed
quantitatively using Statistical Package for Social Scientist software and the findings of the
research presented using tables. From the findings of the multiple regression analysis, the study
established when all other factors are held constant, a unit increase in Taxpayers Tax
knowledge would lead to a 0.259 increase in Residential Rental Income Tax Compliance in
Machakos County (β1= 0.259, p=0.000<0.05). It was also established that a unit increase in
Fines penalties and interests would lead to a 0.152 increase in Residential Rental Income Tax
Compliance in Machakos County when other factors are held constant β1= 0.152,
p=0.000<0.05). On Tax Rates, the study established that an increase in Tax Rates would lead
to a 0.112 decrease in Residential Rental Income Tax Compliance in Machakos County (β1=-
0.112, p=0.012<0.05). Last but least, the study established that unit increase in Modes of
payment would lead to a 0.313 increase in Residential Rental Income Tax Compliance in
Machakos County (β1= 0.313, p=0.000<0.05). The study thus concluded that taxpayer’s tax
knowledge, tax rates, fines penalties and interests and modes of payment affect residential
rental income tax compliance among landlords in Machakos County in Kenya. The study
recommended that there should be more training through public participation by Kenya
Revenue Authority to all taxpayer in the matters to do with residential tax compliance, tax
knowledge i.e. registration, how to file returns, generating payment slips, modes of payment,
the importance of filing returns, the related fines, penalties and interests in cases of
noncompliance among other aspects to enhance the levels of tax compliance by landlords in
Machakos county and the county as a whole. The study suggested that there is need for more
research to be done based on the same topic but in different regions within the boundaries of
Kenya.

xiii
 CHAPTER ONE

INTRODUCTION

1.1 Background

There is an increased demand by the public for better services from tax authorities over the last

ten years in Kenya (Grampert, 2011). The Kenya Revenue Authority (KRA) responded to the

demand by the public, through creation of a taxpayer service unit in April 2000, to support and

ensure that KRA meets the increased demand for better taxpayer services. The taxpayers

usually visit revenue authorities’ offices for various purposes although most significantly, they

are looking for information on tax matters and registering as taxpayers. The tax revenue

organizations as service providers are therefore under obligation to offer quality service to their

customers, who are mainly taxpayers. The tax revenue collector needs to meet the attributes of

a quality service that include among others: promptness, urgency, precision, tax knowledge,

pleasantness and clarity. The attitude of the revenue officers in providing a quality taxpayer’s

service is very decisive and as such, front line officers in revenue organizations need to avoid

being arrogant, rude, impatient, un-receptive and appearing bored (Surrey, 2014).

A number of studies have been done globally on the aspect of tax compliance: Palil, (2013)

conducted a study on tax compliance and tax awareness in a self-assessment system in

Malaysia. As per his study, he asserted that tax compliance is largely influenced by probability

of being audited, penalties, and personal financial constraints. Hargreaves (2012) in his study

on the effect of tax system on New Zealand’s housing market, he found out that a large number

of owner occupiers are not tax compliant since they do not remit their taxes from rental income.

Dube, (2014) carried out a case study in Zimbabwe on how taxes are administered in the

informal sector where he concluded that issues of high taxes and ignorance are the major

contributors to non-compliance to tax payments in the informal sector resulting to low income

1
tax revenue collected. However, the above international studies did not concentrate on

residential rental income taxes.

In Kenya, KRA has sought to boost tax compliance by introduction of sanctions such as

electronic monitoring, audits, compliance checks, investigations and shutting of non-compliant

taxpayers' businesses, heavy penalties and prosecution of tax evaders. There is also a whistle

blowers reward to those who volunteer information that lead to recovery of taxes. These

sanctions and the reward have helped in improving the general level of tax compliance. While

there is an increase in collection figures and compliance, the tax compliance ratio on rental

income is still below the global average of 20% and the sub Saharan average of 18% (KRA,

2018).

The Kenyan government expects individuals to determine their own tax requirements and

voluntarily pay whatever is due both regularly if monthly salary and annually. By assigning

the responsibility on individuals, the government eludes the expensive alternative of

determining each taxpayer’s obligation and exploit alternatives to collect it. Nonetheless, one

cost of depending so greatly on the voluntary compliance of individual tax payers is that not

all individuals voluntarily pay their taxes when due. Kenya is considered to be one of Africa's

low-income and low-tax countries with a difficult duty to guarantee a resourceful and efficient

fiscal governance.

Kenya Revenue Authority (KRA) performs education monthly to all newly registered

taxpayers so as to improve tax compliance. Whether the increased taxpayer education has led

to improved tax compliance has not been captured in any observed study (KRA, 2011). It is a

law that any income generated from any investment in the Kenyan country to be subjected to

taxes. The government of Kenya since 2003 has focused on mobilizing the domestic resources

for purposes of financing the recurrent expenditure. The 2011 recurrent expenditure was

2
financed to the level of 94% through taxes. While tax collection increased significantly to over

300 percent between 2003 and 2011 the contribution of landlords is very small (KRA, 2018)

In Kenya, two tax regimes exist in the taxation of residential rental income. This is the tax

payable by resident persons (individual or company) on rental income earned for the use or

occupation of a residential property where the rent income is between Kshs. 144,000 (Kshs.

12,000 per month)and Kshs. 10 million per annum. The first tax regime is the rental taxation

under the annual regime where rent is charged on the actual amount received, the expense

incurred to generate the rent is allowed under section 15 of the Income-tax act Kenya and then

tax is calculated under individual graduated scale or corporate rate of 25%. The second tax

regime is the monthly rental income tax (MRI) charged under section 6A of the Income Tax

Act, it was introduced by Finance Act 2015 and was effective from 1st January 2016.

Residential rental income is charged at a flat rate of 10% on gross rent received per month and

is payable when landlords receive rent from their tenants either monthly, quarterly, semi-

annually, or annually. However, returns must be filed monthly. No expenses, losses, or capital

deduction allowances shall be allowed for deduction from the gross rent. (KRA, 2020)

1.2 Statement of the Problem

In most third world countries rental house taxation has been classified as economic transactions

which are a bit difficult to detect given the large number of citizens involved (OECD, 2012).

In Kenya, taxation has been the main source of revenue for the government. The taxes are used

by the government to provide public goods and/or services to the general public. Over the past

years, though revenue collections by the Kenya Revenue Authority have increased, the

revenues collected have not been sufficient to fund the budget proposals resulting into budget

deficits (Alegana, 2014). In addition, the rise in government expenditure has forced the

government to bring each and every sector into taxation bracket so as to be able to fund such

3
crucial goods and services to the public. Thus, there is need to examine the factors influencing

residential rental income tax compliance by Landlords in Machakos County.

Despite that rental business has been largely operating as an informal segment, there is a rapid

growth in the real estate business adding into informal sector. Informal sector comprises

economic activities not regulated by laws such as environmental, labor or taxation, but is

subject to the regulations of the local authorities. Studies estimate that informal businesses

account for 35-50% of GDP in many developing countries. Similarly, in Kenya, the informal

sector is quite large contributing over 25% of the country’s GDP (Crivelli E, De Mooij R, &

Keen M., 2016). Due to the challenges associated with difficulty in taxing informal segments

of the economy, growth in this segment translates to loss in government revenues. According

to the Institute of Economic Affairs IEA (2011), there is a strong relationship between the size

of informal sector and the inability of the Government to collect the requisite taxes.

Most researchers (Torgler, 2013; McBarnet, 2013 and Murphy and Harris, 2017) on tax

compliance focused their attention on the Western World and some Asian countries. Socio-

cultural factors are important components in the lives of a people and given the deep-rooted

and pervasiveness of these in the Kenyan societies, there is a clear need for more empirical

research on the factors affecting residential income tax compliance. It is therefore, the focus of

this study to subject tax compliance to empirical analysis in the Kenyan context. According to

Murphy and Harris (2017), tax laws cannot cope with every eventuality and has to be

supplemented with administrative procedures and decisions and just as importantly, in order to

work, it has to have a reasonable degree of willing compliance on the part of the taxpayers

themselves.

Despite the fact that there are many studies related to tax compliance for developed country,

there is however paucity of study on the factors affecting rental income tax compliance for

4
developing countries especially for Kenya. Some related studies, in particular (Lumumba,

Wanjohi and Magutu, 2010; Omondi, 2010; Moyi & Ronge, 2016 and Karingi, Wanjala,

Nyamunga, Okello, Pambah, & Nyakang, 2015) have investigated the relationship between

education, tax audit and tax evasion; and also discussed about ethics on tax evasion in Kenya.

None of them have looked specifically at the factors affecting tax compliance on residential

rental income. Realizing the significant effect of tax evasion on an economy and a lack of study

in this area for Kenya, this study attempts to fill the gap. Specifically, this study attempts to

estimate factors that cause residential rental tax non-compliance and their relative contribution

in Kenya.

1.3 Objectives

1.3.1 General Objective

The general objective of this study was to investigate factors affecting residential rental income

tax compliance among landlords in Machakos County in Kenya.

1.3.2 Specific Objectives

i. To find out the effect of the taxpayers’ tax knowledge on residential rental income tax

compliance among landlords in Machakos County

ii. To investigate the effect of penalties and interest on residential rental income tax

compliance among landlords in Machakos County

iii. To ascertain the effect of tax rates of the revenue authority on residential rental income

tax compliance among landlords in Machakos County

iv. To establish whether modes of payment influence residential rental income tax

compliance among landlords in Machakos County

1.4 Research Questions

This study sought to address the following research questions;

5
 i. How does taxpayers’ tax knowledge affect residential rental income tax compliance

among landlords in Machakos County?

ii. How do fines, penalties and interest affect residential rental income tax compliance

among landlords in Machakos County?

iii. How do tax rates of the revenue authority affect residential rental income tax

compliance among landlords in Machakos County?

iv. How do the modes of payment of tax affect residential rental income tax compliance

among landlords in Machakos County?

1.5 Justification of the study

The study is relevant to the following stakeholders;

At the end of every year, as government prepares budget for the ensuing year, forecasting what

it expects to receive and what it tends to spend. The bulk of receipts, which are through taxation,

serve as a source of government revenue. These revenues are used to develop both human and

infrastructure of the country in the form of hospitals, schools, roads and to carry out essential

services like electricity, water and sanitation, but sadly enough majority of the citizenry who

by statutory provision are qualified to honor their tax obligation to the state fail to do so thus

denying the state the needed revenue to carry out these classes of projects. It is assumed that

these categories of people would come to understand the purpose of taxation.

