FACTORS INFLUENCING VALUE ADDED TAX COMPLIANCE AMONG

SMALL AND MEDIUM BUSINESS ENTERPRISES IN THIKA TOWN

GLADYS WAIGWE NJUGUNA

A RESEARCH PROJECT REPORT SUBMITTED TO JOMO KENYATTA

UNIVERSITY OF AGRICULTURE AND TECHNOLOGY IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF POST

GRADUATE DIPLOMA IN TAX ADMINISTRATION

2020
 DECLARATION

This project report is my original work and has not been presented for any other
award in any other university.

Signature………………………… Date: ……………………

Njuguna Gladys Waigwe

This project report has been submitted for examination with my approval as
University Supervisor

Signature……….……………………. Date: ………………………….

Dr. Bruce Ogaga

Kenya School of Revenue Administration, Nairobi

i
 DEDICATION

I dedicate this work to my parent for their practical help and emotional

encouragement pursued this course is highly appreciated

ii
 AKNOWLEDGEMENT

I would like to thank the almighty God for the gift of life, time and the opportunity

and ability to write this paper.

I also express my gratitude to the people who have assisted me in their special ways

and supported me in search of knowledge which helped in the completion of this

research.

I am also very grateful to my supervisor Dr Bruce Ogaga for the great advice and

guidance and his valuable time to take me through the process of completing my

work.

My sincere gratitude to all the taxpayer who took their time to answer my questioners

that helped me with the information I needed for my data collection.

iii
 TABLE OF CONTENTS

DECLARATION.......................................................................................................... i

DEDICATION............................................................................................................. ii

AKNOWLEDGEMENT............................................................................................ iii

TABLE OF CONTENTS .......................................................................................... iv

LIST OF TABLES .................................................................................................... vii

LIST OF FIGURES ................................................................................................. viii

ABREVIATION AND ACRONYMS ....................................................................... ix

DEFINITION OF TERMS..........................................................................................x

ABSTRACT ................................................................................................................ xi

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

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

1.1 Background of the study ..........................................................................................1

1.2 Statement of the Problem .........................................................................................9

1.3 Objectives ..............................................................................................................11

1.4 Research questions .................................................................................................11

CHAPTER TWO .......................................................................................................13

LITERATURE REVIEW .........................................................................................13

2.1 Introduction ............................................................................................................13

2.2 Theoretical review .................................................................................................13

2.3 Empirical Review...................................................................................................15

2.4 Tax Information and VAT compliance ..................................................................16

2.5 Taxpayer’s Attitude and VAT compliance ............................................................17

2.6 Tax Compliance Cost and VAT compliance .........................................................19

2.7 Conceptual frame work ..........................................................................................22

2.8 Critique of the existing literature ...........................................................................23

2.9 Summary of literature review ................................................................................24

iv
2.10 Justification ..........................................................................................................25

2.11 Research Gaps ......................................................................................................27

CHAPTER THREE ...................................................................................................28

RESEARCH METHODOLOGY .............................................................................28

3.1 Introduction ............................................................................................................28

3.2 Research design .....................................................................................................28

3.3 Target population ...................................................................................................28

3.4 Sampling size and procedures ................................................................................29

3.5 Data collection methods .........................................................................................29

3.6 Data collection procedure ......................................................................................30

3.7 Pilot test .................................................................................................................30

3.8 Data Processing and analysis .................................................................................31

CHAPTER FOUR ......................................................................................................32

RESEARCH FINDINGS AND DISCUSSIONS .....................................................32

4.1 Introduction ............................................................................................................32

4.2 Response Rates ......................................................................................................32

4.3 Demographic Characteristics .................................................................................33

4.4. Companies with KRA pin Numbers .....................................................................35

4.5 Number of Employees in the SME ........................................................................35

4.6 Statistical Assumptions ..........................................................................................36

4.7 Multicollinearity Test.............................................................................................38

4.8 Descriptive Statistics ..............................................................................................39

4.9 Correlation Analysis ..............................................................................................44

4.10 Regression Analysis .............................................................................................45

4.11 Discussion of the Findings ...................................................................................47

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CHAPTER FIVE .......................................................................................................50

SUMMARY, CONCLUSION AND RECOMMENDATIONS .............................50

5.1 Introduction ............................................................................................................50

5.2 Summary of the Findings .......................................................................................50

5.3 Conclusions ............................................................................................................51

5.4 Recommendations ..................................................................................................52

5.5 Suggestions for Further Research ..........................................................................52

REFERENCES ...........................................................................................................54

APPENDICES ............................................................................................................63

Appendix 1: Questionnaires .........................................................................................63

Appendix II : List of taxpayers ....................................................................................67

Appendix III : Revenue performance during the Sixth Corporate Plan period ...........71

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 LIST OF TABLES

Table 3.1: Reliability Statistics ................................................................................31

Figure 4.1: Response Rate ........................................................................................32

Table 4.1: Nature of business of respondents ..........................................................33

Table 4.2: Years of existence of Respondents business ...........................................34

Table 4.3: Monthly business turnover of Respondents ............................................35

Table 4.4: Businesses with Pin numbers ..................................................................35

Table 4.5: Number of Employees in the business ....................................................36

Table 4.6: Tests of Normality ..................................................................................38

Table 4.7: Multicollinearity Test ..............................................................................39

Table 4.8: Tax Information ......................................................................................40

Table 4.9: Taxpayer Attitude ...................................................................................41

Table 4.10: Tax Compliance Cost ............................................................................42

Table 4.11 : Value Added Tax Compliance ............................................................43

Table 4.12: Overall Effect Of Tax Information, Taxpayer attitude, Tax Compliance
Cost On value added tax compliance .......................................................................46

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 LIST OF FIGURES

Figure 2.1: Conceptual Framework ............................................................................. 23

Figure 4.1: Response Rate ........................................................................................... 32

viii
 ABREVIATION AND ACRONYMS

ACP- Average collection period

APP- Average payment period

DWCN- Days of working capital needs

PAYE - Pay As You Earn

ROI- Return on investment

ROS- Return on sale

SME- Small Medium Enterprise

VAT- Value Added Tax

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 DEFINITION OF TERMS
Taxpayer attitude; this is a feeling or opinion about tax, or a way of behaving that is

caused by payment of taxes. Balan (2013) defined attitude as an individual's

belief on something that he holds which subsequently influence his action.

Tax compliance: Tax compliance is the fulfillment of all tax obligations as specified by

the tax laws or the degree to which a taxpayer complies or fail to comply

with the tax rules of his country. According to Brown and Mazur (2003), tax

compliance is multi-faceted measure and theoretically, it can be defined by

considering three distinct types of compliance such as payment compliance,

filing compliance reporting compliance.

Tax compliance cost: according to Evans, Tran-Nam and Lignier (2014), compliance

costs are the costs which taxpayers incur in meeting obligations imposed

under tax legislation.

Tax information; This is the knowledge the taxpayer has toward tax. That is; the class

of tax, amount he is supposed to pay and when to remit the tax. Tax

information can be obtained from the tax law act which in our case is

chapter 476 of the tax law Kenya. (Diebold, 2010).

Value added tax: Value added tax is tax levied on supply of goods and services, which

is borne by the final consumer but collected at each stage of the production

and distribution chain (United Kingdom statement of standard accounting

practice (SSAP)). According to chapter 476 of tax laws of Kenya, value

added tax is a consumer tax charged on the supply of taxable goods or

services made or provided in Kenya and on the importation of taxable goods

or services into Kenya. (Merriam, Webster, 1993).

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 ABSTRACT
Tax is the most important stream of revenue for government’s development projects
and services which includes, Health care, infrastructure, education and electricity
efforts must be made by governments to ensure that it is accurately and efficiently
collected to facilitate the government’s operations. In an effort to maximize collection
of revenue and efficiency in tax administration, there must be fair and favorable tax
policies to ensure maximum compliance among the tax payers. This study sought to
discuss the factors that influence VAT compliance in Kenya, specifically focusing on
SME’s operating within Thika town. This study was guided by measuring how
availability of tax information to the taxpayer, taxpayer attitude and compliance cost
affect value added tax compliance among the SMEs. The guiding theories for the
study were economic (deterrence) theory, the Expediency theory of taxation and cost
of service theory. This study employed a descriptive research design to determine the
correlation between the independent and dependent variables. The target population
was 1050. The research used a sample size of 290 SME’s selected from the target
population for the study. This study used both primary data and secondary data.
Primary data was collected using structured questionnaires with closed questions and
secondary data was acquired from the Kenya Revenue Authority reports and from
journals which represents academic research. The study used both descriptive and
inferential statistics in analyzing the data collected while the regression analysis was
used to ascertain the correlation that exist between the independent variables and
dependent variable. The study established that the correlation between the
independent variables was statistically significant with a p value of 0.00 which is less
than 0.05. The findings were presented using frequency distribution tables and charts.
The study concluded that tax information, taxpayer attitude and tax compliance cost
affected value added tax compliance of SME’s operating within Thika town. Based on
the findings the study recommends that the KRA should continue providing tax payer
education to the tax payer so that they can understand the digital tax return system
hence they can file their returns with no external sourcing which will lead to a low
compliance cost and introduce tax education to students to create a positive attitude
toward paying tax. The government can also create an exclusive social recognition to
the compliance taxpayer acts as an incentive for more tax payers to join the
compliance list, hence increase the level of VAT compliance. However, further
studies can be done on 33.1% of the change in value added tax compliance factors
which were not included in the model

xi
 CHAPTER ONE

INTRODUCTION

1.1Background of the study

Small and medium-sized enterprises (SMEs) are independent firms which employ less

than a given number of employees with most frequent upper limit designating an

SME as 250 employees, for the European Union. However, some countries set the

limit at 200 employees, while the United States considers SMEs to include firms with

fewer than 500 employees. Small and Medium Enterprises have always been

considered an important force for economic development and industrialization in

smaller economies (Aryeetey & Ohene, 2004 and Oludele & Emilie, 2012).

According to OECD, 2005, OECD SME and Entrepreneurship Outlook, In the

European Union, a new definition came into force on 1 January 2005 applying to all

Community acts and funding programmers’ as well as in the field of State aid where

SMEs can be granted higher intensity of national and regional aid than large

companies

Tax Compliance can be defined as the degree to which a taxpayer complies or fails to

comply with the tax rules of his country, by filling return on time and making

payments on time and in honest. Brown and Mazur (2003), tax compliance is multi-

faceted measure and theoretically, it can be defined by considering three distinct types

of compliance such as payment compliance, filing compliance and reporting

compliance.

