Determinants of Tax Compliance among SMEs in Kenya
Main Article Content
Keywords
Tax compliance, SMEs, tax education, compliance costs, institutional factors, socio-cultural factors, technological advancements
Abstract
Tax compliance among Small and Medium Enterprises (SMEs) in Kenya is a critical aspect significantly influencing national revenue generation and economic sustainability. SMEs account for approximately 45% of Kenya's GDP and 85% of employment, making them vital players in the tax system. However, tax compliance within this sector remains a challenge, with non-compliance rates affecting the government's ability to achieve its revenue targets. This review explores the key determinants of tax compliance among SMEs in Kenya by synthesizing existing literature. The study was anchored on Economic Deterrence Theory, developed by Allingham and Sandmo (1972) and Theory of Planned Behavior (TPB), developed by Icek Ajzen in 1985 and further elaborated in 1991. This study employed a systematic literature review methodology to examine the determinants of tax compliance among SMEs in Kenya. Relevant literature was sourced from reputable academic databases such as Scopus, Web of Science, Google Scholar, ScienceDirect, SpringerLink, AJOL, ResearchGate and institutional reports, using predefined keywords and Boolean operators to refine search results. A thematic analysis was conducted to categorize and synthesize findings from selected studies. Factors such as high compliance costs, inadequate tax education, complex filing procedures, socio-cultural factors, technological advancements and limited trust in government institutions have been considered to be major determinants of non-compliance. Furthermore, enforcement measures such as penalties and audits affect behavior towards compliance. The study recommends that in order to enhance tax compliance among SMEs, the Kenya Revenue Authority (KRA), in collaboration with the National Treasury and financial institutions, should intensify taxpayer education through tax clinics, awareness campaigns and mobile-friendly payment systems like M-Pesa. Lowering administrative burdens through unified tax payments, offering tax incentives and promoting transparent tax administration will boost compliance. Leveraging technology, including automated tax systems and blockchain solutions, can improve efficiency and security. Public sensitization campaigns and reward-based compliance programs, such as tax rebates and recognition schemes, will further encourage voluntary tax adherence, fostering a fair and SME-friendly tax system.
References
Adebiyi, O. O. (2023). Taxation in the digital age: an examination of the necessity, feasibility, and implications of taxing virtual infrastructures. Asian Journal of Economics, Business and Accounting, 23(23), 13-35.
African Union (2022). The African Union Annual Small And Medium Enterprises Forum. https://au.int/fr/node/41891
Ajzen, I. (1991). The theory of planned behavior. Organizational behavior and human decision processes, 50(2), 179-211. https://www.sciencedirect.com/science/article/abs/pii/074959789190020T
Ajzen, I., & Fishbein, M. (1980). Understanding attitudes and predicting social behavior. Englewood Cliffs, NJ: Prentice-Hall
Aondo, R. M. (2018). Factors Affecting Tax Compliance Among SMEs in Nakuru County, Kenya: A Survey of SMEs in Naivasha Sub County. Management University of Africa. https://core.ac.uk/download/pdf/185520630.pdf
Appiah, T., Domeher, D., & Agana, J. A. (2024). Tax knowledge, trust in government, and voluntary tax compliance: Insights from an emerging economy. Sage Open, 14(2), 21582440241234757.
Atawodi, O. W., & Ojeka, S. A. (2012). Factors that affect tax compliance among small and medium enterprises (SMEs) in North Central Nigeria. International journal of business and management, 7(12), 87. https://
pdfs.semanticscholar.org/b086/5a53fa7e530b2ca1f0322cc5cbc2f7360fc1.pdf
Bandura, A. (1997). Self-efficacy: The exercise of control. New York: W.H. Freeman.
CNBC Africa. (2022). Tax compliance remains a challenge for Kenyan SMEs. https://www.cnbcafrica.com/
media/6312254910112/tax-compliance-remains-a-challenge-for-kenyan-smes/
Ekundina, R. I. (2018). Factors Influencing Online Tax Returns On Tax Compliance In Kenya.(A Case Study Of Small Businesses In Central Business District Nairobi City County (Doctoral dissertation, MUA). https://core.ac.uk/download/pdf/224836819.pdf
Feld, L. P., & Frey, B. S. (2007). Tax compliance as the result of a psychological tax contract: The role of incentives and responsive regulation. Law & Policy, 29(1), 102-120.
Gitaru, K. (2017). The Effect of Taxpayer Education on Tax Compliance in Kenya: A Case Study of SMEs in Nairobi Central Business District. University of Nairobi. https://mpra.ub.uni-muenchen.de/80344/
Hanapi, A. M. (2022). Determinant of tax non-compliance among Taxpayer. Asian Journal of Accounting and Finance, 4(1), 13-25. https://myjms.mohe.gov.my/index.php/ajafin/article/view/18117
Katua, C. M. (2019). Digitization Of Tax Administration, Technology And Tax Compliance By Small And Medium Sized Enterprises In Nairobi Central Business District (Doctoral dissertation, University of Nairobi).