The arguments that tax authorities are inefficient and are therefore not proactive in collecting

taxes are thought of sound reasoning. Conversely, the Kenyan tradition of not paying taxes is

rooted so deeply in Kenya since colonial times. This research is expected to be of benefit to

Revenue officials who are saddled with the responsibility of ensuring that taxpayers are not

negligent in paying their taxes. It can also assist in knowing why taxes are evaded. The outcome

of this research can enable them to have a better understanding of why tax payers evade taxes.

6
Therefore, when these reasons are adequately appraised, it is expected that it can in turn

translate to the provision of necessary infrastructure for the society when the resources are

judiciously utilized.

This research would enhance the rental income earner to honor their tax obligation for the

government to honor its responsibility. It is assumed that all things being equal, at the end of

this research the citizenry will not be antagonistic about the tax collection system and thus

honor their tax obligation.

The impact of tax compliance on the operations of Kenya Revenue Authority in Kenya and

indeed the economy at large is of interest to researchers and industry practitioners. This study

can serve as a stepping stone for new research on taxation. The study will be of benefit to

researchers and academicians as it will add to the body of knowledge on the factors affecting

residential rental income tax compliance by landlords in Machakos County, Kenya. This

research is also expected to be of benefit to researchers and students of accounting since it is

an important aspect of taxation. Hence, it serves as a reference point for future researchers and

a blue-print for policy makers.

1.6 Scope of the study

The area of consideration for the study was Machakos County. The commercial activities

commonly found in Machakos County are; Pharmacy Shops, Chemical/Drugs Store Operators,

Seamstress and Tailors, Plumbers and Pipe fitters, Hairdressers and beauticians, Auto

Mechanics, Carpenters & Joiners and Masons. Therefore, for the purpose of this research the

target was the landlords of this County who receive monthly rent from various tenants. The

study was conducted during the period June 2020 to July 2020 and only covered the variables

stated in the specific objectives.

7
1.7 Limitations of the study

Time constraint was a limiting factor because the researcher is a full time employee.

Availability of funds was also a limiting factor to the study since the researcher is self-

sponsored. There was no assurance that the respondents will return all the questionnaires duly

completed, neither was there a guarantee that those who will be interviewed would respond to

all the questions put forward to them comprehensively for fear that it would expose their

noncompliance to K.R.A. Covid-19 pandemic was also a limiting factor as the landlords were

afraid to handle the questionnaires.

To counter these limitations, the researcher took leave from work to make time to interview

the respondents and also sought for funding from relatives. The landlords’ fear of participation

was overcome by explaining to them the intent of the study and issuing the transmittal letter as

well as the supervisors contact for verification purposes. Hand sanitizers were used when

handling the questionnaires.

8
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter reviews literature on the factors affecting residential rental income tax

compliance. It starts by reviewing the theories that are relevant to this area of study. The

concept of this study is also figuratively depicted in order to provide a succinct idea of the

study themes and variables.

2.2 Theoretical Literature Review

This section provides a review of some theories which form the epistemological foundations

of the study. The theories are mainly oriented towards behavioral reason for compliance

tendencies among human beings.

2.2.1 Intrinsic Motivation Theory

Other sciences like sociology and psychology have stressed the importance of behavior based

on moral and ethical considerations. In economic analysis, internalized values are taken as

exogenously given and not influenced by prices or regulations. (Becker 1976 and Hirshleifer

1985). Frey (1997) demonstrates that intrinsic versus extrinsic motivation are also relevant for

explaining compliance behavior. He looks at tax morale as a particular kind of intrinsic

motivation. It is an attempt to introduce a psychological effect into economics without giving

up the rational choice framework. His approach includes a crowding out effect of intrinsic

motivation in the analysis of tax compliance.

Increasing monitoring and penalties for noncompliance, individual will ensure that extrinsic

motivation has increased, which on the other hand crowds out intrinsic motivation to comply

with taxes. Thus, the net effect of a stricter tax policy is unclear. If intrinsic motivation is not

recognized, taxpayers get the feeling that they can as well be opportunistic. This puts into

9
account the relevance of policy instruments in supporting or damaging the intrinsic motivation.

Intrinsic motivation depends on the application of policy instruments. Frey (1997) claims that

tax morale is not expected to be crowded out if the honest taxpayers perceive the stricter policy

to be directed against dishonest taxpayers. Regulations which prevent free riding by others and

establish fairness and equity help preserve tax morale.

Tax payers have particular inherent attributes that decide how they cope with different life

requirements. The need for tax compliance is of paramount importance but taxpayers actions

towards compliance are sometimes dictated by intrinsic motives of the taxpayers.

2.2.2 Economic Theory

In the classic Sandmo (2005) paper, a moral but risk averse taxpayer, with true income Y,

chooses the fraction of income to declare to tax authorities to maximize her expected utility of

income. The policy environment is given by the legally mandated income tax function, T(Y),

the penalty rate on detected but underpaid taxes, p, and the probability of tax audit and

detection. For simplicity, we assume a proportional tax function with tax rate there. The

fraction of income reported voluntarily to tax authorities (or the level of compliance) is denoted

by x. The taxpayer’s decision problem can be written as: MaxE(U) = (1-p)U[YN] + pU[YC]

This model predicts that, provided the expected additional payment on detection p (1+p) tY is

below the tax due when income is reported honestly (tY), the taxpayer will not comply fully,

choosing to report less than 100 per cent of her income. However, there will be greater

compliance if there is stricter enforcement either by raising p. In studies attempting to

empirically verify the Economic model, it has been pointed out that since expected additional

payments if evasion is detected observed in practice are always less than taxes due, taxpayers

would always evade taxes if they behaved in accordance with the AS model. Tax evasion,

however, is not resorted to by all taxpayers, in evidence from countries like the USA. This has

10
prompted an enormous number of extensions of the Economic model over the past 30 years,

leading to the identification of many of the compliance determinants reviewed above. (Das-

Gupta, 2004).

2.2.3 Fiscal Exchange Theory

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

models. It is based on the existence of a psychological, relational or social contract between

the taxpayers and the government (McKerchar & Evans, 2009). The theory proposes that

government expenditure is the main motivation of tax compliance and the government has the

power to ensure that its citizen are compliant by providing better public goods and services

with the amount of tax collected (Fjeldstad, Sjursen,& Ali, 2013). Secondly, this theory

proposes a relation of tax bargaining between government and the taxpayers, which is deemed

as essential to building a relation of accountability and obligations involving the state and

society (Fjeldstad, et al., 2012).

It asserts that government expenditure provides a motivating factor for taxpayer compliance,

particularly when the goods and services received from the government are valued by the

taxpayers (Bello & Danjuma, 2014). Consequently, the taxpayers will be more ready to comply

when they are content with services provided by the government on the other hand, taxpayers

are likely to adjust their trading terms by reducing compliance when they are discontented with

services provided by the government, or even when they detest the way their taxes are utilized

(Torgler, 2003). The significance of this theory is that landlords may be willing to pay

residential rental income tax when they value public goods and services offered by their

government and trust that there will be more service provision by the government for more tax

paid. Conversely, the landlords may be unwilling to comply if they believe that they do not

gain any benefit from the taxes paid to the government or that there is wasteful expenditure

and looting in public coffers.

11
2.2.4 Theory of Crime

The theory of crime asserts that people are rational actors who behave in a manner that will

maximize their expected utility. In the early 1970s, Alligham and Sandmo (1972) interlinked

on the economics of crime to the taxation context. They examined taxpayer's decision to evade

taxes when they were filling out their tax returns and examined the relationship between penalty

rate for tax evasion at the time, the probability of detection, and degree of tax evasion engaged

in. What they found was that there was a relationship between these variables; with a higher

penalty rate and probability of detection deterring individuals from evading their taxes. In the

1980s, therefore, many scholars began to question the value of deterrence alone in regulating

behavior. They began to focus their attention on researching compliance rather than deterrence

and began to realize the importance of persuasion and cooperation as a regulatory tool for

gaining compliance. In fact, research has shown that the use of threat and legal coercion,

particularly when perceived as illegitimate, can produce negative behavior; these actions are

more likely to result in further non-compliance (Murphy & Harris 2017), creative compliance

(McBarnet, 2003), criminal behavior or opposition (Fletcher 2009).

2.3 Conceptual Framework

The goal of a conceptual framework is to categorize and describe concepts relevant to the study
and map relationships among them. The conceptual framework for this study is figuratively
depicted below under figure 2.1.

12
 Independent Variables Dependent Variable
Tax knowledge

 Knowledge on tax return filing

 Tax Laws
 Knowledge on Tax calculation

Tax penalties &interests

 Tax audit Residential Rental Income Tax

 Tax fines Compliance
 Penalty systems structure
 Tax Registration
 Tax returns Filing
 Correct reporting
Modes of payment  Tax payment
 E-slip generation.
 Mpesa /Bank transaction.

Tax rates

 Tax base
 Level of tax rate

Figure 2.1 Conceptual Framework

(Source: Author, 2021)

2.4 Empirical Literature Review

This section discusses literature from various sources regarding tax compliance and also brings

out gaps in literature that this study seeks to address.

2.4.1 Tax Knowledge and Residential Rental Income Tax Compliance

Knowledge about taxation, the benefits of taxation and the dangers of non-compliance remain

a key impediment to tax compliance in many countries. Countries such as the US, Canada,

Japan, New Zealand, Australia, the UK and Malaysia have all been implementing a continuous

tax education for taxpayers and children as future taxpayers (Palil, 2013). Various countries

such as the USA, the UK and Australia also have developed interactive websites, disseminated

leaflets together with tax returns, opened call centers’, created advertisements or supplied

reminders via television and radio (e.g. to remind taxpayers of deadline dates for filings). In

13
addition to tax education, knowledge about tax laws also plays a major role in determining

taxpayers’ compliance (Ongore & K’Obonyo, (2011)

Khan, and Awan, (2012) showed that other factor that cause tax evasion is tax culture. They

evaluated the influence of education on tax compliance among undergraduate students in

Malaysia, and found that there is a close relationship between education and tax compliance.