While Tax evasion is the failure by a person or business to comply with all the tax

obligations, this includes being registered for the necessary obligation like the VAT,

excise and income tax (Joel Slemrod, 2007). It is a serious challenge to tax authorities

1
in both the developed and developing countries. It diminishes the mobilization of

resources that governments need to invest in critical areas of social and personal

development including health, education and infrastructure development (Cummings,

2007). Small and Medium Enterprises have always been considered an important

force for economic development and industrialization in smaller economies

(Aryeetey&Ohene, 2004 and Oludele& Emilie, 2012). These small enterprises have

increasingly been recognized as enterprises that contribute considerably to the

creation of jobs, economic growth and eradication of poverty in Africa.

Globally, the growth of any economy is dependent on vibrant SMEs and when the

reverse seems the case, the entire economy suffers. The stunted growth of the

economy has often been blamed on many factors, top of which is the challenge of

uncoordinated tax administration that has crippled production capacity of the SMEs.

One of the major factors to the growth of SMEs is the issue of taxation. The yoke of

taxes on SMEs ranked second among the factors stunting the growth of the economy

in USA (Thuronyi, 2009). Small enterprises in Ghana are said to be a characteristic

feature of the production landscape and have been noted to provide about 85% of

manufacturing employment in Ghana (Aryeetey, 2001)

All over the world in most developing countries many government policies, small and

medium enterprises are usually viewed and treated in the same light as large

corporations. In levying of taxes for these enterprises in particular, issues that need to

be considered are how these tax policies can be designed to bolster the growth of

SMEs and the most effective ways to administer them. The importance of SMEs as a

mechanism of economic growth and development is often ignored. They are

perceived as minute establishments that have minimal effect on the state of the

economy. However, if a thriving environment is created for these SMEs to grow

2
through proper regulation, the SME sector has the highest propensity to transform

developing economies.

United States of America and the United Kingdom trace their development from

growth of their SMEs (Organization for Economic Co-operation and Development,

2009). A study by Amyx (2005) attested that SMEs cover more than 95% of all firms

in Sub-Saharan Africa and their importance cannot be overestimated

In Africa Small and medium enterprises (SMEs) are considered the backbone of

economic growth in all countries. Smaller enterprises represent over 90% of private

businesses and they contribute to more than 50% of employment and GDP in most

African countries (UNIDO, 2009)

Tax is a charge levied on the citizens by a country or state. Tax is an obligatory

payment which the country imposes on its citizens, firms, and organizations not as a

penalty for any offence or immediate exchange of goods but as income to enable

government meet its expenditure (Ali-Nayea, 2008)

In developing countries, most large companies have their roots in small and medium

enterprises they started out as SMEs before expanding. Therefore the SMEs should be

well natured to avoid closure leading to the future large business enterprise. SMEs

engine room of innovation and due to their competition and entrepreneurship the

benefits on widening our economy efficiency and aggregate productivity growth.

There is a need to provide enabling environment for SMEs in developing countries in

Kenya that will lead to an economic transformation. Such transformation includes

mobilization of domestic savings for investment, contribution to gross domestic

product, increased harnessing of local raw materials, employment generation, and

significant contribution of poverty reduction and enhancement in personnel income,

technological development and export diversification (Smatrakalev, 2006).

3
In Kenya, the SME sector contributes an estimated 18% of the GDP as well as

creating employment for 80% of the workforce population (Wanjohi & Mugure,

2008). SME s being profit generating establishments are also expected to pay taxes.

Taxation revenues can be used effectively by government for meeting its public

expenditures that include health services, education and infrastructure. Kenya has a

complex tax system that makes it expensive for taxpayers to comply with as it is

costly to implement occasioning to losses in the Kenya’s economy. The more

complex a tax system is the more costly is its administration and the more expensive

it is for people to comply with. Some of the taxes administered in Kenya include

corporate income tax, personal income tax, Value Added Tax (VAT) and withholding

tax.

The current corporate tax rate applicable in Kenya is 30 percent in the case of resident

corporations which are limited liability companies. A non-resident company with a

permanent establishment in Kenya is taxed at 37.5 percent, personal income tax taxed

to person earning ksh 144,000 per annum, VAT rate is 16 percent and withholding tax

rates begin from 3 percent and depend on income source and whether one is a resident

or non-resident (Government of Republic of Kenya, 2012).Withholding taxes are

deducted at source from the following sources of income, Interest, dividends,

royalties, management or professional fees, commissions, pension or retirement

annuity, rent, appearance or performance fees for entertaining, sporting or diverting

an audience. Advance tax payable on commercial Vehicles. Turnover tax (TOT) has

been replaced with presumptive tax that will be taxed at a rate of 15 percent based on

their single business permit fee to all businesses with a turnover of 5 millions or

below per year of income from 1st January 2019.

4
Value added tax is a tax under the Value Added Tax Act 2013. It is a tax on consumer

expenditure introduced in Kenya in January 1990 to replace Sales Tax, which had

been in operation since 1973. VAT was introduced as a measure to increase

Government revenue through the expansion of the tax base; it was confined to sale of

goods at manufacturing and importation level under the sales tax system. VAT is an

indirect tax on the consumption of goods and services. VAT relates to the value added

to the goods or services at each individual stage, and amounts to the difference

between output tax and input tax .Output tax is the VAT that is chargeable at the

appropriate rate on the sale of taxable commodities by a taxable person.

An entrepreneur has to be registered for VAT, and calculate the output tax when his

taxable turnover has exceeded the threshold which is for compulsory VAT

registration. Input tax is the VAT added to the price of commodities liable to VAT,

which are purchased by the entrepreneur. A taxpayer who has attained a threshold of

5 million is required to register for vat obligations or register voluntary if one is

supply vatable goods or services. VAT is levied on consumption of taxable goods and

a service supplied or imported into Kenya and is collected by registered persons at

designated points who then remit it to the Commissioner. Registered persons only act

as VAT agents in collecting and paying the tax since the tax is borne by the final

consumer of goods and services.

Taxable goods and services are contained in the various schedules of the VAT act

2013. The first Schedule deals with exempt goods which are non-Taxable Goods and

services, the schedule lists the exempt goods and services, goods and services which

are not included in the list are taxable. The second schedule lists goods and services

which are zero rated. This mean the good and servicers under this schedule vat is

5
charged on them but at a rate of zero percent. All other goods and services not listed

in the schedules are taxable at a standard rate of sixteen percent (14%).

The study helps to find the factors that influence VAT compliance among the SMEs

and the research will focus on how informed the taxpayer is on the tax obligation

within his income, how the cost incurred to be compliant affect his business and what

attitude do the taxpayer have towards taxation.

Tax compliance is not very effective in many small organizations hence this study

aims to find out the factors influencing VAT compliance on small and medium

enterprises in Thika town.

1.1.1 Value Added Tax

VAT is a consumption tax as it is charged at the point where transfer of ownership of

goods and provision of service takes place. Ideally, VAT seeks to increase

government revenue as it broadens the tax base. In some countries such as India and

Malaysia VAT is known as Goods and Services Tax (GST) as it is imposed on

consumption taxable goods and services (Bidin, Marimuthu, Derashid, Idris, &

Ahmad, 2016). Whilst, VAT or GST improves revenue collection it directly impacts

on prices of commodities. It is for this reason that VAT policy implementation must

be critically looked by government as higher prices of commodities may lower

consumption which may result to reduction in VAT collections. Different nations

have different tax bases on which VAT is levied. For instance, VAT charge is at 25 %

in Denmark and Sweden while the standard VAT rate is at 5 % in Singapore (Palil &

Ibrahim, 2011). In addition, some goods and services that are essential such as

foodstuffs attract a lower VAT rate while some are entirely exempt from VAT. Zero

rating some basic essentials commodities results into a tax system characterized by

equity (Ling, Osman, Muhammad, Yeng, &Jin, 2016). VAT is levied under self -

6
assessment system (SAS) since the taxpayers are required to compute VAT payable in

a given month and remit the tax payable.

In Kenya, the government levies various types of taxes and among them is Value

Added Tax (VAT) which is a consumption tax. By it being consumption tax, it means

that it is charged at the point at which consumption takes place (Zachary, Kariuki, &

Mwangi, 2017). In this at any place where a vatable supplies exchanges along the

supply chain, a VAT is charged (VAT Act, 2013). It can therefore be noted that the

impact and incidence of the VAT can be borne by different parties as it is transferable.

In actual sense, the person who suffers the burden of VAT is the ultimate consumer of

the goods or services as they cannot transfer it to some other parties. Businesses and

individuals are subject to VAT which in Kenya is at 14% of the price or cost for

general rated supplies and 8% for petroleum products (Tax Procedure Act, 2018).

VAT to be paid is the net of VAT on sales after deducting the VAT on purchases. The

VAT on sales is known as output VAT and VAT on purchases is known as input

VAT. In this regard, when output VAT is more than Input VAT then the net is

payable and conversely the taxpayer is in a credit position which can be offset in the

following months (Mativo, Muturi, & Nyang'au, 2015). The Kenya Revenue

Authority is charged with responsibility of administration of Value Added Taxes in

Kenya. VAT returns need to be filed by 20th of the following month and is accounted

for at the earlier of invoice or payment dates. Additionally, withholding VAT is at the

rate of 2% with effect from 7th November 2019. Failure to file VAT returns attracts a

penalty of Kshs. 10,000 or 5% whichever is higher and the penalties are compounded

monthly. The penalty on late filing is 5% of the tax that was due in the month and 1 %

interest is charged compounded (Kenya Revenue Authority, 2019).

7
1.1.2 Tax Compliance

There are several facets that discuss on what tax compliance is all about. Tax

compliance is the measure of how taxpayers adhere to tax laws in a given tax

jurisdiction (Azmi, Saipei, Mustapha, & Adbullah, 2016). What this means is that tax

compliance entails the level to which taxpayers comply with regulations that govern

taxes. It therefore implies that tax compliance is an intrinsic measure unless the

number of complying taxpayers are quantified which may be complex.

Tax compliance is important to the government in that it ensures that revenue that is

needed to cater for public expenditures is available. It is true to suffice that tax

compliance is measured in different aspects such as willingness to register for tax

obligations, correct computation of taxes due, filing returns in time and payment of

taxes dues within the stipulated time (Dwenger, Kleven, Rasul, & Rinckle, 2016).

There is a wide spectrum of evidence on what contributes to high or low tax

compliance in which various scholars have sought to establish circumstances under

which taxpayer comply of fail to comply with tax regulations. The good things that

enhance tax compliance are often referred to as incentives to comply while the bad

things as perceived by the taxpayers are known as deterring factors (Gangl, Pfabigan,

Lamm, Kirchler, & Hoffman, 2017). In this respect, where incentives to comply are

more than the deterring factors, it follows therefore that tax compliance can be high

and the reverse case is true. In order to conceptualize tax compliance, it crucial to note

that it can be achieved through persuasive or coercive mechanisms.