Kenya Private Sector Alliance (2024). KEPSA CEO’S OPENING REMARKS DURING THE KEPSA ANNUAL SME CONFERENCE. Theme: Unlocking SME Financing and Scaling Up Innovations for Accelerated Growth. https://admin.kepsa.or.ke/public/files/docs/17244156772.pdf
Kenya Revenue Authority. (2021). Managing SME Compliance Through Tax Simplification. 41st CATA Technical Conference. https://static1.squarespace.com/static/5c6aa605ca525b3b56a7e512/t/6197beabdeff8b502c088625/1637334700432/Kenya+Revenue+Authority+-
+Managing+SME+Compliance+through+Tax+Simplification.pdf
Keraro, J. M. (2017). Determinants of Tax Compliance Among Small and Medium Enterprises in Nakuru Central Business District, Kenya. Kabarak University. http://ir.kabarak.ac.ke/bitstream/handle/123456789/87/JOSEPHINE%20M.%20KERARO.pdf
KICTANet. (2024). Understanding Digital Taxation in Kenya: A Pathway to Fair and Inclusive Policy Reforms. https://www.kictanet.or.ke/understanding-digital-taxation-in-kenya-a-pathway-to-fair-and-inclusive-policy-reforms/
Kirchler, E., Hoelzl, E., & Wahl, I. (2016). Enforced versus voluntary tax compliance: The “slippery slope” framework. Journal of Economic Psychology, 29(2), 210-225. https://www.sciencedirect.com/science/article/abs/pii/S016748700700044X
Levin, J. (2021). Taxation for inclusive development: challenges across Africa. Nordiska Afrikainstitutet. https://www.diva-portal.org/smash/record.jsf?pid=diva2%3A1573054&dswid=7861
Mathenge, E. M., & Abdul, F. (2021). Technological tax reforms and tax compliance among small and medium enterprises in Nyeri County. International Academic Journal of Economics and Finance, 3 (7), 198, 220(2).
Matthew, P. H., & Kan, L. R. (2017). Theory of planned behavior. Encyclopedia of Personality and Individual Differences. https://doi.org/10.1007/978-3-319-28099-8_1191-1
Muhwa, G. (2023). Issuance of Agency Notices and Tax Compliance of Small and Medium Enterprises in Nairobi County, Kenya. Research Journal of Business and Finance, 2(1), 49-61. https://www.ajol.info/index.php/rjbf/article/view/261059
Musau, N. (2015). Determinants of Tax Compliance Among Small and Medium Enterprises in Kenya: A Case of Nairobi County. University of Nairobi. http://erepository.uonbi.ac.ke/handle/11295/95034
Musyoka, N. N. (2019). Effect of tax reforms on voluntary tax compliance among small and medium enterprises in Kenya: a case of Nairobi County (Doctoral dissertation, Strathmore University). https://su-plus.strathmore.edu/server/api/core/bitstreams/69054634-d635-4193-8eeb-13f41fd1fc58/content
Muthinji, J. E. S. S. E. (2020). Factors affecting turnover tax compliance among micro small and medium enterprises in Roysambu, Nairobi (Doctoral dissertation, Doctoral dissertation, Moi University).
Nduruchi, G. M., Gregory, E. N. M. P. P., & Namusonge, S. (2017). Determinants of tax compliance among small and medium enterprises in Bungoman County, Kenya. system, 9(18).
Nyakundi, J. B. (2018). The effect of tax compliance strategies expenditure on government tax revenue in Kenya (Doctoral dissertation).
Okuku, D. (2022). Determinants of Turnover Tax Compliance Among Small and Medium Enterprises Sector in Kenya (Doctoral dissertation, KESRA/JKUAT-Unpublished research project). https://ikesra.kra.go.ke/server/api/core/
bitstreams/431bd872-c4c1-4a12-9ee6-6d6fca22ea28/content
Ondimu, O. M. (2015). Effects of Tax Reforms on Compliance of Small and Medium Enterprises in Kenya; Case of Kisumu Town. Kenyatta University. https://ir-library.ku.ac.ke/items/e50eb038-115a-4c7c-afd5-66afa0d2b1d9
Pan African Chamber of Commerce and Industry (2024). Financing Small and Medium Enterprises (SMEs) in Africa: A Crucial Imperative for Chambers. https://www.pacci.org/financing-small-and-medium-enterprises-smes-in-africa-a-crucial-imperative-for-chambers/
Thuku, M. N. (2020). Determinants of consumption tax compliance among micro and small enterprises in Ruiru Town (Doctoral dissertation, Moi University). https://ikesra.kra.go.ke/server/api/core/bitstreams/3cd7f2e2-f6c3-4951-9d7b-bf201f8ec982/content
Tilahun, M. (2022). Factors Affecting “Tax Compliance Behaviour” Of Taxpayers: The Case Of Ministy Of Revenue Small Taxpayer’s Branch Officein Addisababa (Doctoral Dissertation, St. Mary’s University).
United Nations (2024). MSMEs and the SDGs. Leveraging the Power and Resilience of Micro-, Small and Medium-
sized Enterprises (MSMEs) to Accelerate Sustainable Development and Eradicate Poverty in Times of Multiple Crises. https://www.un.org/en/observances/micro-small-medium-businesses-day
Walsh, K. (2012). Understanding taxpayer behaviour–new opportunities for tax administration. The Economic and Social Review, 43(3, Autumn), 451-475. https://www.esr.ie/esr/article/view/46
Warundu, L. (2021). Determinants of Tax Compliance among Small and Medium Enterprises in Nairobi County, Kenya (Doctoral dissertation, University of Nairobi). https://erepository.uonbi.ac.ke/bitstream/handle/11295/160374/Lucy%20%20Warundu%20%20-Project.pdf?sequence=1&isAllowed=y
Zachary, J. M. N., Kariuki, S., & Mwangi, S. (2017). Tax compliance cost and tax payment by small and medium enterprises in Embu County, Kenya. International Academic Journal of Economics and Finance, 2(3), 206-219.
Article Sidebar
Article Details
Zaccheaus M. Odongo , Department of Accounting and Finance, School of Business and Economics, Mount Kenya University, Kenya
Department of Accounting and Finance, School of Business and Economics, Mount Kenya University, Kenya