Studies in India by Keasey (2017) also found that complicated tax structure, dishonest staff,

high tax rates and high tax rate on sales are factors that cause high black money in India. Among

large number of studies related to residential income tax, only limited number of these studies

investigated the phenomena in Malaysia. Among these studies, we can point to the study of

Kasipillai et al., (2013) that investigated the influence of education on tax avoidance and tax

evasion by using questioner method.

According to the Fischer Model, non-compliance opportunities can affect tax compliance both

directly and indirectly through attitudes and perceptions. Chan, Troutman, and O'Bryan (2010)

investigate the direct and indirect effects of two noncompliance opportunities, namely

educational and income level. Previous literature supports the direct, negative relationship

between educational level and taxpayer compliance but a direct relationship' between income

level and tax compliance is unclear.

Chan et. al., (2010) also postulates that greater education is directly linked to a likelihood of

compliance. They argue that 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 et. al., (2010) 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.

14
Hasseldine, Hite, James & Toumi, (2007) investigate the current developments in the USA,

highlighting that tax academics need to emphasise teaching and development. In other

countries, tax education, as well as tax development is not as good as in the USA. Their study

was expected to be able to help academics in other countries to adapt what has been done in

the USA, especially in teaching methodology (in tax courses) so that other countries can learn

how to educate taxpayers more effectively and efficiently.

Traditionally, the US taxation courses are taught within accounting departments only. The first

paper introduces students to personal taxation; by the end of the course, the students will be

able to prepare the tax return. The weaknesses of this method had been commented upon by

Jones and Duncan, (2015). They noted that this narrow approach in the long run does not fulfill

the education needs for the students because most students are not aiming to become

accountants or tax professionals.

Jones and Duncan (2015) added that a first taxation course should be broader in nature so that

the students will be able to relate taxation aspects to other related fields such as accounting,

financial economics and perhaps law. This scenario happened in other countries as well, when

the education systems itself indirectly narrowed the students' mindset to be focused only on a

taxation field without then relating this to other fields (Craner and Lymer, 2019).

A formal tax education is only taught to accounting students in higher learning institutions.

Other than this, they could not easily find any tax related courses but in other countries such as

the USA, there are a lot of accounting (tax) education programmes offered to the public. While

the education levels become more important in increasing tax compliance across countries,

(Mintzberg, 2009), suggested that one of the measures to increase to unitary compliance is by

assuring that taxpayers have a certain level of qualifications, ability and confidence to exercise

their tax responsibility. From the empirical literature, little research has been done to establish

15
whether literacy of the tax system and tax laws has any influence on tax compliance and more

so among landlords in Machakos County.

2.4.2 Penalties and Interest on Residential Rental Income Tax Compliance

Empirical studies on the impact of penalties and fines on rental tax compliance did not find the

clear picture on the correlation between the two variables. In sum, the relation of fines and tax

compliance also shows inconsistent findings. Some experiments show that fines are slightly

higher related to tax compliance than audit probabilities are (Park & Hyun, 2013). Keeping

constant the expected value of a tax but changing audit probabilities and fines for non-

compliance, it showed that compliance increased significantly with higher fines, but not with

higher audit probabilities. Other experiments, on the contrary, showed that fines and tax

compliance are not related, but audit probabilities and tax compliance are. In the current

framework, it would be argued that the interpretation of fines matters.

In an antagonistic climate, fines can be a part of the game of "cops and robbers"; in a synergistic

climate, they can be perceived as an adequate retribution for behavior that harms the

community. Fines are therefore connected to trust and power. Fines that are too low could be

perceived as indicator that the authorities are weak and unable to control the wrongdoers,

undermining trust among honest taxpayers. Fines that are inappropriate because a taxpayer

involuntarily made a mistake resulting from ambiguous tax laws, or fines that are exorbitantly

high, would undermine the perception of retributive justice and induce tax evaders to try even

harder to regain their "losses'" incurred by those fines (Kirchler et al., 2013).

Tax audit is one of the most effective policies to protect the behaviour of tax evasion. The level

of tax audit can be determined by two elements: one is how many taxpayers are selected for

audit and the second is how much intensive the audit is. The first element is easily measured

by the number of audited taxpayers divided by the total number of taxpayers. However, the

16
second element is so difficult to measure due to no published information about the process of

tax audit. It is commonly measured by the first element to indicate the level of tax audit for

practical comparison (Gwaro, Maina, & Kwasira, 2016). Tax audit generates administrative

cost. As a constraint of the fixed administration cost, an increase in the level of tax audit is

required to decrease the level of other administrative functions, like taxpayer service, tax

collection etc.

The increasing tax avoidance and tax resistance due to an increase of fines puts into question

how fines should be assessed to be effective. On the one hand, fines 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 fines 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, fines are

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

might yield too low fines to have deterrent effects. An alternative would be to adjust the fine

to the income of taxpayers. In an experimental survey study by Muehlbacher, Holzl and

Kirchler, (2009) income-adjusted fines had more impact on the sentenced taxpayer's intention

to commit the same offense again than fines which were solely adjusted to severity of evasion

fact.

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 behaviors. If some

17
taxpayers had the intentional evasions, the penalty rate is much higher than that of unintentional

evasions (Joulfainan, 2010).

2.4.3 Tax Rates and Residential Rental Income Tax Compliance

The main objective of imposing certain taxes on the public is to generate revenues for the

government for public expenditure (Surrey, 2014). However, there are other functions of taxes

as suggested by Lymer and Oats (2011) including to reduce inequalities through a policy of

redistribution of income and wealth so that income gap between the rich and the poor is not as

significant. According to Lymer and Oats (2011) tax systems are also designed for social

purposes, such as discouraging certain activities which are considered undesirable and

protecting the environment. For instance, the excise taxes on alcohol and tobacco are (at least

partly) exercised to decrease consumption and thus encourage a healthier lifestyle. Taxes are

also expected to ensure economic goals through the ability of the taxation system to influence

the allocation of resources including transferring resources from the private sector to the

government to finance the public investment programme, the direction of private investment

into desired channels through such measures as regulation of tax rates and the granting of tax

incentives.

Kasipillai, Reckers, and Roark, (2013), assert that some cases non-compliance may mean an

outright failure to pay levied taxes. Eriksen and Fallan, (2006) found that non-compliance is

prevalent in developing countries and it hinders development thereby leading to economic

stagnation and other socio-economic problems. Kimani, Mwangi, Nyachwaya, Cheruyot,

(2015) identified tax rates as one of the causes of tax evasion. He pointed out that a higher tax

rate increases taxpayers' burden and reduces their disposable income therefore, the probability

of evading tax is higher. Small taxpayers under the regular system of taxation are discriminated

against, since the compliance requirements, cost of compliance and tax rate are the same for

both small and large enterprises. Reducing the compliance costs and tax rate increases the small

18
enterprises profit margin. It also increases the Government's tax revenue, since the simplified

provisions for small and medium enterprises reduce the size of the informal economy and the

number of non-complying registered taxpayers (Vasak, 2012).

2.4.4 Modes of Payment and Residential Rental Income Tax Compliance

A study by Atawodi and Ojeka (2012) on the factors that affect tax compliance among small

and medium enterprises (SMEs) in North Central Nigeria found out that tax rates are a major

challenge facing micro and small enterprises across the globe. Despite the fact that they face

other tax related issues, it is the problem of high tax rate that mostly promotes non-compliance

and pushes most SMEs to remain in the informal sector. This concurs with another study by

Carroll (2011) in Ghana, who found out that the impact tax payments had on women’s

businesses and livelihoods was varied. Thirty-seven per cent of women surveyed reported that

these had no impact on their livelihoods, while in the focus group discussions, some said it had

a positive impact on their livelihoods as their taxes pay for hospitals, schools and so on. Others

who formed majority reported a reduction in profits as a result of paying tax, and some said

their ability to provide for their families was negatively impacted by the amount of tax they

had to pay.

Atawodi and Ojeka, (2012) 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 and evasion are taken by taxpayers as solution to escape from payment

of proper business house rental income taxes.

19
Kimaru, and Jagongo, (2014) 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 probit 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.

Kobia, (2012) explored factors influencing turnover tax compliance in the Kenya revenue

authority domestic taxes department in Nairobi County. The study used a sample of 56

respondents selected via stratified sampling and data collected using questionnaires. The study

findings revealed that the perceptions of taxpayers towards the modes of payment greatly

determine the level of compliance for turnover tax. The findings also found that other factors

like cost of compliance and complicated systems result into the low levels of compliance. The

study also established that increased tax knowledge had a significant effect on perception of

tax system.

Thananga, Wanyoike and Wagoki (2013) carried out a study on how landlords in Nakuru

Municipality 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.

20
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 45

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 noncompliance 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 noncompliance of Kenyan taxpayers. This study seeks to

establish the effect of modes of payment on residential rental income tax compliance among

landlords in Machakos County.

2.5 Study Gaps

The findings from the empirical research suggest that taxpayers' knowledge of the tax system

and tax laws are important in explaining the taxpayer non-compliance. Related to the tax

system itself, there is specific evidence to suggest that adequate training on tax system and tax

laws can affect taxpayers' views about paying tax and can go on to affect their compliance

decisions. However little has been done to show the effect of knowledge of tax of landlords on

the rental income tax compliance.

Empirical studies on the impact of penalties and fines on rental tax compliance show

contradictory findings. Some researchers (Park & Hyun, 2013) have found out that keeping

constant the expected value of a tax but changing audit probabilities and fines for non-

compliance, it showed that compliance increased significantly with higher fines, but not with

higher audit probabilities. Other experiments, on the contrary, showed that fines and tax

compliance are not related, but audit probabilities and tax compliance are. In the current

framework, it would be argued that the interpretation of fines matters (Kirchler et al., 2013).

21
Realizing the significant effect of penalties and fines on tax compliance and a lack of studies

in this area for Kenya, this study attempts to fill the gap. Specifically, this study attempts to

estimate factors that cause residential rental income tax non-compliance and the relative

contribution in Kenya’s revenue collection.