Notably, persuasive means aims at educating the taxpayers on the need of paying

taxes while coercive factors seeks to use force to enforce tax compliance (Mativo,

Muturi, & Nyang'au, 2015). As a result, coercive mechanisms may even motivate tax

evasion and deter compliance if too harsh. It is important to note that it tax

8
compliance entails a process rather than a single observation at a point it time. This is

because tax compliance measures the tax morale of taxpayers throughout the country

with regard to the entire of the tax system or a single tax base. It is voluntary

compliance that is cost effective to government and taxpayers (Zachary, Kariuki, &

Mwangi, 2017).

1.1.3 Overview of Thika Town

Thika is a market Town in Central Province Kenya located about 40km north of

Nairobi at 13degrees south and 37.55 degree east. The elevation of Thika is 1420

meters to 1550 meters above sea level (Thika strategic plan, 2008-2012). It has an

average temperature of maximum25 degrees centigrade and rainfall average of

1020mm per annum. Thika District has an estimated population of about 850,000 with

Thika Municipality. Thika Municipality has an estimated population of about 140,000

(strategic plan2005-2008).Thika is externally serviced by a dual carriage to Nairobi, a

highway to Garissa and a railway line. Internally, the town has a well maintained road

network. The Economic activities of the town include, Agriculture mainly horticulture

and coffee industry, other include textile, mining (building stones), tannery, motor

vehicle assemblies and cigarette manufacturing. Thousands of micro enterprises, a

hundred of small scale industries and about twenty major factories exist in and around

the town. (Thika strategic plan 2008 - 2012)

1.2 Statement of the Problem

From the previous published studies, VAT noncompliance is widespread resulting

significant revenue losses, though the extent varies considerably across countries,

Agha and Haoghton (1996) surmised findings from five countries in Europe and two

in Asia. The study found that losses vary from as low of 3% (France United

Kingdom) to a high of 40% (Italy) the low finger being as high as 3 billion dollars. A

9
very high proportion practicing non-compliance action, example is 66% of the firms

in France after audit was found to have understated the taxable amount and 40% had

overstated the input tax.

In the recent past the Kenyan government through Kenya Revenue Authority (KRA)

has put all efforts to improve the efficiency and effectiveness of the tax collection

system.

However, Small and Medium Enterprises (SMEs) are less compliant in comparison to

large businesses. Even though there have been many administrative reforms, VAT

compliance level has remained low contributing only 23% of the total revenue.

Although there is a 12.3% growth in VAT collection in 2018/2019 over 2017/2018

financial year where the VAT collected amounted to ksh 205,099 millions in

2017/2018, and ksh 230,968 millions in 2018/2019 financial year, (KRA 6th

Corporate Plan, 2017/2018), there is a 45% VAT compliance gap in the domestic

VAT collection financial year 2017/2018. VAT compliance gap is the highest among

all other tax heads where excise duty has the least tax gap of 15.2%. This gap is due to

the variances between the targeted vat collections which were ksh 241,124 million

against the actual VAT collection which amounted to ksh 230,348 million leading to a

variance of 10,776 millions.

It is for this reason that research need to be undertaken to identify the causes for low

tax compliance among small and medium enterprises in Thika town.

10
1.3 Objectives

1.3.1 Main objectives

The main objective of this study was to establish the factors influencing value added

tax compliance among the SMEs in Thika town

1.3.2 Specific objectives

The study was guided by the following specific objectives;

i) To determine the availability of tax information on influence compliance

among SMEs in Thika town

ii) To determine how SMEs attitude towards tax influences VAT compliance

among SMEs in Thika town

iii) To establish how the tax compliance cost influence VAT compliance among

SMEs in Thika town

1.4 Research questions

In order to address the objectives of the study the research sought to answer the

following questions;

i) How does availability of tax information influence VAT compliance among

SMEs in Thika town?

ii) How does taxpayer attitude influence VAT compliance among SMEs in Thika

town?

iii) How does tax compliance cost influence VAT compliance among SMEs in

Thika town?

11
1.5 Scope of the Study

The study was carried out to find if taxpayer information, taxpayers’ attitude and cost

of compliance affect compliance among the SMEs in Thika town Kiambu County.

Thika is the industrial hub in Kenya therefore they are many businesses that deal with

vatable goods and services hence a good study area target. There were 1050 SMEs

registered in Thika sub-county as at December 2017 and the data was collected in

2018.

12
 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter consists of the literature review from other studies carried globally,

regionally and in Kenya. The chapter also includes the different types of theories that

explain different approaches towards taxation, the conceptual framework that show

the measures of the variables, critic o previous literatures

2.2 Theoretical review

2.2.1 The Expediency Theory of Taxation

This theory was advanced by Swiss philosopher Jean (1712-1778), the French

political economist Say (1767-1832) and the English economist Mill, (1806-1873).

This theory holds that the taxation should be levied according to an individual’s

income or ability to pay and is the basis of progressive tax where tax rate increases by

the increase of the taxable amount (Jones et al, 2011).

This theory asserts that all the tax laws must be practicable. Tax practicability is the

only consideration while choosing the tax laws and policies as per the expediency

theory while the economic and social objectives of the state are kept irrelevant. This is

protects the tax authorities from the pressure from economic, social and political

groups as each group try to promote its interest. By setting such rules, the

administrative is able to collect taxes at a reasonable cost. Higher marginal tax cost

will not only create disincentive to work, investment and saving but encourages tax

avoidance and evasion, these reduces public generated revenue (Oriakhi & Ahuru,

2014).An optimum tax compliance cost encourages savings, investment and labour

supply, and at the same time motivate tax payment obligation effectively collected tax

13
is used for remedying economic and social skills such as income equalities, cab

unemployment and cyclical fluctuations.

2.2.2 The Economic Deterrence Theory

This is a theory in criminal law and owes its origin to the works of Becker and was

developed by Allingham and Sandmo (1972).

The basic tenet of this theory is that action of taxpayers, with regard to them

complying or not is a function of costs and benefits that are imminent if they engage

in tax evasion. As such, the model assumes or views that taxpayer are rational

economic agents who basically assess the costs and benefits of evading taxes before

making the decision to comply or not. Costs of tax evasion are attributed to aspects

such as chance of being detected, associated fines for tax evasion and penalties.

This theory is developed on the impressions that if penalty of committing a wrong

greater is than the advantage of the wrong doing itself, a person may be discouraged

from committing the wrong act (Chauke & Sebola, 2016). If the taxpayer is well

informed of the benefit of paying his taxes diligently, this will create a positive

attitude leading to tax compliance. Due to low level of tax information a large number

of taxpayer have outsource tax compliance service leading to an increased cost in

their businesses. Due to this the tax payer will opt not to register as VAT taxpayer

voluntarily. Increasing the risk of non compliance that is the fines and penalties while

creating tax education forearms will increase the taxpayers’ knowledge on benefits of

being compliant hence increase in level of compliance among the SMEs.

14
2.2.3 The Cost of Service Theory

The cost of service theory was developed by Myers (1984).He argues that based on

the treatment of this theory, a payment for public service is equal to the cost of

services rendered.

Some economists were of the opinion that if the state charges actual cost of the

service rend from the people, it will satisfy the idea of equity or justice in taxation.

The cost of service theory can no doubt be applied to some extent in those cases

where the services are rendered out of prices and are a bit easy to determine, example

postal, railway services and supply of electricity. But most of the expenditure incurred

by the state cannot be fixed for each individual because it cannot be exactly

determined, for instance, the cost of service of the police, armed forces, judiciary, to

different individuals. Dalton has also rejected this theory on the ground that there is

no quid pro qua in a tax (Kaplow, 2010).

2.3 Empirical Review

Any good research work is expected to be an original work of the researcher and

should not be a replica of what has been researched in a given field. Roth (2007)

defined the term empirical as the systematic process of deriving and analyzing data

from direct or indirect observation. Eisenhardt and Graebner (2007) discussed

empirical research and suggested that it requires sound literature grounding, then

identify the present research gaps and based on it develop the research questions to

fulfill these gaps. Empirical research helps in theory building as well as in verification

of proposed theories. The research gap might be in form of the background structure

of the study or a conceptual framework

This segment pursues to offer the empirical review whose aim is to provide the gap

that is study seeks to fill. It is arranged in line with the selected predictor variables of

15
vat compliance. Additionally, global, regional and local research works are

deliberated.

2.4 Tax Information and VAT compliance

Standard models assume that tax payers are fully informed of all the aspects that

cover the tax reporting processes. However this is a strong assumption and not the

case. (AndreoniErrard, 1998) Tax research has shown that the degree of information

is an important factor on behavior of tax payers and how it influences tax evasion.

When a tax payer is not fully informed of his obligation regarding to tax compliance,

he will evade paying the due amount. Less educated tax payer’s are less exposed to

tax compliance information and are less informed about relevant tax compliance

information hence are more prone to tax evasion. Some tax payers find the complexity

of tax information more difficult to understand than others and this complexity may

lead to unintentional non compliance if a tax payer have problems in filling of tax

returns more so if not aware that vat returns are done monthly.

In 1992, Kenya adopted the self assessment system of paying taxes where the

responsibility of declaring and paying the taxes is vested on the tax payer. Taxpayer

education is one of the strategies of improving service delivery to the tax payers.

Improving service delivery is critical to enhance voluntary tax compliance. Lack of

voluntary tax compliance compels revenue authorities to use costly and coercive

methods for tax enforcement (Fjeldstad and Ranker 2003).If the authority has reason

to believe that a tax payer did not disclose the correct taxes; it is empowered under the

law to carry out an in-depth tax audit to verify the information disclosed by the tax

payer. The tax payer then goes through the rigorous process that is both time

consuming and costly for errors or omissions that would have been avoided had

advance tax rulings been in place. The education component is expected to deal with

16
non-compliance practice among the taxpayers especially in the informal sector

(Kimingu and Kileva, 2007). This is based on the possibility of non-compliance being

unintentional, where the taxpayer is not aware of his/her tax obligations or fails to

fulfill his/her tax obligations due to ignorance of tax laws and procedures or may be

intentional due to the compliance attitudes (Christina, Deboral and Gray, 2003).

Taxpayer education program creates taxpayer awareness of laws and procedures,

educate taxpayers on their tax responsibilities and rights, assist and motivate taxpayer

to comply voluntarily, assist taxpayers on reporting the correct income and amount of

tax, maintaining close relationship between the tax authority and the taxpayer

continuously, and, instill public confidence in taxation system (Oyedele, 2009).

