Turnover tax compliance in Kenya: Juma William

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FACTORS AFFECTING TURNOVER TAX COMPLIANCE AMONG SMALL AND MEDIUM SIZE
ENTERPRISES: A CASE STUDY OF SMALL AND MEDIUM SIZE BUSINESSES IN LANGATA
ZONE, KENYA.
BY
AHENDA JUMA WILLIAM
082075
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE AWARD OF THE DEGREE OF BACHELOR OF COMMERCE-ACCOUNTING OPTION,
SCHOOL OF MANAGEMENT AND COMMERCE.
DEGREE OF BACHELOR OF COMMERCE
ACCOUNTING
STRATHMORE UNIVERSITY.
DECEMBER 2017

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DECLARATION
This research project is my original work and has not been presented as a partial fulfilment of degree in
any other higher learning institution.
Sign__________________________________ Date_______________________
Name: Juma William (Admission number 082075)
This report has been submitted for review and examination with my approval as the Strathmore University
lecturer and as student’s supervisor.
Sign _____________________________ Date________________________
Name: Mr. Erastus Mbithi
Lecturer, School of Management and Commerce
Strathmore University.
18/12/2017

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DEDICATION
I dedicated this research to High living God, for giving me strength and stability in life. To my mentor
Dr. David Mathuva, Ms. Rosemary Mbaluto, Ms. Sarah Muigai and Mr. Joseph Kimemia, I would not
have made it without their encouragement, motivation and offering support to my entire study and being
my family for my needs and wants. To my supervisor who has always been there to guide and give
direction of what was expected of me. To my fellow students who played critical part in building my
confidence and offering guidance whenever I got stuck and hence I could renew my strength and move
on, may God bless you all.
I conclude with special thanks to my Mother Eveline Nekesa for her persistence prayer for this long
journey of study, her prayer has always triggered intrinsic motivational factors to keep me moving despite
the circumstances gone through in this four years of study. Thank you mum for your prayer and believing
in my capabilities, I believe you will be delighted to receive this from your son.

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ACKNOWLEDGEMENT
I am greatly indebted to my supervisor, Mr. Erastus Mbithi who imparted invaluable knowledge and skills
to me about the research process and always found time to guide despite him having other activities. I wish
to appreciate Strathmore University fraternity for giving me an opportunity to take this course on
Scholarship, indeed I owe you everything that I have acquired for these four years. I sincerely wish to
thank all Strathmore University Lecturers especially those that I have interacted with them one on one
having conversation with them and they were more than willing to offer advice and motivation to me. You
are a blessing to my life.
My gratitude goes to all stakeholders that have involved either directly or indirectly in my study starting
from Port-mixed primary school teachers (Ms. Irene Musila, Ms. Elizabeth Habili, Mr. Collins Ouma, Mr.
Seth, and Lawrence among others), Nairobi school fraternity(Ms. Mwangi, Mr. Kisilu, and Ms. Macharia
among others), Korean organization scholarship through Mr. Kim Colonel and my Uncle Mr. Albert
Makobi, my second Mother Mrs. Grace Ojall and her husband Mr. Joshua Ojall and other parties that
contributed towards my education. I just have these words for you; may you live to enjoy the fruits of the
seed that you planted in me and to all individuals and organization that I have not specifically mentioned
by name, please accept my gratitude for without your support, this study would have remained a mare
dream back in primary school level when I did not have school fees to proceed with academic. Thank you
all.

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Contents
DECLARATION...............................................................................................................................................2
DEDICATION...................................................................................................................................................3
ACKNOWLEDGEMENT.................................................................................................................................4
Abstract..............................................................................................................................................................8
ACRONYMS.....................................................................................................................................................9
CHAPTER ONE..............................................................................................................................................10
1.0 INTRODUCTION .....................................................................................................................................10
1.1 Background of the research .......................................................................................................................10
1.1.1 Small and Medium Enterprises .........................................................................................................11
1.1.2 Turnover Tax Compliance ................................................................................................................12
1.2 Problem Statement................................................................................................................................13
1.3 Research objectives and questions.............................................................................................................14
1.3.1 Research Objectives:...........................................................................................................................15
1.3.2 Research Questions:................................................................................................................................15
1.4 The scope of the study ...............................................................................................................................15
1.5 Justification and significance of the research ............................................................................................15
a. The students..............................................................................................................................................16
b. The Kenya Revenue authority..................................................................................................................16
c. Researchers...............................................................................................................................................16
d. Small and medium size businesspersons..................................................................................................16
CHAPTER TWO .............................................................................................................................................17
LITERATURE REVIEW ................................................................................................................................17
2.0 Introduction................................................................................................................................................17
2.1 Concept of the study ..................................................................................................................................17
2.1.1 The sacrifice theory.................................................................................................................................18
2.1.2 Benefit Theory ........................................................................................................................................18