The mode of payment of rental income tax has evoked great attention among many Revenue

Authorities in the World especially in Developed Countries. However, there is little evidence

on what has been done towards the study on the effect of modes of payment of rental income

and tax compliance among landlords as they concentrate more in studies which would increase

their budgets "bottom-line" in terms of huge revenue collection and enforcement efforts at the

expense of studies on the methods of tax payment which would make increase in rental income

tax compliance to be realized and enforcement efforts work.

2.6 Summary of the Literature Review

This chapter presented a review of the literature addressing the research questions on the factors

affecting residential rental income tax compliance by landlords in Machakos County, Kenya.

Based on the existing literature and empirical studies, the chapter discusses the relationship

between tax knowledge, penalties and interests, taxation rates, modes of payment and

residential rental income tax compliance. Chapter three will discuss the methods and

procedures used to carry out the study.

22
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the methods that were used to prepare for the study, collect data and the

methods of data analysis. The specific areas included are the target population, sampling

technique, sample size, data collection method, research instruments, pilot testing, instruments,

and data collection procedures and data analysis.

3.2 Research Design

Research design is the blue print for the collection, measurement and analysis of the data. It is

a plan and structure of investment so conceived as to obtain answers to research questions

(Coopers & Schindler, 2006). The study used a descriptive research design. Descriptive survey

designs are used in preliminary and exploratory studies, to allow researchers to gather

information, summarize, presents data and interpret it for the purpose of clarification (Creswell

2003). According to Orodho & Kombo (2002), descriptive design is used when collecting

information about people's attitude, opinions and habits.

Descriptive survey design has been used in other studies. For example, Wanjau (2010) used

descriptive survey design to investigate the role of quality in growth of SMEs in Kenya while

Mwangi and Bwisa, (2013) used descriptive exploratory design to identify and analyze the role

played by supply chain relationships in enhancing the growth of small enterprises in Kenya.

3.3 Population

A population is defined as the total collections of elements about which inferences are made

and refers to all possible cases which are of interest for a study Sekaran and Bougie (2010).

Other scholars like Smith (2011) view population as the large collection of all subjects from

where a sample is drawn. For the purpose of this study, the target population was 464 landlords
23
operating in Machakos County in Kenya. The accessible population was all the landlords

residing within Machakos County because there are landlords who are non-residents while

other are based out of Machakos and the logistics of reaching them proved to be cumbersome.

When the population of the study is small and located in a narrow geographical area, the target

population is closely comparable to the accessible population (Mugenda and Mugenda, 2003).

3.4 Sample and Sampling technique

Mugenda & Mugenda (2003) defines sample frame as the list of accessible population of

people, events or documents that could be included in a survey and from where the researcher

can pick a sample to collect data. The sampling frame for this study consisted of the list of

landlords in Machakos County. This sample frame was chosen from Machakos municipality

which is one of the three municipalities in the Machakos county government. Machakos

municipality is under the department of housing and urban development responsible for all

physical developments within the County and is better placed to locate all building structures

within the County. Also, all building plans will be approved and monitored by the said

department. Sekaran & Bougie, (2010) describes a sampling frame as a list of members of the

research population from which a random sample may be drawn.

Different scholars have defined the term "sample" in various ways. For example, scholars like

Mugenda& Mugenda (2003) and Sekaran, & Bougie, (2010) define a sample as a part of the

total population. Orodho and Kombo (2002) view a sample as a finite and representative

number of individuals or objects in a population to be studied. On the other hand, Kothari

(2004) describes a sample as a collection of units chosen from the universe to represent it.

Gerstman (2003) state that a sample is needed because a study that is insufficiently precise is

a waste of time and money.

24
The study selected a sample size of 210 landlords using Fisher, Laing & Stoeckel (1983)

formula.

The formula is as stated below

𝑁
𝚗 = Z 2 𝑝. 𝑞(e2 (𝑁−1+Z2𝑝.𝑞)

Where:

n= the required sample size

P = proportion of population with the required characteristics of the study

Q = proportion of population without the required characteristics of the study (1-P)

N= Total population

e = accuracy level required.

Standard error = 10%

Z= Z value at the level of confidence of 95% = 1.96

Therefore, the total number of respondents in this study was 210 respondents, who were

involved in this study.

464
n = 1.962 ∗ 0.52 (0.052 ∗463 +(1.962 ∗ 0.52 ))

464
n = 0.9604((1.1575+0.9604))

464
n = 0.9604(2.1179 )

n = 210

Based on the workings the sample size of the study was 210.

25
3.5 Data Collection Instruments

The study used a questionnaire to obtain primary data. Orodho and Kombo (2002) states that

the questions or statements in a questionnaire in a study are directly related to the research

questions. In development of a survey questionnaire, the variables for which information needs

to be collected have to be identified followed by their operational definition. According to

Sekaran and Bougie, (2010) questionnaires consist of a series of specific, usually short

questions/statements that are either asked verbally by an interviewer, or answered by the

respondent on their own (self-administered). Alikert scale questionnaire will be utilized

because it is possible to convert responses into quantitative format for ease of data analysis

using computer-based software.

3.6 Data Collection Procedure

The questionnaires were self-administered. Cooper and Schindler (2006) support the use of

questionnaires over personal interviews in descriptive studies because self-administered

surveys typically cost less. Two hundred and ten (210) questionnaires were randomly and

conveniently administered to landlords. Due to the confidentiality and sensitivity of the

information Mugenda & Mugenda, (2003) recommends that the questionnaire should be

designed in a manner that will not require the respondents to reveal their names or identities.

3.7 Pilot Test

To check the validity and reliability of the questionnaires in gathering the data required for

purposes of the study, a pilot study carried out. The purpose of pilot testing was to establish

the accuracy and appropriateness of the research design and instrumentation (Saunders, Lewis

& Thornhill (2007). Sekaran and Bougie, (2010) states that the importance of field piloting

cannot be overemphasized; you will almost always find that there are questions that people fail

to understand or interpret in different ways, places in the questionnaire where they are not sure

where to go next, and questions that turn out simply not to elicit useful information. Cooper &

26
Schindler (2006) concur that the purpose of pilot test is to detect weaknesses in design and

implementation and to provide proxy for data collection of a probability sample. Sekaran

(2008) reinforces that pilot test is necessary for testing the reliability of instruments and the

validity of a study.

Baker (1988) states that the size of a sample to be used for piloting testing varies depending on

time, costs and practicality, but the same would tend to be 5- 10 per cent of the main survey.

According to Cooper and Schindler (2006) the respondents in a pilot test do not have to be

statistically selected when testing the validity and reliability of the instruments. In this study,

data collection instrument (questionnaire), was tested on 5% of the sample of the questionnaires

to ensure that it was relevant and effective. It was tested on eleven (11) respondents.

3.7.1 Reliability of the Data Collection Instrument

Reliability refers to the repeatability, stability or internal consistency of a questionnaire (Jack

& Clarke, 1998). Cronbach's alpha was used to test the reliability of the measures in the

questionnaire (Cronbach, 1951). According to Sekaran (2003), Cooper & Schindler (2003),

Cronbach's alpha has the most utility for multi-item scales at the interval level of measurement,

requires only a single administration and provides a unique, quantitative estimate of the internal

consistency of a scale. The questionnaire responses were input into statistical package for social

sciences (SPSS) and Cronbach's alpha coefficient was generated to assess reliability. The closer

Cronbach's alpha coefficient is to 1, the higher the internal consistency reliability (Sekaran&

Bougie, 2010). A coefficient of 0.7 is recommended for a newly developed questionnaire and

this was adequate for this study.

3.7.2 Validity of Data Collection Instrument

Validity refers to whether a questionnaire is measuring what it purports to measure. Saunders

et. al., (2007) describe validity as the degree of congruence between the explanations of the

27
phenomena and the realities of the world. While absolute validity is difficult to establish,

demonstrating the validity of a developing measure is very important in research. This study

used both construct validity and content validity. For construct validity, the questionnaire was

divided into several sections to ensure that each section assessed information for a specific

objective, and also ensure that the same closely ties to the conceptual framework for this study.

To ensure content validity, the questionnaire was subjected to thorough examination by two

independent resource persons, who were randomly selected among the Kenya revenue

authority managers. The resource persons were asked to evaluate the statements in the

questionnaire for relevance and whether the questions posed were meaningful and clear to

answering the research questions. On the basis of the evaluation, the instrument was adjusted

appropriately before subjecting it to the final data collection exercise. Their review comments

were used to ensure that content validity is enhanced. The project supervisor also reviewed the

questionnaire for its content and construct validity.

3.8 Data Processing and Analysis

Bums and grove (2003) define data analysis as a mechanism for reducing and organizing data

to produce findings that require interpretation by the researcher. De Vos (2002) goes ahead and

describes data analysis as a challenging and creative process characterized by an intimate

relationship of the researcher with the participants and data generated. According to Hyndman

(2008), data processing involves translating the answers on a questionnaire into a form that can

be manipulated to produce statistics. This involves coding, editing, data entry, and monitoring

the whole data processing procedure. After data was obtained through questionnaires, it was

prepared in readiness for analysis by editing, handling blank responses, coding, categorizing

and keyed into statistical package for social sciences (SPSS) computer software for analysis.

The statistics generated were frequencies, descriptive statistics and inferential statistics.

28
Microsoft excel was also used to complement SPSS especially in production of charts and

tables.

3.9 Data Analysis

Collected data was analyzed using descriptive and inferential statistics with the help of

Statistical Package for Social Sciences version 21(SPSS 21). Descriptive statistics involved the

use of measures of central tendency, which included frequencies, percentages, the mean and

standard deviation while inferential statistics will be used to draw conclusions.

3.9.1 Analytical Model

In evaluation of relation between variables, that is dependent variables and independent

variables, a multiple regression model was adopted. Regression analysis is a technique used to

estimate relationships between two or more variables. The multiple linear regressions was as

follows.

Y = Ꞵo + Ꞵ1X1 + Ꞵ2X2 + Ꞵ3X3 + Ꞵ4X4 +ɛ

Where

= Residential rental income tax compliance

= Taxpayers Tax Knowledge

= Tax fines penalties and interests

= Tax rates

= Modes of Payment

= Constant

= Regression Coefficients

= Error term

29
3.9.2 Test of Significance

To test the statistical significance, the F and t test was used. The F-Statistic was used to

determine significance of regression model, that is, to what extent the variation in independent

variable explains the changes in dependent variable. Analysis of Variance (ANOVA) was also

used to establish total variations within and between variables to determine relation between

variables. T-test was employed to test statistical significance of regression coefficients at 95%

confidence level.