Therefore, tax education enables the taxpayer to understand tax laws and procedures

as well as creating positive tax compliance attitude (Normala, 2007; Roak and

Stephen, 1994). The tax authorities have given special attention on the business, by

simplification of the tax laws procedures, associations, annuals taxpayers’

appreciation day, and integrity enhancement as among the strategies (Kianuka, 2004;

Kimungu and Kileva, 2007). Tax Education to the business owners becomes

necessary when the objective to raise tax revenue, at the changing environment;

particularly from the official tax assessment is considered (Normala, 2007).

Kenya has a complex tax system that makes it expensive for taxpayers to comply with

an increased cost of doing. Kenya revenue authority should always seek way to

improve the information deliveries to the taxpayer; this could be done by frequent tax

education sections to different business.

2.5 Taxpayer’s Attitude and VAT compliance

Alabede et al. (2011) postulated that, a tax payer whose motive is to demonstrate his

beliefs in a system will evaluate the fairness of the systems with objectivity whereas

17
the taxpayer whose attitude is motivated by what benefit to derive from the system

may label the tax system fair only if he is benefiting from it. Also Richardson (2006)

indicated that perceived fairness of tax system is significantly related to tax non-

compliance. Roth et al. (1989) and Jackson and Milliron (1986) found that tax payers

concerns about fairness have links with attitudes and behavioral intentions about tax

compliance.

There is a very strong relationship between the taxpayers' attitudes and tax

compliance in Kenya, in that taxpayer's attitudes encourages tax compliance as it

involves what a person as individual feels toward paying taxes. In a research

conducted in Kenya (Wanjohi, 2010) most taxpayers view the Kenyan tax system as

unfair as most respondents differed that they are paying a fair share of tax as that of

their neighbors or friends, the tax laws are not easy to understand such as calculation

of tax, filing and paying dates. Some of the factors for tax noncompliance were found

to be the inability to understand tax laws, a feeling that they are not paying a fair share

of tax, negative peer attitude and a belief that their neighbors are not reporting and

paying tax honestly, and non rewarding taxpayers

Taxpayers’ expectations are that the revenue generated from taxes should be spent

and accounted for meaningfully by the state, (Young et al., 2013). Where this is

lacking it can cause a slack in tax payers’ commitment to pay their taxes. This is

corroborated by Thorndike (2009) as he posited that citizens must comply with their

obligations as part of their bargains, while governments are expected to secure the

safety and security of individuals including the right to property. Braithwaite (2001)

contended that the taxpayers’ evaluation of local tax bureau’s performance is

proposed to affect tax compliance. Thus, the extent to which the tax office is

18
delivering on its charter is suggested to be a factor affecting compliance. Young et al.

(2013).

When there is positive attitude towards tax payment, there will be more voluntary

remittance of the right amount of taxes and on the right time. It is important to ensure

that the tax payer does not feel like it’s a burden with no benefit outcome to pay taxes

by ensuring the tax payers are motivated through proper education on the benefits o

being compliance.

2.6 Tax Compliance Cost and VAT compliance

Sandford (1989) compliance cost is expenditure incurred by taxpayer in meeting the

requirements laid to them by the tax law and revenue authority. Tax payers registered

for value added tax have the extra burden of having to keep detailed records of all

input tax and output tax to facilitate the completion of VAT calculation and filing.

This may necessitate them to employ someone skilled in this field, to help in being tax

compliant which will be a tax cost. Compliance costs include all costs associated with

obeying the tax law, including planning and administration, in addition to the direct

time and money spent filing the returns. There was a tax compliance cost surveys

conducted in South Africa, the Republic of Yemen, Ukraine, and Peru that measured

the burdens on business. These surveys helped fine-tune the design of reforms to

lower costs for businesses and improve their competitiveness (Coolidge, 2010).

High compliance costs can result in tax avoidance, tax fraud, and inhibit investment

by way of diminishing competitiveness of the country in terms of taxation

attractiveness (Ojeka, 2012). The IRS estimates Americans spend 6.6 billion hours per

year filling out tax forms including 1.6 billion hours on the 1040 form alone. In a

study carried out on tax compliance and simplifications (OECD, 2004) established

that compliance costs tend to increase with the number of taxes that an entrepreneur is

19
subject to, the complexity of the tax rules, the frequency of submitting tax returns and

the number of levels of government involved in levying and collecting taxes. Taxes

introduce complexities and costs not relevant to SMEs and the complexities may

increase where more than one tax bracket is involved. This results to SMEs avoiding

the paying of taxes as it affects the business leading to noncompliance.

Slemrod and Yitzhaki (1996) identified compliance costs as one of the three

components of the social costs of taxation.

These social costs can be paraphrased as costs incurred by society in the process of

transferring purchasing power from the taxpayers to the government. The other

elements are administrative costs and deadweight efficiency loss from taxation.

Administrative costs are the costs that exist besides the occurrence of compliance

costs that are borne by the companies. These costs are cited as costs that the

government must also take into account as a public cost to ensure that the tax

legislation is obeyed.

These costs are generated by the complexity of legislation, frequency and nature of

changes in the tax laws and costs involved in understanding the tax systems. The

procedural requirements include, the Companies registered for the purposes of VAT,

detailed accounting records containing both input and output taxes the information

necessary for drawing up the VAT return. In Kenya, registration is now conducted

online through KRA online services portal; htt.www.kra.g.ke/portal. The Effective

Date of Registration (EDR) is indicated against the VAT obligation on the taxpayers

Certificate of registration generated and from this date the taxpayer should start

charging VAT on all taxable supplies. Late application for registration is liable to a

default penalty of Kenya shillings 20,000.Once you are registered you are required by

the VAT Law to display your registration certificate in a clearly visible place within

20
your business premises fairer to which, you will be liable to a default penalty of

Kenya shillings 20,000 and in addition shall be guilty of an offence and liable to a

fine not exceeding Kenya shillings 200,000 or imprisonment for a term not exceeding

two years or both. The tax payer should file and pay the VAT amount on or before

20th day of the following month.

In addition, complex tax laws may require sophisticated accounting records, which

may necessitate hiring bookkeepers, therefore increasing tax compliance costs

(Schoonjans et al., 2011). The Communication from the European Commission on the

future of VAT (Communication from the European Commission to the European

Parliament, the Council and the European Economic and Social Committee on the

future of VAT,2011) mentions that compliance costs for business represent 2% to 8%

of VAT receipts. The compliance costs are higher for small business as the

requirement for the large enterprises is equally the same as for the SMEs. SMEs have

fewer resources for copying with the difficulties resulting from the differences in rules

and obligations of the Member State.

The administrative costs in the case in which the company applies the cash accounting

scheme (CAS) are higher since the system requires more accounting records, as well

as completing several forms, statements and logs. If suppliers/service providers who

are applying this system does not mention in the invoices CAS, the beneficiaries shall

be obliged, in order not to have problems with the right of deduction, to check the

status in the register suppliers taxable persons who apply to the CAS available on the

ANAF web site, resulting in additional bureaucratic work.

21
2.7 Conceptual frame work

A conceptual framework is a structure which the researcher can explain as the natural

progression of the phenomenon to be studied (camp, 2001).This study assumes that

the factors under discussion have a direct influence on vat tax compliance among

SMEs in Kenya. The relationship between the independent valuables which are tax

information, tax payer attitude and tax compliance cost and the dependent variable

which is VAT compliance is illustrated in the conceptual framework presented in

figure 2.1.

The first independent variable was tax information which is measured by knowledge

on when to remit tax and the amount payable and level of understanding the digital

tax system

The second independent variable for the study which was tax payer attitude which

was measured by the perceived benefit by the tax payer and the tax beliefs the tax

payers have towards being compliance.

The third independent variable was tax compliance cost and was measured by the cost

o hiring tax experts and the cost o keeping record.

The dependent variable or the study was VAT compliance among the SMEs and was

measured payment of the correct taxes timely tax return filling and registration.

22
Independent variables Dependent variable

Tax information

 knowledge on when to
remit tax and the amount
payable
 Level of Understanding
the digital tax system

VAT compliance
Taxpayer attitude
 Payment
 The perceived benefit
 Timely tax return
 Tax beliefs
filling
 registration

Tax compliance cost

 Cost of hiring tax experts

 Cost of keeping records

Figure 2.1: Conceptual Framework

The independent variables are tax information, tax payers’ attitude and tax

compliance cost and the dependent variable for the study is VAT compliance by

SMEs.

2.8 Critique of the existing literature

The existing literature on the effects of tax on Small Medium Enterprise performance

studies carried have cited different factors that influence vat compliance, Tomling

(2008) cited that resources smaller companies direct towards tax compliance are

resources that could be used for re-investment facilitating future growth. He did not

23
specify how the business would grow to be able to pay taxes without constraints.

Vasek (2008) argued that reducing the compliance costs and tax rate increased the

small enterprises profit margin. He did not go further on suggesting how the growth

would help in the process of taxation later and yield to more tax compliance without

constraints after the growth.

Baurer (2005) argued that tax administration create problems for business community

when they impose burdensome reporting and recordkeeping requirements, excessive

inspections and audits. This finding favored the tax collectors in ensuring that they

were able to undertake taxation effectively however Baurer did not indicated the

positive impact of small medium enterprise importance of record keeping in

managing their financial status and the factors that lead to noncompliance among the

SMEs. Farbod (2000) cites a poorly executed tax system leading to low efficiency,

high collection charges; waste of time for taxpayers affects the small medium

enterprises. The findings did not show the impact of taxation on small medium

enterprises.

Masindo (2010) stated that tax compliance is low among small medium enterprise due

to poor management and internal control practices. Ahmad (2009) cited factors

affecting SMEs growth was lack of management skills, licensing that caused business

constraints but he has not indicated the effects of the taxation on small medium

enterprises.

2.9 Summary of literature review

From the review of literature, there has been research exploring factors that influence

compliance among SMEs. The main objective of this study is to identify the factors

that influence VAT compliance among SMES in Thika town. The research focused on

24
tax information, tax payers attitude and compliance cost. The research outlined in this

paper aims to address the tax gap of non filling, under reporting and under payment.

