Tax Enforcement Measures Enhancing Tax Compliance of Small and Medium-Sized Enterprises in Nairobi County, Kenya

Abstract

Tax is an essential source of government revenue all over the world. It provides the basis of revenue and expenditure. An effective and efficient tax system significantly impacts the socio-economic and general development of a country. Tax revenue is, therefore, a powerful resource to fund government services but the amount of tax revenue generated by a government for its expenditure program depends on the compliance of the taxpayers with the tax laws and regulations. Moreover, in developing countries, Kenya included faces social, behavioral, and economic problems in administering tax policies and frameworks among most business owners who are small and medium-sized enterprises. This study investigated the tax enforcement measures enhancing taxation compliance among small and medium-sized enterprises in Nairobi County, Kenya. The study focused on the following tax enforcement measurements: the effect of tax audits on tax compliance of the small and medium-sized enterprises, an examination of the effect of the imposition of tax penalties and interest on tax compliance, an investigation of the effect of the issuance of agency notices on tax compliance, establishing whether the cancellation of Tax Compliance Certificates (TCCs) influences tax compliance and a determination of whether tax education has a moderating role in a tax audit, penalties, and fines, placement of agency notices, and cancellation of TCCs on tax compliance of small-medium enterprises in Nairobi County, Kenya. The study was grounded on the utility theory, economic deterrence theory, institutional theory, psychology theory and the economic theory of tax compliance. The study targeted small and medium-sized enterprises in Nairobi County, Kenya. The study applied positivism research philosophy and descriptive cross-sectional design with a targeted population of 399 constituting the managers and owners of SMEs in Nairobi County. A structured questionnaire containing closed-ended questions was used to collect data from the respondents. The data obtained were analyzed using descriptive analysis and regression analysis to determine the underlying relationship between the variable under the study using SPSS. Presentation of findings was done using pie charts, bar charts and graphs, percentages, and frequency tables. The study findings portrayed that tax audits have a significant influence on tax compliance of small and medium-sized enterprises in Nairobi County, Kenya (β = 0.423, t = 7.656, p < 0.05). The study findings also showed that imposition of penalties and interest have a significant influence on tax compliance of small and medium-sized enterprises in Nairobi County, Kenya (β = 0.642, t = 10.633, p < 0.05). Besides, placement of agency notices had a significant influence on tax compliance of small and medium-sized enterprises in Nairobi County, Kenya (β = 0.543, t = 13.344, p < 0.05). Additionally, cancellation of tax compliance certificate had a significant influence on tax compliance of small and medium-sized enterprises in Nairobi County, Kenya (β = 0.201, t = 4.138, p < 0.05). The findings also indicated that significantly moderated the relationship between tax audit and tax compliance (β = -0.126, p = 0.018) and between issuance of agency notices and tax compliance (β = 0.109, p = 0.004). However, tax education did not have a significant moderating influence on the relationship between penalties and fines and tax compliance (p = 0.794) and also between cancellation of tax compliance certificates and tax compliance (p = 0.446). The study concluded that tax audits, imposition of tax penalties and interest, issuance of agency notices, and cancellation of tax compliance certificates showed that the model was fit in explaining tax compliance and statistically significant. The study also found that tax education significantly moderates the relationship between tax enforcement measures and taxation compliance. The findings from this study have provided valuable information on the tax enforcement measures that influence tax compliance behavior, which is very beneficial for policymakers in taxation. The information gathered provides a building block that can assist policymakers in formulating guidelines that can improve the effectiveness of tax enforcement measures in a taxation system that can turn around tax compliance levels to complement the self-assessment taxation regime. This also ensures an equitable, proportionate, clearly defined, and even-handedly taxation administration to encourage voluntary tax compliance and deter the tax offenders.