30
 CHAPTER FOUR

DATA ANALYSIS, FINDINGS AND DISCUSSION

4.1 Introduction

This chapter contains the various findings on factors affecting residential rental income

compliance by landlords in Machakos County, Kenya.

4.2 Response Rate

The questionnaires were distributed to the respondents. The respondents were informed of the

importance of the study. A summary of the response rate is presented in table 4.1.

Table 4.1 Response Rate

Respondents Questionnaire Questionnaire Filled and Percentage

Administered retuned

Total 210 156 0.742

The findings on table 4.1 revealed that out of the population of 210, 156 respondents managed

to participate in the study whereby they filled and returned the questionnaires attaining a

response rate of 74.2%. A response rate of 50% is considered adequate for analyzing and

reporting in social studies, 60% good and above 70% rated very good (Mugenda & Mugenda,

2003). The response rate for this study was 74.2% and was considered very good.

4.3 Reliability Test

Cronbach’s Alpha test was used to test reliability of the research instrument. A coefficient of

0.7 or more indicates a high degree of reliability of the items in the questionnaire. The findings

are summarized in table 4.2.

31
Table 4.2 Reliability Test

Variables Cronbach's Alpha

Residential Rental Income Tax Compliance .854
Tax knowledge .845
Fines, penalties and interests .805
Tax Rates .867
Modes of payment .833

Based on the findings on table 4.2, Residential Rental Income Tax Compliance had a

Cronbach's Alpha coefficient of 0.854, Tax knowledge had a Cronbach's Alpha coefficient of

0.845, Fines, penalties and interests had a Cronbach's Alpha coefficient 0.805, Tax Rates had

a Cronbach's Alpha coefficient 0.867, Modes of payment had a Cronbach's Alpha coefficient

0.833.

Therefore, the findings indicate that there was a high degree of reliability of the items in the

questionnaire which produced reliable information to determine factors affecting residential

rental income compliance by landlords in Machakos County.

4.4 Demographic statistics

Demographics are characteristics of a population. Demographics considered in this study

included gender, ownership duration and age. These factors were arrived at after assessment of

the groups of respondents.

4.4.1 Gender statistics

The study sought to establish the gender distribution of respondents who participated
in the study. The results are presented in Table 4.2.

32
Table 4.3 Gender

Frequency Percent Valid Cumulative

Percent Percent
Male 93 59.6 59.6 59.6
Female 63 40.4 40.4 100.0
Total 156 100.0 100.0
Source: Research findings 2021

From the findings indicated above, the results ascertained that 93(59.6%) of the

respondents were male while 63(40.4%) of the respondents were female landlords in

Machakos County. The results can be interpreted to mean that both gender were well

represented in the study.

4.4.2 Duration of ownership

The respondents were requested to indicate their range of duration they had been

landlords. The results are presented in Table 4.3.

Table 4.4 Ownership duration

Frequency Percent Valid Cumulative

Percent Percent
Less than 2 yrs 20 12.8 12.8 12.8
2-4 yrs 45 28.8 28.8 41.7
5-10 yrs 39 25.0 25.0 66.7
above 10 yrs 52 33.3 33.3 100.0
Total 156 100.0 100.0
Source: Researcher 2021

The findings on table 4.3 reveal that 20 (12.8%) of the respondents had owned their residential

property for less than two years, 45 (28.8%) of the respondents had owned their residential

property between 2-4 years, 39 (25%) of the respondents had owned the residential property

between 5-10 years while 52 (33.3%) of the respondents had owned their residential rentals for

33
over 10 years. The results indicate that majority of the respondents were experienced landlords

who were relied upon to provide credible information.

4.4.3 Age

Information on the age category of the respondents was analyzed. The findings are presented

in the table 4.4

Table 4.5 Age of Respondents

Frequency Percent Valid Percent Cumulative

Percent
18-25yrs 7 4.5 4.5 4.5
26-35yrs 25 16.0 16.0 20.5
36-45yrs 45 28.8 28.8 49.4
Above 45 yrs 79 50.6 50.6 100.0
Total 156 100.0 100.0
Source: Researcher, 2021

The findings on table 4.4 revealed that majority of the respondents 79 (50.6%) were over 45

years of age followed by 45 (28.8%) of the respondents were aged between 36-45 years while

25 (16.0%) of the respondents were aged 26-35 years and finally 7 (4.5%) of the respondents

were aged between 18-25 years. The results indicate that majority of the respondents were

experienced landlords who were relied upon to provide credible information.

4.5 Descriptive Statistics

The objective of the study was to determine the factors affecting residential rental income

compliance by landlords in Machakos County, Kenya. To ascertain this, descriptive statistic

was carried out to determine the effect of taxpayers’tax knowledge, fines penalties and interest,

tax rates and modes of payment on residential rental income tax compliance by landlords in

Machakos County. The respondents were asked to indicate their levels of agreement with

statements on a five-point Likert scale where 1= Strongly Disagree; 2 = Disagree; 3 = Not Sure;
34
4 = Agree; 5 = Strongly Agree. Based on the constructs of the study, the means of the input

variables and standards deviations were computed. The mean scores of 0 to 2.5 were taken to

represent statements disagreed upon by a majority of respondents while mean scores of

between 2.6 to 5.0 represented statements agreed upon by a majority of respondents.

4.5.1 Taxpayers Tax Knowledge on residential rental income tax compliance in

Machakos County

Descriptive statistic was carried out to determine the effect of taxpayers’tax knowledge on

residential rental income compliance by landlords in Machakos County. The findings of the

means and standard deviations are as indicated in table 4.4 below.

Table 4.6 Descriptive statistic on Taxpayers Tax Knowledge

N Minimum Maximum Mean Std. Deviation

Residential rental owners
have adequate knowledge
on tax rate, basis of taxation
and compliance 156 1 5 4.15 1.152
requirements under
residential rental income
tax.
Knowledge about tax laws
plays a major role in
determining residential 156 1 5 2.62 .595
rental owners’ tax
compliance
Effective tax education can
change the attitude and
perception of residential 156 1 5 3.15 1.170
rental owner towards tax
compliance
KRA has created a lot of
public awareness on
156 1 5 3.37 .779
residential rental income
tax
Aggregate Mean = 3.3225 Standard Deviation(SD) = 0.924
Source: Research findings 2021

The findings on table 4.6 , revealed that majority of the respondents agreed that Residential

rental owners have adequate knowledge on tax rate, basis of taxation and compliance

35
requirements under residential rental income tax as shown by the mean of (x̅=4.15); majority

of the respondents agreed Knowledge about tax laws plays a major role in determining

residential rental owners’ tax compliance as shown by the mean of (x̅=2.62); majority of the

respondents agreed that Effective tax education can change the attitude and perception of

residential rental owner towards tax compliance as shown by the mean of (x̅=3.15); majority

of the respondents agreed that KRA has created a lot of public awareness on residential rental

income tax as shown by the mean of (x̅=3.37).

In totality, majority of the participant’s responses suggested the influence of taxpayers’tax

knowledge on residential rental income tax compliance by landlords in Machakos County as

shown be the Aggregate Mean of 3.3225 and Standard Deviation (SD) of 0.924.

4.5.2 Fines, penalties and interests effect on residential rental tax

The respondents were asked using various questions on their views on fines, penalties and

interests and how they affect tax compliance by landlords in Machakos County. Descriptive

statistic was carried out to determine the effect fines, penalties and interests on residential rental

income tax compliance by landlords in Machakos County. The findings of the means and

standard deviations are as indicated in table 4.4 below.

36
Table 4.7 Descriptive statistics on Fines, penalties and interests

N Minimum Maximum Mean Std. Deviation

Fines, penalties and
interests discourage tax
non-compliance of 156 1 5 4.43 .634
residential rental income
tax obligation.
Periodic waiver of
fines ,penalties and interests
156 1 5 3.81 .873
could encourage tax
compliance
Residential rental owners
file nil or incorrect returns
to avoid penalties of non- 156 1 5 1.40 .793
compliance on the iTax
system
KRA charges high rates of
156 1 5 4.60 .599
Penalties and fines
Aggregate Mean = 3.56 Standard Deviation(SD) =0.72475
Source: Research findings 2021

The findings on table 4.7 reveal that majority of the respondents agreed that Fines, penalties

and interests discourage tax non-compliance of residential rental income tax obligation as

shown by the mean of (x̅=4.43);.majority of the respondents agreed that Periodic waiver of

fines ,penalties and interests could encourage tax compliance as shown by the mean of

(x̅=3.81); majority of the respondents disagreed that Residential rental owners file nil or

incorrect returns to avoid penalties of non-compliance on the iTax system as shown by the

mean of (x̅=1.40); majority of the respondents agreed that KRA charges high rates of Penalties

and fines as shown by the mean of (x̅=4.60);

In the overall analysis, majority of the participant’s responses suggested the influence of Fines,

penalties and interests on residential rental income compliance by landlords in Machakos

County as shown be the Aggregate Mean of 3.56 and Standard Deviation (SD) of 0.72475.

37
4.5.3 Tax Rates

The respondents were asked their views using various questions on tax rates and how they

affect residential rental tax compliance. Descriptive statistic was carried out to determine the

effect of tax rates on residential rental income compliance by landlords in Machakos County.

The findings of the means and standard deviations are as indicated in table 4.4 below.

Table 4.8 Descriptive statistics on Tax rates

N Minimum Maximum Mean Std. Deviation

The tax rates for residential
156 1 5 3.12 .938
rental income are too high
The government spend well
the taxes earned through the 156 1 5 2.30 1.443
tax charges on landlords
10% residential rental
income tax rate(MRI) is fair 156 1 5 2.25 1.308
to most landlords
Residential rental owners
are now willingly paying
156 1 5 2.21 1.097
tax due to the well-
structured tax rate
Aggregate Mean = 2.47 Standard Deviation(SD)= 1.1965
Source: Research findings 2021

The findings on table 4.8 reveal that majority of the respondents agreed that the tax rates are

too high (regardless of the amount of income bracket you range in) as shown by the mean of

(x̅=3.12); majority of the respondents disagreed that the government spend well the taxes

earned through the tax charges on landlords as shown by the mean of (x̅=2.30); majority of

the respondents disagreed that 10% residential rental income tax rate(MRI) is fair to most

landlords as shown by the mean of (x̅=2.25); majority of the respondents disagreed that

Residential rental owners are now willingly paying tax due to the well- structured tax rate as

shown by the mean of (x̅=2.21).