The specific aim of the research is to gain insight into the factors that influence vat tax

compliance among SMEs in Thika. Less educated tax payer’s are less exposed to tax

compliance information and are less informed about relevant tax compliance

information hence are more prone to tax evasion. Some tax payers find the complexity

of tax information more difficult to understand than others and this complexity may

lead to unintentional non compliance. Tax payers attitude maybe influenced by many

factors which eventually influence taxpayer’s behavior (Ambrecht, 1998). These

factors which influence tax compliance are many and are different from one country

to another and from one person to another. They include tax payers’ perception of the

tax system and revenue authority, peer attitude, tax payers understanding of tax

system and tax laws, motivation such as rewards and penalties, Cost of compliance,

enforcement efforts such as audit and the probability of tax fraud detection by the

revenue authorities, amount of business income and fairness of the tax systems. High

compliance costs can result in tax avoidance, tax fraud, and inhibit investment by way

of diminishing competitiveness of the country in terms of taxation attractiveness

(Ojeka, 2012. Therefore there is need to minimize the compliance cost hence increase

compliance among the SMEs

2.10 Justification

A key issue for many countries is how to collect tax in such a way that necessary

public revenue can be acquired but not at the cost of long term industrialisation. An

important area here is that of VAT and how best to levy it with respect to the SMEs.

Previous empirical studies conducted by Moyi and Ronge (2006), indicates that VAT

contribution is estimated to an average of 5.4% of GDP between the year of its

25
introduction (1990) and the year 2005. Study conducted by Waris et al, (2009) reveals

that despite the importance of VAT in the national budget, the period between the

year 2000-2003 showed that VAT had the highest share of total tax (above 30%).

However, the VAT contribution trend declined to total taxes collected from the year

2003 onwards. This trend is worrying and calls for intervention reforms. Kenya

revenue Authority (KRA) has since introduced several reforms in its revenue

collection system including the introduction of electronic tax registration. The

challenge of lack of knowledge of tax compliance attitude towards a tax system is

serious on the grounds that it may have played part in the Ksh. 3.4 billion short fall in

2005/2006 (Kenya Data and Statistics, 2012).

Karingi et al (2005) argues that in revenue collection, tax administration is crucial in

the implementation of a properly designed tax. Tax administration which is the Kenya

Revenue Authority in Kenya consists of the identification of tax liabilities based on

existing tax laws, the assessment of taxes to determine if the taxes actually paid are

smaller (or large) than liabilities and the collection, prosecution and penalty activities

that impose sanctions on tax evaders and ensure that taxes and penalties due from tax

payers are actually collected. Besides focusing on tax compliance, it is important that

other attributes of the tax system are controlled. These include tax fairness, simplicity,

as well as firm characteristics such as firm size, age, legal and ownership structures.

A good understanding of an economically normal taxpayer by the revenue authority

managers who will voluntarily avoid paying tax as long as the expected returns from

non-compliance are higher to the anticipated consequence of getting apprehended,

will help change the attitude o the tax payer and in return comply. This can be

achieved by introducing online and easy access tutorials to help the tax payer file and

26
pay their tax returns. The authority could also introduce frequent audits to create

awareness to the tax payer o the possibility o being caught in case they evade tax.

2.11 Research Gaps

This study sought to find out how small medium enterprises could achieve a high

compliance level that will lead to a maximum revenue collection from the SMEs. The

research looks into factors that influence VAT compliance and mainly focuses on

availability of tax information to the taxpayer, tax payer’s attitude and the cost of

compliance. The researcher does not go into finding how the SMEs can contribute to

ensure they are compliance with the tax laws and also some of the measures the

authority can take to increase compliance like tax audit. Studies conducted revealed

that tax audit minimize the probability of to evade taxes. Niway and Wondwossen

(2017) stated that tax audits can play a significant play a significant role and their

fundamental role is to increase tax compliance level. This because they believed that

taxpayers who have experienced strong tax audits might be more careful in reporting

their tax liability on time as a result of the fact that they fear detection which brings

penalty.

The researcher should also look at the tax payer perceived attitude on noncompliance

as a crime. The weight of the perception they have towards its seriousness is still less.

This is unanimous with the previous study conducted in Yemen in 2011 and cited by

Muleye (2016) that people are less likely to perceive tax evasion as a serious crime.

27
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

To achieve the purpose of this research, a research methodology was outlined. This

chapter includes the research design, target population, sampling for the study, data

collection instruments and data analysis.

3.2 Research design

A descriptive survey design was adopted for this study, descriptive survey design was

used as it describes characteristic associated with the population and what make it

behave the way it behaves. According to Cooper and Schindler (Cooper, 2003)

descriptive design discovers and measures the cause and effect of relationships

between variables. (Mugenda, 2013) state that a descriptive research determines and

reports the way things are and attempt to describe possible behavior, attitude, values

and characteristics of such things. The study used a descriptive design because it

enables the researcher to collect a large quantity of in-depth information about the

population being studied and the data required for analysis needed to be collected

from a large population that is SMEs operating in Thika Industrial area.

3.3 Target population

The research targeted SMEs operating their business in Thika town. According to

data from municipal councilThika west, had a total of 1050 SME`s as at 2017. (Thika

sub-county)

28
3.4 Sampling size and procedures

The sample size is an important feature of any empirical study in which the goal is to

make inferences about a population from a sample. In practice, the sample size used

in a study is determined based on the expense of data collection, and the need to have

sufficient statistical power. Sample size is important primarily because of its effect on

statistical power. Statistical power is the probability that a statistical test will indicate

a significant difference when there truly is one. (Morgan, 2001)

The sample size for the registered businesses in Thika town was calculated based on

Yamane’s formula (Yamane, 1967).

N
n=
(1 + Ne2 )

N = 1050

1050
𝑛=
1 + (1050 ∗ 0.052 )

n = 289.655 or 290

By using Yamane’s formula of sample size with an error 5% and with a confidence

coefficient of 95% (Yamane, 1967), the calculation from a population of 1050

businesses come to 290 businesses.

3.5 Data collection methods

The study employed primary data collection. Primary data was collected through a

self-administered questionnaire. The questionnaire adopted structured open ended as

well as closed questions. A questionnaire gathered statistically meaningful data on the

perspectives of respondents on an issue of interest based on a set of predetermined

questions. The questionnaire had two major sections. The first dealt with the

29
biographic data and the second section dealt with the factors influencing tax

compliance.

3.6 Data collection procedure

The questionnaires were administered to the respondents directly by the researcher.

The researcher used drop and pick method. Where the questionnaires were dropped

and their contacts collected. The researcher gave them one to fill and then the

questionnaires was collected the day after.

3.7 Pilot test

The researcher used four questionnaires to test the understanding of the questions in

the questionnaire by the respondent. The four questionnaires were administered to

four different SMEs as a pre-test. Any question that was not well understood was

adjusted for clear understanding and accurate responses.

3.7.1 Reliability of Research Instruments

According to Drost (2011) reliability is the extent to which a measure adequately

represent the underlying construct that it is supposed to measure. It contributes to

standardization of research instruments which in turn enables the results of a study to

be generalized to the larger population.

The reliability analysis was done using Cranach’s Alpha which is usually interpreted

as the mean of all possible split-half coefficients. Tax information had an alpha of

0.781, tax compliance cost had an alpha of 0.875, taxpayer attitude had an alpha of

0.890 and lastly Tax Compliance had an alpha of 0.702. The benchmark value of 0.7

is commonly used for the reliability whereby alpha values above 0.7 are considered

acceptable and satisfactory, above 0.8 are considered good and above 0.9 are

considered to reflect exceptional internal consistency. (Mohajan, 2017). The

30
Cronbach’s alpha coefficient of 0.7 was used as the benchmark for this study, and all

variables had met the threshold.

Table 3.1: Reliability Statistics

Number of Cronbach's Conclusion

Items Alpha
Tax information 4 .781 Reliable

Tax compliance cost 3 .875 Reliable

Taxpayer attitude 4 .890 Reliable

VAT Compliance 4 .702 Reliable

3.8 Data Processing and analysis

Analysis of the completed questionnaires was done to ensure that the collected data

was accurate and consistent with other information gathered. Data was analyzed by

coding according to variables in the study for efficiency. After completion of coding,

the data was classified on the basis of common characteristics and attributes. The raw

data was then assembled and tabulated in form of statistical tables and percentages

and later presented using bar graphs and pie charts for clear interpretation. The data

was used to prove the effectiveness of taxation on SMEs.

31
 CHAPTER FOUR

RESEARCH FINDINGS AND DISCUSSIONS

4.1 Introduction

This chapter represents the analysis, presentation and interpretation of the findings. In

addition, the findings are also discussed in relation to literature reviewed. It gives the

empirical findings and results following the application of the variables using the

techniques mentioned in chapter three in methodology. In an attempt to address the

specific objectives of the study, this chapter provides details description of descriptive

and inferential statistics and research findings and discussions.

4.2 Response Rates

Research’s data collection instruments (questionnaires) were administered within a

period of three weeks. Out of 290 questionnaires administered and a total of 250

questionnaires were successfully completed and returned this made a response rate of

86%.Bailery, (2000) asserts that a response rate of 50% is considered good, and

response greater than 70% is considered very good, therefore the response was very

good. The findings are presented in chart

Response Rate

14%
86%

Response

Figure 4.1: Response Rate

Survey Data (2019)

32
4.3 Demographic Characteristics

The study wanted to find out the nature of business data of respondents,

manufacturing, sales products, services offering, Health and others.

Nature of Businesses operated by theRespondents

The study found out that 26% of the respondents were in the manufacturing sector

while 17.2% did deal with sale of products, while 30.8% were in the service industry.

Respondents in the health sector comprised of 19.6%.Only 16.4% of the respondents

dealt with other nature of businesses. From the response businesses were dominated

by the manufacturing and service industry.

This is as shown in the table 4.1.

Table 4.1: Nature of business of respondents

Nature of business Frequency Percentage

Manufacturing 65 26

Sales of products 43 17.2

Service industry 77 30.8

Health 49 19.6

Others 16 6.4

Total 250 100

Years of Existence of Respondents Businesses

The study sought to find out the number of years the businesses had been in operation

or existence. The researcher found out that, majority of the businesses had been in

existence from 6-10 years 38.8% respondents, followed by over 10 years 34%, while

46 of respondents said that they were in existence between 1-5 years making 18.4%.

33
Lastly 22 respondents were in business for less than 1 year making 8.8%.

Table 4.2: Years of existence of Respondents business

Years Frequency Percentage

Less Than 1 Year 22 8.8

1-5 Years 46 18.4

6-10 years 97 38.8

Over 10 years 85 34

Total 250 100

Business Monthly Turnover of respondents

The researcher was interested in finding out the monthly business turnover of the

respondents. From the table 4.3, Respondents with a monthly turnover of between

1,000,000- 2,000,000 dominated at 33.2%. They were followed by those with

500,000- 1,000,000 at 24%, while turnover of between 2,000,000- 3,000,000 had

23.6% of the respondents, followed by a cash flow of less than 500,000at 14.4%. The

respondents with monthly cash flow of over3000, 000 shillings had the least 4.8%

respondents among the SME`s. This implies that Majority of the businesses sampled

had a monthly turnover of between 1 million and 2 million shillings.

34
Table 4.3: Monthly business turnover of Respondents

Turn Over Frequency Percentage

Less than 500,000 36 14.4

500,001- 1,000,000 60 24

1,000001-2,000,000 83 33.2

2,000,001- 3,000,000 59
23.6
Over 3,000,000 12
4.8

250 100

4.4. Companies with KRA pin Numbers

The researcher sought to establish the number of SME`s which had a registered KRA

Pin Certificate. From the table 4.4, majority of respondents at 54% had KRA pin

numbers while 46% of SME`s indicated that their businesses didn’t have pin numbers.

This indicates that Most SME`s in Thika region had KRA pin Numbers.

Table 4.4:Businesses with Pin numbers

KRA pin number Frequency Percentage

Yes 13554

No 11546

250 100

4.5 Number of Employees in the SME

The researcher was interested in finding out the number of employees in the SME`s

within Thika Region. Table 4.5, 31.2% of the respondents had between 21-30

employees which was the highest, Followed by 28.8% of the SME`s had11-20

35
employees. 19.6% had 41-50 employees. SME`s with 31-40 Employees comprised

8% of the Respondents while those with less than 10 employees had 7.2%.Lastly

over 51 employees had 5.2% of the SME`s surveyed.

The table 4.5 shows how they responded. Most respondents had 21-30 employees at

31.2% while the least had over 50 employees.

Table 4.5: Number of Employees in the business

Number of Frequency Percentage

Employees
Less Than 10 18 7.2
11-20 72 28.8

21-30 78 31.2

31-40 20 8

41-50 49 19.6

Over 51 13 5.2
Total 250 100

4.6 Statistical Assumptions

Statistical tests rely upon certain assumptions about the variables used in the analysis.

Osborne and Waters (2014), opine that when these assumptions are not met the results

may not be valid. They further argue that this may result in a type I or type II error, or

over or under-estimation of significance or effect size(s). It is therefore important to

pretest for these assumptions for validity of their results. Osborne, Christensen, and

Gunter (2001) observed that few articles report having tested assumptions of the

statistical tests they rely on for drawing their conclusions.

36
According to Osborne and Waters (2014), not pretesting for these assumptions has led

to a situation where there is rich literature in education and social science, but

questions in to the validity of many of these results, conclusions, and assertions still

exist. Testing for assumptions is beneficial as it ensures that an analysis meets the

associated assumptions and helps avoid type I and II errors (Osborne and Waters,

2014; Owino, 2014). Prior to data analysis, assumptions for linear regression were

checked together with multicollinearity and normality.

4.6.1 Test of Normality

Parametric statistics by definition assume that the data under test is normally

distributed, hence the use of the measure of central tendency (Zikmund, 2010). A

number of statistical procedures including correlation, regression, t-test and f-tests are

based on the assumption that the data follows a normal distribution

(Ghasemi&Zahediasl, 2012). There are several ways of testing normality such as

Shapiro-Wilk, Kolmogorov-Smirnov, Lilliefors and Anderson Darling.

According to Razali and Wah (2011) Shapiro-Wilk is the most powerful normality

test. This study adopted it. The findings of the tests are presented in Table 4.6. The

test was used in testing the data in this study. Normality was tested using the Shapiro-

Wilk test and the results showed that all the variables were above 0.05 (p > 0.05)

hence confirming data normality. The study’s data set was subjected to a normality

test and the results are shown in Table 4.6.

37
Table 4.6: Tests of Normality

Shapiro-Wilk

sstatistic df Sig.

Tax information 0.894 250 0.17

0.909 250 0.29

Taxpayer attitude

Tax compliance cost 0.876 250 0.19

Tax compliance 1.054250 0.48

A. Lilliefors Significance Correction

4.7Multicollinearity Test

Multicollinearity is the undesirable situation where the correlation among the

independent are strong. It increases the standard errors of the coefficients using

collinearity statistics to get tolerance and variance inflation factor (VIF). In order to

test for multicollinearity, VIF was computed using statistical packages for social

science (SPSS). Multicollinearity increases the standard errors of the coefficients and

thus makes some variables statistically not significant while they should otherwise be

significant (Osborne and Waters, 2014). Tolerance is the amount of variance in

independent variable that that is not explained by the other independent variable.

Bowerman and Connell (2006) stated that lower levels of VIF are better while higher

levels of VIF are known to affect adversely the result associated with a multiple

regression analyses. The authors argued that VIF above 2.50 start to indicate

relatively high levels of multicollinearity. The Variance Inflation Factor test in the

study regression model ranged between 1.171 and 1.899.

38
These values were lower than the 2.5 level suggested by Allison (2009) as an

indicator of muliticollinearity; therefore, multicollinearity was not a problem on this

analysis. Thus the study findings were able to fulfill the threshold mainly because

Table shows that the VIF of the study were all less than 2.

Table 4.7: Multicollinearity Test

(Constant) Collinearity Statistics

Tolerance VIF
Tax information 0.142 1.381

Taxpayer attitude 0.127 1.899

Tax compliance cost 0.399 1.171

Dependent Variable: Tax Compliance

4.8 Descriptive Statistics

4.8.1 Tax Information

The respondents were asked to rate using a scale of 1 to 5, the extent to which they

knew about tax information by indicating the level of agreement tax related

statements where 1= Strongly Disagree; 2 = Disagree; 3 = Not Sure; 4 = Agree; 5 =

Strongly Agree).

39
Table4.8: Tax Information

Factor Mean SD

I know the amount of tax I am supposed to pay 3.69 1.067

I know when I am supposed to file my tax return and 4.20 0.800

submit my tax

I understand the digital tax return system hence I can file 4.55 0.503
my return with no external sourcing

I understand all I have to do to be tax compliance 4.37 0.662

Mean 4.20

One of the objectives of the study was to determine the effect of tax information on

tax compliance by small and medium business enterprise in Thika town. Based on

various propositions touching on this variable, it generally emerged that a significant

majority of the respondents had the views that tax information had influence on tax

compliance by SMEs in Thika town. For instance, as illustrated in table 4.8, the

respondents unanimously agreed with the suggestion I know the amount of tax I am

supposed to pay with a mean score of 3.69. Similar sentiments were echoed when the

respondents were asked I know when I am supposed to file my tax return and submit

my tax with a mean score of 4.20 Regarding whether they I understand the digital tax

return system hence I can file my return with no external sourcing with mean score of

4.55.Lastly on statement I understand all I have to do to be tax compliance had a

mean score of 4.37.

4.8.2 Taxpayer Attitude

The respondents were asked to rate using a scale of 1 to 5, the extent to which they

40
knew about taxpayer attitude by indicating the level of agreement tax related where

1= Strongly Disagree; 2 = Disagree; 3 = Not Sure; 4 = Agree; 5 = Strongly Agree).

Table4.9: Taxpayer Attitude

Factor Mean SD

Being fully compliant with the tax laws is right thing to do 4.85 0.616

I feel confident regarding knowledge and ability to omit income 4.18 0.713
tax in my tax declaration

If I would get a way to evade VAT and avoid being penalized 3.91 0.742
I would evade paying tax

Mean 4.31

The second objectives of the study, was to determine the effect of taxpayer attitude on

tax compliance by small and medium business in Thika town. Based on various

propositions touching on this variable, it generally emerged that a significant majority

of the respondents had the views that taxpayer attitude had influence on tax

compliance by SMEs in Thika town. For instance, as illustrated in table 4.9, the

respondents unanimously agreed with the suggestion that being fully compliant with

the tax laws is right thing to do with a mean score of 4.85. Respondents also agreed

on I feel confident regarding knowledge and ability to omit income tax in my tax

declaration with a mean score of 4.18.Lastly on statement If I would get a way to

evade VAT and avoid being penalized I would evade paying taxhad mean score of

3.91

41
4.8.3Tax Compliance Cost

The respondents were asked to rate using a scale of 1 to 5, the extent to which they

knew about tax compliance cost by indicating the level of agreement tax related

statements where 1= Strongly Disagree; 2 = Disagree; 3 = Not Sure; 4 = Agree; 5 =

Strongly Agree).

Table4.10: Tax Compliance Cost

Factor Mean SD

The administrative cost of tax compliance procedure4.53 0.720

is very high

The cost of being VAT compliance affects my business 4.70 0.619

profitability

It is very expensive to hire professionals to help me with3.97 0.740

my tax filing

There is great effect on my business cash flow due to the4.01 0.774

cost of compliance

Mean 3.97

One of the objectives of the study was to determine the effect of tax compliance cost

on tax compliance by small and medium business enterprise in Thika town. Based on

various propositions touching on this variable, it generally emerged that a significant

majority of the respondents had the views that tax information had influence on tax

compliance by SMEs in Thika town. For instance, as illustrated in table 4.10, the

respondents unanimously agreed. The administrative cost of tax compliance

42
procedure is very high with a mean score of 4.53. The cost of being VAT compliance

affects my business profitability with a mean score of 4.70. Regarding whether they it

is very expensive to hire professionals to help me with my tax filing with mean score

of 3.97. Lastly on statement there is great effect on my business cash flow due to the

cost of compliance had a mean score of 4.01.

4.8.4: Tax Compliance

The respondents were asked to rate using a scale of 1 to 5, the extent to which they

knew about tax compliance by indicating the level of agreement tax related

statements where 1= Strongly Disagree; 2 = Disagree; 3 = Not Sure; 4 = Agree; 5 =

Strongly Agree).

Table 4.11: Value Added Tax Compliance

Statement Mean Std.

Deviation

I always file my VAT returns as stipulated by the law 4.11 .266

I register for new tax obligations as and when I attain 4.98 .514
registration criteria

I compute and pay my VAT correctly and in good time 2.98 .963
as stipulated by the law

I file VAT returns voluntarily without being compelled 3.03 1.033

to do so.

Mean 3.7

In line with statistics presented on Table 4.5, VAT compliance the results shows

respondents always file their VAT returns as stipulated by the law with a mean score

of 4.11. Respondent were in agreement on statement I register for new tax obligations

43
as and when I attain registration criteria with a mean score of 4.98. Also the statement

I compute and pay my VAT correctly and in good time as stipulated by the law had

the lowest mean score of 2.98. Lastly, statement I file VAT returns voluntarily

without being compelled to do so respondents agreed with a mean score of 3.03.This

implies respondents register for VAT compliance when they attain registration

criteria.