In the overall analysis, majority of the participant’s responses was interpreted to suggest the

influence of tax rate on residential rental income compliance by landlords in Machakos County

as shown be the Aggregate Mean of 2.47 and Standard Deviation (SD) of 1.1965.
38
4.5.4 Modes of payment

The study sought to establish the influence of tax payment modes on the residential rental tax

compliance. The respondents were asked to indicate the extent to which they agreed with the

statements regarding modes of tax payment. Descriptive statistic was carried out to determine

the effect of Modes of payment on residential rental income compliance by landlords in

Machakos County. The findings of the means and standard deviations are as indicated in table

4.4 below.

Table 4.9 Descriptive statistics on Tax Payment modes

N Minimum Maximum Mean Std. Deviation

KRA tax payment modes
for landlords and tenants
156 1 5 3.79 .957
are complex and thus result
to non-compliance
Mpesa payment methods
make it easier for
156 1 5 4.63 .485
compliance of rental
income tax
Rental income tax payment
is best suited with bank
transactions as most 156 1 5 3.81 .877
payments are made through
bank transactions.
A combination of Mpesa
and Bank transactions has
diversified the modes of
156 1 5 4.61 .596
payment for transactions
and thus enhanced rental
income tax compliance
Aggregate Mean = 4.21 Standard Deviation(SD)= 0.72875
Source: Research findings 2021

The findings on table 4.9 reveal that majority of the respondents agreed that KRA tax payment

modes for landlords and tenants are complex and thus result to non-compliance as shown by

the mean of (x̅=3.79); majority of the respondents agreed that Mpesa payment methods make

it easier for compliance of rental income tax as shown by the mean of (x̅=4.63);majority of the

respondents agreed that Rental income tax payment is best suited with bank transactions as

39
most payments are made through bank transactions as shown by the mean of (x̅=3.81);.

majority of the respondents agreed that A combination of Mpesa and Bank transactions has

diversified the modes of payment for transactions and thus enhanced rental income tax

compliance as shown by the mean of (x̅=4.61).

In totality, majority of the participant’s responses suggested the influence of tax payment

modes on residential rental income compliance by landlords in Machakos County as shown be

the Aggregate Mean of 4.21 and Standard Deviation (SD) of 0.72875.

4.5.5 Tax compliance levels by landlords in Machakos County

The respondents were asked to indicate the tax compliance levels by landlords in Machakos

County. The findings are as indicated below.

Table 4.10 Descriptive statistics on Tax compliance

N Minimum Maximum Mean Std. Deviation

I file Residential Rental
income tax returns
156 3 5 4.62 .595
appropriately and on time
as required by law
I pay Residential Rental
156 3 5 4.21 .596
income tax on time
I declare correct
Residential Rental income
156 1 5 4.13 1.157
tax from rent when filing
their returns
I pay Residential Rental
income tax fines and 156 3 5 4.61 .596
penalties if any on time
Aggregate Mean = 4.3925 Standard Deviation(StD)= 0.736
Source: research findings, 2021

The findings on table 4.10 reveal that majority of the respondents agreed that From the findings

they file Residential Rental income tax returns appropriately and on time as required by law as

shown by the mean of (x̅=4.62); majority of the respondents agreed that they pay Residential

Rental income tax on time as shown by the mean of (x̅=4.21); majority of the respondents
40
agreed that they declare correct Residential Rental income tax from rent when filing their

returns as shown by the mean of (x̅=4.13); majority of the respondents agreed that they pay

Residential Rental income tax fines and penalties if any on time as shown by the mean of

(x̅=4.61).

In totality, majority of the participant’s responses suggested the influence of taxpayers’tax

knowledge on residential rental income compliance by landlords in Machakos County as

shown be the Aggregate Mean of 4.3925 and Standard Deviation (SD) of 0.736.

4.6 Inferential Statistics

4.6.1 Correlation Analysis

The main objective of the study was to ascertain how the selected factors affect residential

rental income tax compliance by landlords in Machakos. To accomplish this, Pearson

correlations analysis was used to determine the effect of Taxpayers Tax knowledge, Fines

penalties and interests, Tax Rates and Modes of payment on residential income tax compliance

by landlords in Machakos County. The findings are as shown on Table 4.11.

41
Table 4.11 Pearson Correlations Analysis

Residential
Rental
Income Tax
Compliance Fines,
in Taxpayers penalties
Machakos Tax and Tax Modes of
County knowledge interests Rates payment
Residential Pearson
1
Rental Income Correlation
Tax Compliance Sig. (2-tailed)
in Machakos N
156
County
Taxpayers Tax Pearson
.684** 1
knowledge Correlation
Sig. (2-tailed) .000
N 156 156
Fines, penalties Pearson
.604** .580** 1
and interests Correlation
Sig. (2-tailed) .000 .000
N 156 156 156
Tax Rates Pearson
-.361** .476** .786** 1
Correlation
Sig. (2-tailed) .000 .000 .000
N 156 156 156 156
Modes of Pearson
.760** .660** .676** .435** 1
payment Correlation
Sig. (2-tailed) .000 .000 .000 .000
N 156 156 156 156 156
**. Correlation is significant at the 0.01 level (2-tailed).

Source: Research findings 2021

The findings on Table 4.11 revealed there exists a positive and significant association between

Taxpayers Tax knowledge and Residential Rental Income Tax Compliance in Machakos

County at 1% level of significance (r=0.684, p=0.000<0.01). The findings also revealed that

there exists a positive and significant association between Fines, penalties and interests and

Residential Rental Income Tax Compliance in Machakos County at 1% level of significance

42
(r=0.604, p=0.000<0.01). The findings further revealed that there exists a negative and

significant association between Tax Rates and Residential Rental Income Tax Compliance in

Machakos County at 1% level of significance (r=-0.361, p=0.000<0.01). Last but not least, the

findings reveal that there exists a positive and significant association between Modes of

payment and Residential Rental Income Tax Compliance in Machakos County at 1% level of

significance (r=0.760, p=0.000<0.01).

4.6.2 Regression Analysis and Results on Taxpayers Tax Knowledge

The study sought to establish the relationship between Taxpayers Tax knowledge (Independent

variable) and Residential Rental Income Tax Compliance in Machakos County (dependent

variable). In this context, Residential Rental Income Tax Compliance was regressed against

Taxpayers Tax Knowledge and the correlation results presented in Table 4.12.

Table 4.12; Model Summary for Taxpayers Tax Knowledge.

Model R R Adjusted R Std. Error

Square Square of the
Estimate
1 .371a .148 .131 .97162
a. Dependent Variable: Residential Rental Income Tax Compliance
b. Predictors: (Constant), Taxpayers Tax Knowledge

From the results on Table 4.12, the value of the coefficient of determination (R-square) is

given as 0.148 this means that 14.8% change in Residential Rental Income Tax Compliance,

in Machakos County, Kenya is influenced by Taxpayers Tax Knowledge. The results can be

interpreted that there are other factors that influence on Residential Tax Compliance that

should be subject of further studies.

Further, ANOVA analysis was conducted to establish the reliability of the above simple

regression analysis.

43
Table 4.13: ANOVAa for Taxpayers Tax Knowledge

Sum of Squares df Mean Square F Sig.

Regression 55.659 5 22.187 69.112 .000b
Residual 45.739 149 .330
Total 101.398 154
a. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County

b. Predictors: (Constant), Taxpayers Tax Knowledge

From Table 4.13, the value of F calculated is given as 69.112 with the p-value as 0.000. The

significant value in this case, 0.000>0.05, thus rendering the model reliable.

The simple regression analysis done was used to determine the extent of change that would

occur in Residential Rental Income Tax Compliance, in Machakos County whenever a change

in Taxpayers Tax Knowledge occurred. Further, regression coefficient (β) was used to

determine the expected increase (or decrease) in Residential Rental Income Tax Compliance,

in Machakos County when there is a unit increase or decrease in Taxpayers Tax Knowledge.

Table 4.14; Coefficientsa for Taxpayers Tax Knowledge

Model Unstandardized Standardized t Sig.

Coefficients Coefficients
B Std. Error Beta

(Constant) .384 .367 .979 .487

1 Taxpayers Tax .948 .092 .813 10.148 .000
Knowledge

a. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County

b. Predictors: (Constant), Taxpayers Tax Knowledge
From Table 4.14 the regression coefficient was 0.948 and resulted in the following regression
model;
Residential Rental Income Tax Compliance in Machakos County = 0.384 + 0.948
(Taxpayers Tax Knowledge)

44
From the analysis, a unit in Taxpayers Tax Knowledge, the Residential Rental Income Tax

Compliance in Machakos County increases by 0.948 (β=0.948). Therefore, an increase in

Taxpayers Taxpayer knowledge has a direct positive impact.

4.6.3 Regression Analysis and Results Tax Penalties and Interests

The study sought to establish the relationship between Tax Penalties and Interests

(Independent variable) and Residential Rental Income Tax Compliance in Machakos County

(dependent variable). In this context, Residential Rental Income Tax Compliance was

regressed against tax penalties and penalties, and the correlation results presented in Table

4.15.

Table 4.15; Model Summary for Tax Penalties and Interests.

Model R R Adjusted R Std. Error

Square Square of the
Estimate
1 .369a .318 .302 .98762
c. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County
d. Predictors: (Constant), Tax Penalties and Interests
From the results on Table 4.15, the value of the coefficient of determination (R-square) is

given as 0.318 this means that 31.8% change in Residential Rental Income Tax Compliance,

in Machakos County, Kenya is influenced by Tax Penalties and Interests. The results can be

interpreted that there are other factors that influence on Residential Tax Compliance in

Machakos County that should be subject of further studies.

Further, ANOVA analysis was conducted to establish the reliability of the above simple

regression analysis.

45
Table 4.16: ANOVAa for Tax Penalties and Interests

Sum of Squares df Mean Square F Sig.