4.9 Correlation Analysis

The study used Pearson’s correlation coefficient (r) to examine the extent of

correlation between the variables of study and to show the strength of the linear

relationships between the variables in the regression ranges between ±1. Where r=

+0.7 and above it indicates a very strong relationship; r=+0.5 to below 0.7 is a strong

relationship; r=0.3-0.49 is a moderate relationship while r=0.29 and below indicates a

weak relationship. Where r=0 it indicates that there is no relationship (Esther- Smith,

Thorge & Love, 1999).

Results in Table 4.10 indicated that there was a significant positive association

between tax information and VAT compliance among small and medium business

enterprise in Thika town(r=.543). The results also showed that taxpayer altitude was

positively correlated with VAT compliance among small and medium business

enterprise in Thika town (r=-.469).The results also showed that tax compliance cost is

positively correlated with VAT compliance among small and medium business

enterprise in Thika town (r=.714). Thus tax compliance cost has a more statistically

significant strong positive relationship with VAT compliance among small and

medium business enterprise in Thika town.

44
Table 4.12: Correlation Matrix
Variable VAT Tax Taxpayer Tax
Tax knowledge attitude compli
Compliance ance
cost
Vat Tax Pearson 1
Compliance Correlation
Sig. (2-
tailed)

Tax knowledge Pearson 0.549 1

Correlation
Sig. (2-
tailed)

Taxpayer attitude Pearson 0.469 0.311 1

Correlation
Sig. (2-
tailed)

Tax compliance Pearson 0.714 0.521 0.550 1

cost Correlation
Sig. (2-
tailed)

Correlation is significant at the 0.05 level (2-tailed).

Survey Data (2020)

4.10 Regression Analysis

The main objective of the study was to establish the factors influencing value added

tax compliance among the SMEs in Thika town. To achieve this objective, the study

used various inferential statistical tools and multiple regression analyses were used

4.10.1 Model Summary

To test how well the model works in explaining the correlation between tax

information, taxpayer altitude, tax compliance cost on value added tax compliance

among the SMEs in Thika town, regression analysis was conducted. The findings in

Table 4.12, revealed that Tax information, taxpayer attitude, tax compliance cost

45
correlate with value added tax compliance up to 81.8% (R=0.818) and accounts for a

coefficient of determination of 66.9% (𝑅 2 =0.669). This implies that 33.1% of the

change in value added tax compliance was caused by other factors which were not

included in the model. The findings further reveal that even if the results adjusts, the

model would still account for 66.5% (Adjusted 𝑅 2 , 0. 665) variation value added tax

compliance among the SMEs in Thika town

Table 4.13: Overall Effect of Tax Information, Taxpayer attitude, Tax

Compliance Cost On value added tax compliance

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) 0.809 .101 8.009 .000
Tax Information .389 .087 0.211 4.471 .000
Tax Payer Attitude .295 .073 .357 4.041 .001
Tax compliance cost .436 .094 .453 4.638 .000
R 0.818
R Square 0.669
Adjusted R Square 0.665
F Value 52.273
Sig 0.000𝑏
a Dependent Variable: VAT Compliance
b Independent Variables: (Tax information, taxpayer attitude& tax compliance
cost)

Régression Equation
Y= .809 + .389X1 +.295X2 + .436X3 +e
Where
Y = VAT Compliance
X1= Tax information

46
X2 = Taxpayer attitude
X3= Tax compliance cost
Regression Equation shows that for each unit change of Tax information, taxpayer

attitude and tax compliance cost causes an increase of 38.9%, 29.5%, and 43.9%

respectively on VAT compliance.

4.10.2 Analysis of Variance

As presented in Table 4.12, the P-value of 0.000 implies that Tax information,

taxpayer attitude and tax compliance cost have a significant joint correlation with

VAT Compliance, which is significant at a confidence interval of 0.01 level and 0.05

levels. This also shows that the regression model adopted is statistically significant

and can thus be used to assess the association between the independent and dependent

variables and to make further inferences

4.11 Discussion of the Findings

This chapter presents discussion for the results of the regression analysis carried out

on the study. The main purpose of the study was to establish the factors influencing

VAT Compliance among SME`s in Thika town. The results of each variable were

discussed.

4.11.1 Effect of Tax Information on Value Added Tax Compliance

The first objectives of the study was to ascertain the influence of availability of tax

information on vat compliance in SME`s in Thika town. The findings from the

biographic data indicated that the various SME`s in Thika town had tax certificate’s

the first document for one to be compliant from the study findings.

The objective had a corresponding question which asked how does availability of tax

information influence VAT compliance among SMEs in Thika town. From the

47
findings of the study they pointed out that tax information was statistically significant

at a p value of 0.000, which is less than 0.05 the convectional probability significance

level. It agrees with the study done by Mutinda (2015) the researcher carried out a

research on the relationship between tax information and tax performance among

supermarkets in Kenya. The study established that most of the supermarkets in Kenya

had tax information for more than five years. It was also evident that there was a very

significant relationship between availability of tax information among the SMEs,

according to (Andreoni Errard, 1998) the degree of information is an important factor

on the behavior of tax payers and how it influences tax evasion. Less educated tax

payer’s are less exposed to tax compliance information and are less informed about

relevant tax compliance information and thus are more prone to tax evasion.

4.11.2Effect of Taxpayer Attitude on Value Added Tax Compliance

The Second objective was to find out the effect the level of taxpayer attitude on value

added tax compliance SMEs in Thika town and from the findings it was statistically

significant at a p value of 0.001 which is less than 0.05 taxpayer attitude influence

VAT compliance among SMEs in Thika town.

There is a very strong relationship between the taxpayers' attitudes and tax

compliance in Kenya, in that taxpayer's attitudes encourages tax compliance in and all

that influence the taxpayers' attitude equally affect the taxpayers' compliance with the

tax requirements. In a research conducted in Kenya (Wanjohi, 2010) most taxpayers

view the Kenyan tax system as unfair as most respondents differed that they are

paying a fair share of tax as that of their neighbors or friends, the tax laws are not easy

to understand such as calculation of tax, filing and paying dates. Some of the factors

for tax noncompliance were found to be the inability to understand tax laws, a feeling

48
that they are not paying a fair share of tax, negative peer attitude and a belief that their

neighbors are not reporting and paying tax honestly, and non-rewarding taxpayers.

The attitude issues from the various studies rotate around the tax fairness, some

taxpayers feel that there is improper use of revenue collected by government

especially due to the increased graft cases and the intent to evade payment of tax for

the individual interest as some tax payer want to make abnormal profit to grow their

business in a short period. A taxpayer with positive attitudes towards tax evasion is

expected to be less compliant than a taxpayer with negative attitudes.

4.11.3Effect of Tax compliance Cost on Value Added Tax Compliance

The third objective was to find out the effect the level of tax compliance cost on value

added tax compliance SMEs in Thika town and from the findings it was statistically

significant at a p value of 0.000 which is less than 0.05 tax compliance cost influence

VAT compliance among SMEs in Thika town. In a study carried out on tax

compliance and simplifications (OECD, 2004) established that compliance costs tend

to increase with the number of taxes that an entrepreneur is subject to, the complexity

of the tax rules, the frequency of submitting tax returns and the number of levels of

government involved in levying and collecting taxes. Taxes introduce complexities

and costs not relevant to SMEs and the complexities may increase where more than

one tax bracket is involved. This result to SMEs evading taxes as it affects the

business cash flow leading to non compliance.

49
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

This chapter presents a summary of the findings in line with the specific objectives of

the study, conclusions drawn and the necessary recommendations made for the study

including suggested areas of further study to enrich relevant knowledge under the

study.

5.2 Summary of the Findings

The general objective of this study was to establish the factors influencing value

added tax compliance among the SMEs in Thika town. The specific objectives were

to determine the availability of tax information, tax payer attitude and the cost of

compliance influence compliance among SMEs in Thika town. The study adopted

descriptive survey design. The researcher correlation found that VAT compliance

among SMEs in Thika town and have a significant association with VAT compliance

in Thika town. Multipleregression was used to answer research the questions.

5.2.1Effect of Tax Information on Value Added Tax Compliance

The first objective of the study was to determine the availability of tax information on

VAT compliance among SMEs in Thika town. Correlation analysis revealed a

significant positive association between tax information and VAT compliance among

SMEs in Thika town. Regression analysis indicated that tax information and Thika

town VAT compliance have a positive and significant relationship. Tax information

was found to be satisfactory in explaining VAT compliance among SMEs in Thika

town

50
5.2.2 Effect of taxpayer Attitude on Value Added Tax Compliance

The second objective of the study was to determine the availability of taxpayer

attitude on VAT compliance among SMEs in Thika town. Correlation analysis

revealed a significant positive association between taxpayer attitude and VAT

compliance among SMEs in Thika town. Regression analysis indicated that taxpayer

attitude and Thika town VAT compliance have a positive and significant relationship.

Taxpayer attitude was found to be satisfactory in explaining VAT compliance among

SMEs in Thika town

5.2.3Effect of Tax Compliance Cost on Value Added Tax Compliance

The third objective of the study was to determine the effect of tax compliance cost on

VAT compliance among SMEs in Thika town. Correlation analysis revealed a

significant positive association between tax compliance cost and VAT compliance

among SMEs in Thika town. Regression analysis indicated that tax compliance cost

and Thika town VAT compliance have a positive and significant relationship. Tax

compliance cost was found to be satisfactory in explaining VAT compliance among

SMEs in Thika town

5.3 Conclusions

This study concludes that tax information has an effect on VAT compliance among

SMEs in Thika town. Further, it was concluded that tax information has a positive

bearing on VAT compliance among SMEs in Thika town. As such, an increase in tax

information is likely to improve VAT compliance among SMEs in Thika town.

Additionally, it is concluded that influence of taxpayer attitude had an effect on VAT

compliance and the right attitude will increase VAT compliance. Lastly the study

concluded that tax compliance cost affect VAT compliance due to business cash flow.

51
Therefore, in dealing with issues relating to improvement of VAT compliance, tax

information, taxpayer attitude and tax compliance cost should not be overlooked

5.4 Recommendations

Based on the study findings the study made several recommendations. To start with,

the study recommended on tax information that the KRA should continue with tax

payer education programs to the taxpayers so that they can understand the digital tax

return system hence they can file their return with no external sourcing. This will

provide more tax information and also reduce the cost of hiring tax experts.

The government can design several interventions to develop tax compliance as a

prestigious social norm. An exclusive social recognition to the compliance taxpayer

acts as an incentive for more tax payers to join the compliance list.