Regression 22.059 6 24.697 74.162 .006b
Residual 87.837 146 .440
Total 109.896 152
a. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County

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

From Table 4.16, the value of F calculated is given as 74.162 with the p-value as 0.006. The

significant value in this case, 0.006>0.05, thus rendering the model reliable.

The simple regression analysis done was used to determine the extent of a change that would

occur in Residential Rental Income Tax Compliance, in Machakos County whenever a change

in Tax Penalties and Interests occurred. Further, regression coefficient (β) was used to

determine the expected increase (or decrease) in Residential Rental Income Tax Compliance,

in Machakos County when there is a unit increase or decrease in Tax Penalties and Interests.

Table 4.14; Coefficientsa for Tax Penalties and Interests

Model Unstandardized Standardized t Sig.

Coefficients Coefficients
B Std. Error Beta

(Constant) .695 .367 .869 .302

1 Tax Penalties and .786 .092 .852 12.148 .000
Interests

a. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County

b. Predictors: (Constant), Tax Penalties and Interests
From Table 4.14 the regression coefficient was 0.948 and resulted in the following regression
model;
Residential Rental Income Tax Compliance in Machakos County = 0.695 + 0.786 (Tax

Penalties and Interests)

46
From the analysis, a unit increase in Tax Penalties and Interests, the Residential Rental Income

Tax Compliance in Machakos County increases by 0.786 (β=0.786). Therefore, an increase in

Tax Penalties and Interests has a direct positive impact.

4.6.4 Multiple Regression Analysis

Multiple Regression Analysis was used to determine the effects of the of Taxpayers Tax

knowledge, Fines penalties and interests, Tax Rates and Modes of payment on residential

income tax compliance by landlords in Machakos County. The findings are as follows

Table 4.15 Model Summary

Std. Error of the

Model R R Square Adjusted R Square Estimate
a
1 .810 .656 .647 .19108
a. Predictors: (Constant), Modes of payment, Tax Rates, Taxpayers Tax knowledge, Fines,
penalties and interests

From the model summary above, the coefficient of correlation denoted R was 810 which was

interpreted to mean that there is a strong association between the independent variables of the

study and the dependent variable. The coefficient of determination denoted R square (R2) of

0.656 which was adjusted to 0.647 can be interpreted to mean that 64.7% of all changes in

Rental Income Tax Compliance in Machakos County was explained by independent variables

of the study Taxpayers Tax knowledge, Fines penalties and interests, Tax Rates and Modes of

payment. Therefore, the residual value of 35.3 % in Rental Income Tax Compliance in

Machakos County was explained by other factors not considered in this study.

47
Table 4.16 ANOVAa

Sum of
Model Squares df Mean Square F Sig.
1 Regression 10.501 4 2.625 71.899 .000b
Residual 5.513 151 .037
Total 16.014 155
a. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County
b. Predictors: (Constant), Modes of payment, Tax Rates, Taxpayers Tax knowledge, Fines,
penalties and interests

The findings on ANOVA showed that the model was valid. F (4, 151) = 71.89, p=0.000<0.05

implied that the F-calculated was greater than F-critical. This was interpreted to mean that the

model was significant and a good fit in evaluating factors that affect residential rental income

tax compliance by landlords in Machakos County.

Table 4.17 Coefficientsa

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 1.159 .171 6.779 .000
Taxpayers Tax
.259 .052 .327 4.942 .000
knowledge
Fines, penalties and
.152 .054 .269 2.783 .006
interests
Tax Rates -.112 .044 -.202 -2.531 .012
Modes of payment .313 .052 .450 6.017 .000
a. Dependent Variable: Residential Rental Income Tax Compliance in Machakos County

From the coeffcients table 4.12 above, the deduced model of the study was:

Y = β0+β1X1 +β2X2+β3X3+ β4X4+ e

Y = 1.159+0.259X1+0.152X2 - 0.112X3+0.313X4+ e

Where:

β0 = constant

β1- β3= beta coefficients

X1 = Tax knowledge

48
 X2 = Fines, penalties and interests

X3 =Tax rate

X4 = Mode of payment

e = error term

The regression constant (β0) was 1.159. This was interpreted to mean that when the study

variables are zero, there would be a 1.159 Residential Rental Income Tax Compliance in

Machakos County.

The coefficient for Taxpayers Tax knowledge was β1= 0.259, p=0.000<0.05).This was

interpreted to mean that when all other factors remain constant, a unit increase in Taxpayers

Tax knowledge would lead to a 0.259 increase in Residential Rental Income Tax Compliance

in Machakos County.

The coefficient for Fines penalties and interests was β2= 0.152, p=0.000<0.05). This was

interpreted to mean that a unit increase in Fines penalties and interests would lead to a 0.152

increase in Residential Rental Income Tax Compliance in Machakos County when other factors

are held constant.

The coefficient for Tax Rates was β3=- 0.112, p=0.012<0.05). This was interpreted to mean

that when all other factors are held constant, a unit increase in Tax Rates would lead to a 0.112

decrease in Residential Rental Income Tax Compliance in Machakos County.

The coefficient for Modes of payment was β4= 0.313, p=0.000<0.05). This was interpreted to

mean that when all other factors are held constant, a unit increase in Modes of payment would

lead to a 0.313 increase in Residential Rental Income Tax Compliance in Machakos County.

4.7 Discussion of the Study Findings

The study was carried out to establish the factors affecting residential rental income tax

compliance by landlords in Machakos. The biographic information of the respondents indicated

that most of the respondents were male. An indication, that most of the landlords in Machakos

49
County were men. On the aspect of the number of years that the respondents had been landlords,

it was ascertained that most of the respondents had been landlords for a period between 2-4 years

and very few had had been for a period less than two years.

In addition to that, demographics based on the age of the respondents indicated that more than

50% of the landlords were aged over 45 years which is an indication that most of the respondents

had adequate knowledge on the data sought about the factors affecting residential rental income

tax compliance by landlords in Machakos County.

The results of the study indicate that tax rates, modes of payment, tax knowledge and fines,

penalties and interests affect residential rental income tax compliance an indication that these

factors affect residential rental tax compliance by landlords in Machakos County.

4.7.1 Tax knowledge and residential rental income tax compliance among landlords in

Machakos County.

The findings of the correlation analysis revealed there exists a positive and significant

association between Taxpayers Tax knowledge and Residential Rental Income Tax

Compliance in Machakos County at 1% level of significance (r=0.684, p=0.000<0.01). The

results of the multiple regression analysis revealed that the coefficient for Taxpayers Tax

knowledge was β1= 0.259, p=0.000<0.05).This was interpreted to mean that when all other

factors remain constant, a unit increase in Taxpayers Tax knowledge would lead to a 0.259

increase in Residential Rental Income Tax Compliance in Machakos County.

4.7.2 Penalties and interest and residential rental income tax compliance among landlords

in Machakos County.

The findings of the correlation analysis revealed that there exists a positive and significant

association between Fines, penalties and interests and Residential Rental Income Tax

Compliance in Machakos County at 1% level of significance (r=0.604, p=0.000<0.01). On the

other hand, the results of the multiple regression analysis revealed that coefficient for Tax Rates

50
was β2=- 0.112, p=0.012<0.05). This was interpreted to mean that when all other are held

constant, a unit increase in Tax Rates would lead to a 0.112 decrease in Residential Rental

Income Tax Compliance in Machakos County.

4.7.3 Tax rates and residential rental income tax compliance among landlords in

Machakos County.

The findings of the correlation analysis revealed that there exists a negative and significant

association between Tax Rates and Residential Rental Income Tax Compliance in Machakos

County at 1% level of significance (r=-0.361, p=0.000<0.01). The results of the multiple

regression analysis revealed that the coefficient for Tax Rates was β3=- 0.112, p=0.012<0.05).

This was interpreted to mean that when all other are held constant, a unit increase in Tax Rates

would lead to a 0.112 decrease in Residential Rental Income Tax Compliance in Machakos

County.

4.7.4 Modes of payment and residential rental income tax compliance among landlords

in Machakos County

The findings of the correlation analysis revealed that there exists a positive and significant

association between Modes of payment and Residential Rental Income Tax Compliance in

Machakos County at 1% level of significance (r=0.760, p=0.000<0.01). The results of the

multiple regression analysis revealed that the coefficient for Modes of payment was β4= 0.313,

p=0.000<0.05). This was interpreted to mean that when all other factors are held constant,, a

unit increase in Modes of payment would lead to a 0.313 increase in Residential Rental Income

Tax Compliance in Machakos County.

In conclusion use of fines, penalties and interests increases the levels of residential rental

income tax compliance by landlords in Machakos County. In addition, adequate knowledge,

higher awareness on tax issues results in increased levels of residential rental income tax

compliance.

51
These findings are as per the findings of Wasau (2012) where his findings indicated that tax

rates, tax knowledge affect tax compliance. Besides Kołodziej (2011) also indicated that high

tax rates reduce the levels of tax compliance by landlords. Besides Chepkurui et al (2014)

indicated too that tax compliance is also affected by the modes of payment and tax knowledge.

A study by Mohd, (2010) indicated that knowledge on taxes is important to enhance awareness

on taxes and importance of tax compliance.

Karanja (2013) also ascertained all the factors affecting tax compliance, which include tax

rates, fines and penalties, tax knowledge and modes of payment have a positive influence on

compliance levels of tax payments.

Erikson and Fallan (1996) concluded that various trainings carried out by the government are

important in enhancement of knowledge on tax compliance. Fried land et al. (1978) in his

study also concluded that fines, penalties and interests affect the levels of tax compliance.

Karanja (2013) also ascertained all the factors affecting tax compliance, which include tax

rates, fines and penalties, tax knowledge and mode of payment have a positive influence on

compliance levels of tax payments.

52
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

Summary of the study, conclusions established from the study, recommendations are what

make up this chapter. This chapter goes further to discuss the various limitations of the study.

5.2 Summary of the Findings

The main purpose of this study was to investigate factors affecting residential rental income

tax compliance among landlords in Machakos County in Kenya. The independent variables of

the study were Taxpayers Tax knowledge, Fines penalties and interests, Tax Rates and Modes

of payment on residential income tax compliance by landlords in Machakos County. The

findings on response rate revealed that out of the population of 210, 156 respondents managed

to participate in the study whereby they filled and returned the questionnaires. Therefore the

study attains a response rate of 74.2% which was very substantial for the study.

Based on the biographic information of the respondents, it was ascertained that there were more

male than female in the respondents number an indication that most of the landlords in

Machakos County were male. Based on residential rental ownership, the findings indicated that

most of the respondents had owned their residential properties for a period of over 10 years.

The results of descriptive statistics indicated that most of the respondents agreed that the

independent variables of the study had an influence on the residential rental income tax

compliance of landlords in Machakos County.

5.2.1 Taxpayers Tax knowledge

The findings on Pearson correlation analysis revealed that there exists a positive and significant

association between Taxpayers Tax knowledge and Residential Rental Income Tax

Compliance in Machakos County at 1% level of significance (r=0.684, p=0.000<0.01). The

53
coefficient for Taxpayers Tax knowledge was β1= 0.259, p=0.000<0.05).This was interpreted

to mean that when all other factors remain constant, a unit increase in Taxpayers Tax

knowledge would lead to a 0.259 increase in Residential Rental Income Tax Compliance in

Machakos County.

5.2.2 Fines, Penalties and Interests

The findings also revealed that there exists a positive and significant association between Fines,

penalties and interests and Residential Rental Income Tax Compliance in Machakos County at

1% level of significance (r=0.604, p=0.000<0.01). The coefficient for Fines penalties and

interests was β2= 0.152, p=0.000<0.05). This was interpreted to mean that a unit increase in

Fines penalties and interests would lead to a 0.152 increase in Residential Rental Income Tax

Compliance in Machakos County when other factors are held constant

5.2.3 Tax Rates

The findings further revealed that there exists a negative and significant association between

Tax Rates and Residential Rental Income Tax Compliance in Machakos County at 1% level of

significance (r=-0.361, p=0.000<0.01). The coefficient for Tax Rates was β3=- 0.112,

p=0.012<0.05). This was interpreted to mean that when all other are held constant, a unit

increase in Tax Rates would lead to a 0.112 decrease in Residential Rental Income Tax

Compliance in Machakos County.

5.2.4 Modes of Payment

Finally, the findings reveal that there exists a positive and significant association between

Modes of payment and Residential Rental Income Tax Compliance in Machakos County at 1%

level of significance (r=0.760, p=0.000<0.01). The coefficient for Modes of payment was β4=

0.313, p=0.000<0.05). This was interpreted to mean that when all other factors are held

constant, a unit increase in Modes of payment would lead to a 0.313 increase in Residential

54
Rental Income Tax Compliance in Machakos County. Based on the multiple regression

analysis results, the regression constant (β0) was 1.159. This was interpreted to mean that when

the study variables are zero, there would be a 1.159 Residential Rental Income Tax Compliance

in Machakos County.

5.3 Conclusion

The main purpose of this study was to investigate factors affecting residential rental income

tax compliance among landlords in Machakos County in Kenya. The study specifically looked

at the effect of taxpayer’s tax knowledge, tax rates, fines penalties and interests and modes of

payment. The researcher took a detailed preview of the previous studies that had been carried

out related on the topic of study in order to identify the various gaps in knowledge that this

research intended to fill. In order to attain this, the researcher carried out library research.

The study sought to find out the effect of the taxpayers’ tax knowledge on residential rental

income tax compliance among landlords in Machakos County. The results of this study are in

line with the Wasau (2012) study where his findings indicated that, tax knowledge affect tax

compliance.

The second objective of the study, sought to investigate the effect of penalties and interest on

residential rental income tax compliance among landlords in Machakos County. The findings

of this study agree with Karanja (2013) study that ascertained fines and penalties have a

positive influence on compliance levels of tax payments

The third objective sought to ascertain the effect of tax rates of the revenue authority on

residential rental income tax compliance among landlords in Machakos County. The results of

this study are in line with Kołodziej (2011) that indicated that high tax rates reduce the levels

of tax compliance by landlords.

55
The last objective was to establish whether modes of payment influence residential rental

income tax compliance among landlords in Machakos County. The findings of this study also

relate with Chepkurui et al (2014) study that indicated that tax compliance is also affected by

the modes of payment and tax knowledge.

The study findings indicated that there exists a positive relationship between tax knowledge,

tax rates, fines, penalties and interests and modes of payment and the residential rental income

tax compliance by landlords in Machakos County. This was indicated by positive mean values

for the correlation between the factors and residential rental income tax compliance by landlords

in Machakos. The study thus concluded that taxpayer’s tax knowledge, tax rates, fines penalties

and interests and modes of payment affect residential rental income tax compliance among

landlords in Machakos County in Kenya.

5.4 Recommendations

The study findings indicated that taxpayers tax knowledge, tax rates, fines, penalties and

interests and modes of payment have impact on residential rental income tax compliance

among landlords in Machakos.

From these findings, Taxpayers tax knowledge has a direct positive impact on residential tax

compliance, therefore, this study recommends that there should be more training through public

education by Kenya Revenue Authority, Machakos County to all taxpayer in matters to do with

residential tax compliance. The management within Machakos County should educate

taxpayers on: Registering for Residential income tax, how to file returns, generating payment

slips and the process of making tax payments.

According to study findings, fines, penalties and interests have a positive impact on residential

tax compliance, therefore, Kenya Revenue Authority, Machakos County should be keen

instituting strict fines, interests and penalties on identified non-compliant taxpayers: this has

an impact of discouraging residential tax non-compliance.

56
Based on Study findings, high tax rates have a negative impact on residential tax compliance,

therefore, Kenya Revenue Authority Machakos County, should consider the option of revising

tax rates downwards. This can be achieved through proposing the need to revise the residential

tax rates to top management Kenya Revenue Authority.

Based on the study, modes of payments have a direct impact on residential tax compliance,

therefore, Kenya Revenue Authority Machakos County Management should conduct mass

education on modes of tax payment, the process of tax verification and payment.

5.5 Suggestion for Further Research

The study suggested that there is need for more research to be done based on the same topic

but in different regions within the boundaries of Kenya.

The Study majored on Rental Income tax within Machakos County, there exists other taxes

such as VAT, Corporate Tax, Capital Gains Tax among others that can be investigated within

Machakos county and the nation at large.

57
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 APPENDICES

APPENDIX I: Questionnaire

The purpose of this survey is to analyze the factors affecting residential rental income tax

compliance by landlords in Machakos County Kenya with the aim of formulating policies

aimed at enhancing tax collection. All responses/answers provided in this survey will only be

used for academic purposes and will be kept confidential.

Section I: Demographic information

Please tick and fill where appropriate

1. Gender
Male [ ]
Female [ ]
2. Number of years residential rental property has existed
Less than 2 years []

2 – 4 years []

5 – 10 years []

Over 10 years []

3. Age
Between 18 – 25 []
26 – 35 []
36 – 45 []
Over 45 years []

65
 Section II

Part I: Tax knowledge

What is your level of agreement with the following statements on Tax knowledge? Use a
scale of 1-5 (1= Strongly disagree, 2= disagree, 3= Neutral, 4= Agree, 5= Strongly Agree)

1 2 3 5
Residential rental owners have adequate knowledge on tax rate, basis of
taxation and compliance requirements under residential rental income tax.

Knowledge about tax laws plays a major role in determining residential

rental owners’ tax compliance

Effective tax education can change the attitude and perception of residential
rental owner towards tax compliance

KRA has created a lot of public awareness on residential rental income tax

Part II: Fines, penalties and interests

What is your level of agreement with the following statements on Fines, penalties and interests?
Use a scale of 1-5 (1= Strongly disagree, 2= disagree, 3= Uncertain, 4= Agree, 5= Strongly
Agree)

1 2 3 4 5

Fines, penalties and interests discourage tax non-compliance of

residential rental income tax obligation.
Periodic waiver of fines ,penalties and interests could encourage
tax compliance
Residential rental owners file nil or incorrect returns to avoid
penalties of non-compliance on the iTax system
KRA charges high rates of Penalties and fines

66
Part III: Tax Rates
What is your level of agreement with the following statements on Tax Rates? Use a scale of 1-

5 (1= Strongly disagree, 2= disagree, 3= Neutral, 4= Agree, 5= Strongly Agree)

1 2 3 4 5

The tax rates for residential rental income tax are too high

The government spend well the taxes earned through the tax charges
on landlords

10% residential rental income tax rate(MRI) is fair to most landlords

Residential rental owners are now willingly paying tax due to the well-
structured tax rate

Part IV: Modes of payment

What is your level of agreement with the following statements on Modes of payment? Use a
scale of 1-5 (1= strongly disagree, 2= disagree, 3= Neutral, 4= Agree, 5= Strongly Agree)

1 2 3 4 5

KRA tax payment modes for landlords and tenants are

complex and thus result to non-compliance

Mpesa payment methods make it easier for compliance of

rental income tax

Rental income tax payment is best suited with bank

transactions as most payments are made through bank
transactions.

67
A combination of Mpesa and Bank transactions has
diversified the modes of payment for transactions and thus
enhanced rental income tax compliance

Part V: Residential Rental Income Tax Compliance

What is your level of agreement with the following statements on Residential Rental Income

Tax Compliance? Use a scale of 1-5 (1= Strongly disagree, 2= disagree, 3= Neutral, 4=

Agree, 5= Strongly Agree)

1 2 3 4 5
I file Residential Rental income tax returns appropriately and on
time as required by law

I pay Residential Rental income tax on time

I declare correct Residential Rental income tax from rent when

filing their returns

I pay Residential Rental income tax fines and penalties if any on

time

Thank you for your participation

68
APPENDIX II: LETTER TO RESPONDENTS

Caroline Murugi Kinyua

P.O Box 217-60103,

Runyenjes,

To the respondent

RE: Questionnaire

The above named is a second year student at JKUAT, Nairobi campus. In order to fulfil the

requirements of the School, I am undertaking a research on factors affecting residential rental

income tax compliance by landlords in machakos county kenya. You are among the chosen

respondents of my study.

I hereby, kindly ask you to respond to the questionnaire to the best of your knowledge.

Confidentiality of the information given will be guaranteed.

Your cooperation will be highly appreciated.

Yours Sincerely,

Caroline Kinyua.

69