To create a tax-compliant culture, the government needs to find ways to compensate

for this sense of loss occurring during the compliance procedure. The solution could

lie in the human brain since human mind are emotions. All human decisions are

influenced by the emotional utility of those decisions. Tax payer will have a positive

attitude towards paying taxes when they know that the tax they paid was used to make

a significant positive impact on society. Emotional utility could be further increased if

individual stories of those who benefitted from the VAT tax and project financed by

the taxes are communicated to the taxpayer

5.5 Suggestions for Further Research

Since the study was carried out in Thika region only, a similar study can be done in

other parts of the county to find out what causes noncompliance in other regions. The

research was also carried out with a focus on SME`s, meaning that a similar study can

be done on MSME`s and large organizations.

52
A research can also be done to investigate each independent variable which are tax

information, tax payer attitude and cost of compliance as the main objective one by

one to get the factors that affects them hence affecting tax compliance. For example

how tax complexity, firm age and tax liability have an effect on tax noncompliance

behaviour through understatement income, over charged cost and both of them

combined. I would recommend further studies on 33.1% of the change in value added

tax compliance factors which were not included in the model

53
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 APPENDICES
Appendix 1: Questionnaires

I am Gladys Njuguna currently undertaking a study on factors influencing VAT

compliance among small and medium enterprises in Thika town. The information you

provide is confidential and purely for academic purpose.

Instruction

Kindly provide the necessary information with honesty

PART A: DEMOGRAPHIC INFORMATION

1. What is the nature of your business?

Manufacturing

Sales products

Services offering

Health

Others specify …………………………………………………

2. How long has the organization been in existence?

Less than One year

1-5 Years

6-10 Years

More than 10 Years

Others (Specify) …………………………………………………..

3 On average, what is your business ‘monthly turnover?

Below Ksh 500, 000

Between Ksh 500,001 and Ksh 1 Million

Between Ksh 1,000,001 and Ksh 2 Million

Between Ksh 2,000,001 and Ksh 3 Million

Over Ksh 3 million

63
4. Does your business have a Personal Identification Number (PIN)?

Yes No

5. Number of employees in the MSE

Below 10

Between 11 and 20

Between 21 and 30

Above 51

Kindly indicate the level of your agreement on the following statements where 1=

Strongly Disagree; 2 = Disagree; 3 = Not Sure; 4 = Agree; 5 = Strongly Agree).

Tax information

1 2 3 4 5

6 I know the amount of tax I am supposed to pay

I know when I am supposed to file my tax return and

7 submit my tax.

I understand the digital tax return system hence I can file

8 my return with no external sourcing.

9 . I understand all I have to do to be tax compliance

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Tax payer attitude

1 2 3 4 5

10 Being fully compliant with the tax laws is right thing to do.

I feel confident regarding knowledge and ability to omit

11 income tax in my tax declaration

If I would evade VAT and avoid being penalized I would be

12 caught

Tax compliance cost

1 2 3 4 5

The administrative cost of tax compliance procedure is very

13 high.

The cost of being VAT compliance affects my business

14 profitability

It is very expensive to hire professionals to help me with my

15 tax filing

There is great effect on my business cash flow due to the cost

16 of compliance.

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VAT compliance

1 2 3 4 5

17 I always file my VAT returns as stipulated by the law

18 I register for new tax obligations as and when I attain

registration criteria

19 I compute and pay my VAT correctly and in good time as

stipulated by the law

20 I file VAT returns voluntarily without being compelled to do so

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 Appendix II:List of taxpayers

1. SD creative 33. Makindu motors

2. Digital social service
3. Kenya vehicle manufacturing Ltd
4. Mazingira and Engineering consultants
5. Value peak ltd
6. Rupccopharma Ltd
7. Erickoeletro ltd
8. Samercharnt construction
9. Osana cleaning services
10. Joecalih photography
11. Jetlack food ltd
12. Kenblest ltd
13. Jubilee feeds industries ltd
14. Peak feed ltd
15. Chania feeds manufacturers ltd
16. Faloy feeds lts
17. Gleegen feeds
18. Kifaru host ltd
19. Unitect electrical consultant
20. Thikaevalast motorcycle
21. Eklow design lab
22. Intel fire group of companies
23. Frontier trading ltd
24. Mama miller ltd
25. Ruhamah enterprises
26. Munjo investment ltd
27. Pavoc solution ltd
28. Amaka security ltd
29. Ecenex computer and allied
30. Thika farmers agrovet
31. Muruka farmers
32. Fashion center
34. Thika motor dealers
35. Express Thika ltd
36. Posh pool electrical
37. Thika cloth mills ltd
38. City general stores ltd
39. Chania deport
40. Muranga motor spare ltd
41. Reenzy dry cleaneros
42. Oswal bakery
43. Saana shoe ltd
44. Wimgs engineering service ltd
45. Jjagrovet
46. Ankur traders
47. Bemwa stationers
48. Gigwabookshoop
49. Hosanna bookshoop suppliers ltd
50. Kenbeat bookshop
51. Core ict consultancy
52. Gatura hardware
53. Julika hardware
54. Wandi hardware
55. Gawaga hardware general store
56. Imara enterprises ltd
57. Kariuahardwares
58. Kiki hardware and building materials
59. khaki clothing store
60. Hemland computers
61. Jasy agencies
62. Kawangu electrical co ltd
63. Sawai stationary supplies
64. Thika commercial hardware

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65. Thika tiles 98. City sounds an refrigeration
66. Twiga bar and restaurant 99. Compressed rubber stamp center
67. Waigi enterprises ltd 100. Electronic work center
68. Waridi garments 101. Elegant beauty salon and kinyozi
69. Winky hardware 102. Elegant photo studio
70. Zebra glass works 103. Excel salon
71. Zelta ltd 104. The food place
72. Dawaline pharmaceuticals 105. Jama feeds ltd
73. Moon pack ltd 106. Pundamilier hardware
74. Furaha pharmacy 107. Ready hardware
75. Githaainipharmarcy 108. Soul color studio
76. Kenwear garment manufactures 109. Daimahardwares ltd
77. Mathais supermarket 110. Joskaent ltd
78. Mayfeeds Kenya ltd 111. Junior manandu timber
79. Nampak k ltd 112. Junior manandu hardware
80. Nehaelecticals 113. Jam tec electrical
81. New salama wholesalers 114. Weaver bird garments ltd
82. Kaniniharaka wholesalers 115. Aliwoth hardware
83. Pewani stationary 116. Joecalih photography
84. Punjab engineering works ltd 117. Core ict consultancy
85. Shade net ltd 118. Techno flex solutions
86. Kel chemicals ltd 119. Marcom ltd
87. Thika plan copiers 120. Posh pool electronics
88. Ukombozi retreat and conference center 121. Legorn feeds
89. Wheatbee ltd 122. Hika animal feeds
90. Zanconsult 123. Hemco animal feeds
91. Afro raod auto spare
92. African touch salon
93. Annex computers
94. Black and gold executive kinyozi
95. Caanan hardware
96. Chania scales maintenance
97. Chania wine agencies

68
124. Saana shoes ltd 157. Colorchase limited
125. Katka island ltd 158. AA shalom cleaning services ltd
126. Khaki clothing ltd 159. Popular industries ltd
127. Kigoro hardware & tools ltd 160. Zurihub limited
128. Winky hardware 161. Mama miller ltd
129. Zelta ltd 162. Ruhamah enterprises
130. Twistiez errands ltd 163. Kiaru enterprises
131. Bulleys tanneries ltd 164. Thika cloth millers ltd
132. Dune packaging ltd 165. Alma agencies
133. Famy auto spares ltd 166. Ziai wines and spirit
134. Neesma designs 167. Pamu wines and spirit
135. Jalex electronics 168. Kwame wines and spirit
136. Alexca electronics 169. Lizna wines and spirits
137. Kiunyu hardware 170. Tikle stop wines and spirit
138. Bidii hardware 171. Elista wines and spirit
139. Jack plane hardware 172. Sammier wines and spirit
140. New Heshimamachant 173. Imham auto spare
141. Karuma hardware 174. J N G Enteprises
142. Losogwa hardware 175. Jomaka enterprises
143. White rose cleaners ltd 176. Kangari central store
144. Chania cleaning services 177. Kariu hardware
145. Protocol dry cleaner 178. Malde enterprises
146. Osan cleaning services 179. Match electrical
147. Mach feeds 180. Meatrace limited
148. Salama feeds 181. Munguka auto spare
149. Farmer reshanimal feeds 182. Mwihoko auto spare
150. Kanguda animal feeds 183. New Weithaga store
151. Tullus agencies 184. Ngamu limited
152. Imara enterprise Thika 185. Onyx agriculture services
153. Roohi enterprises ltd 186. Paric hardware
154. Khilna enterprises ldt 187. P Punja advocates
155. Rush Kenya timber & hardware 188. Sabini store
156. Cisco systems 189. Sakamwa enterprises

69
190. Vallen construction ltd 222. Chania emporium
191. Vianney stationers &general agencies 223. Chania arm care
192. Waigi enterprises ltd 224. Chania wines agencies
193. Winky hardware 225. Cheer motel
194. Zebra glass work &hardware 226. Cielcon hardware ltd
195. Express auto work 227. Clearspan tents and structure
196. Twister errands ltd 228. Clean curtain design center
197. Alpha knits ltd 229. Col care enterprises
198. Khilna enterprises 230. Colorchase ltd
199. New salama wholesalers 231. Computer rubber stamp center
200. Ready timber merchant 232. Deatrach investment
201. Shade net ltd 233. Dinaravestsure ltd
202. Wilma agro ltd 234. District internal audit
203. Beamart ltd 235. Vine yard hospital
204. Rekim enterprises 236. Thika nursing
205. Taji gardens 237. D K Mwangi associates
206. Thika plan copiers 238. Dr S.M clinic
207. Wheatbee limited 239. Durga enterprises
208. Zanconsutant 240. Elliza beauty shop
209. Arolink limited 241. Elwakienteprises
210. Bart engineering services 242. Everlora ltd
211. Beel power & general k ltd 243. Everton uniform distributers
212. Benkam auto spares 244. Felikan building &civil engineering
213. Berma farmers agencies consultant
214. Bisvet Kenya ltd 245. Ndusara beauty shop
215. Blue rose major store 246. Net shop computers
216. Brawe electrical supplieis 247. Thika cloth mills ltd
217. Camso enterprises 248. Kalimoni general suppliers
218. Cannan hardware 249. Weithaga farm extension solutions
219. Caribean enterprises 250. Willmar agro l
220. Champion feeds
221. Chandrakant general store

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Appendix III: Revenue performance during the Sixth Corporate Plan period

FINANCIAL ACTUL TARGECTED

YEAR COLLECTION AMOUNT VARIANCE

2017/2018 205,099 206,899 1,800

2018/2019 230,348 241,124 10,776

71