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2.1.3 Ability to pay Theory..............................................................................................................................19
2.1.4 The cost of service theory.......................................................................................................................19
2.1.5 Proportionate theory of taxation .............................................................................................................19
2.1.6 The expediency Theory of Taxation.......................................................................................................20
2.2 Empirical Literature Review......................................................................................................................20
2.3 Conceptual framework..........................................................................................................................24
2.4 Operationalization of variables.............................................................................................................24
Table 2.4: Operational of variables..............................................................................................................25
2.5 Research gap ..............................................................................................................................................26
2.5 Summary of the literature review ..............................................................................................................27
CHAPTER THREE .........................................................................................................................................28
RESEARCH DESIGN AND METHODOLOGY ...........................................................................................28
2.1 Introduction...........................................................................................................................................28
2.1.1 Research design.................................................................................................................................28
3.1.2 Population............................................................................................................................................28
3.1.3 Sample design and sample size to be used..........................................................................................28
3.2.4 Data collection procedures and techniques .........................................................................................29
3.2.5 Validity and reliability............................................................................................................................30
3.2.6 Data analysis and presentation method...................................................................................................30
3.2.7 Data management and ethical consideration.......................................................................................30
CHAPTER FOUR............................................................................................................................................31
DATA ANALYSIS AND PRESENTATION .................................................................................................31
4.1 Introduction................................................................................................................................................31
4.2 Response rate .............................................................................................................................................31
4.3 Data presentation .......................................................................................................................................34
4.3.1 Analysis of examining the compliance level of filing turnover tax........................................................34
4.3.2 The effect of Kenya revenue authority investing in research. ................................................................37

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4.3.3 Independent Variables ............................................................................................................................39
Table 4.3.2. Fines and penalties percentage results.........................................................................................41
Table 4.3.4 Analysis of various issues raised by respondents .........................................................................42
Table 4.3.4.1 Analysis of various issues raised by respondents ......................................................................42
Table 4.3.4.2 Analysis of various issues raised by respondents ......................................................................44
4.3.4 Summary and interpretations of factors affecting turnover tax compliance...........................................44
CHAPTER FIVE .............................................................................................................................................48
DISSCUSSION, CONCLUSION AND RECOMMENDATIONS.................................................................48
5.0 Introductions ..............................................................................................................................................48
5.1 Summary and discussions..........................................................................................................................48
5.2 Conclusions............................................................................................................................................50
5.3 Recommendations..................................................................................................................................50
5.4 Limitations of the study..........................................................................................................................51
5.5 Recommended areas for further study .......................................................................................................52
REFERENCES ................................................................................................................................................52
APPENDICES .................................................................................................................................................55
6.1 A letter to respondent.................................................................................................................................55
6.2 Questionnaire.............................................................................................................................................56
6.3 Questionnaires feedback. ...........................................................................................................................62
6.4 Findings on reward system ........................................................................................................................63
6.5 Findings on fines and penalties..................................................................................................................64
6.8 Work plan...................................................................................................................................................65
6.9 Research budget.........................................................................................................................................65
6.7 KRA response on researcher’s inquiry on taxpayers’ population in Langata ...........................................66

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Abstract
This study sought to obtain opinions about turnover tax compliance on small and medium size enterprise in
Langata tax zone. The research employed a descriptive design. A sample size of 800 were used from
population 1800 of small and medium size enterprises operators in Langata. To ensure representativeness of
different business sectors of taxpayers, stratified sampling method for collecting data was employed. Data for
this research was collected using self-administered and drop and pick technique questionnaire to SMES.
SMEs felt that they face many challenges such as compliance cost, corrupted tax official who request for
bribes, and poor administrative operations. Enterprises requested government to review the tax rates and
reduce the number types of taxes. KRA investing in research, executing proper fines and penalties and having
a reward system to loyal taxpayers would increase turnover tax compliance. SMEs also requested the
government to empower the courts so that tax defaulter are not released on cash bonds.

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ACRONYMS
TOT: Turnover tax
SMEs: Small and medium enterprise.
TRA: Tax revenue authority
KRA: Kenya revenue authority
SAS: Self-assessment system
VAT: Value added tax
PAYE: Pay as you earn
Keywords: Turnover tax, small and medium size enterprises

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CHAPTER ONE
FACTORS AFFECTING TURNOVER TAX COMPLIANCE AMONG SMALL AND MEDIUM SIZE
ENTERPRISES.
1.0 INTRODUCTION
1.1 Background of the research
Kenya introduced the tax reform program in 1986 with the hope that this would enhance revenue collection,
improve tax administration and reduce compliance and collection costs (James Murunga et al., 2016). Despite
the tax modernization, there are concerns that the challenges that confront the ministry of Finance and Kenya
Revenue Authority today are not much different from the challenges that faced these revenue authorities
before the implementation of reforms (James Murunga et al., 2016). There are also concerns that tax
competitiveness in Kenya is low and the country remains among the most tax unfriendly countries in the world
(Patrick S. , 2011). Many emerging countries including Kenya are faced with the problem of raising the
required revenue to meet government’s expenditure on progress, recurrent expenditure and other activities
that government need to carry out for its citizens (Mary, 2015). Government’s budgeted revenues usually fall
short of the expected expenditures leading to huge borrowing from external lenders and depending on Aids
from developed countries which comes with conditions that might not be in line with vision and mission of
the country (James Murunga et al., 2016).
Over the past one decade, the regime of Kenya has spent more than it is able to generate as revenue and the
gap is often financed with foreign aid and this has led to citizens being unsatisfied with the provision of
activities or goods by the government (Patrick S. , 2011).Tax nonconformity is now widely recognized to be
an extremely serious problem; recent estimate suggests that at least $90 billion of taxable income goes
unreported annually- an average of 10 to 15 percent of the total taxable income (Michael et al., 2017).
Improving tax revenue collection is an important priority for developing economies throughout the world. Not
only do tax revenue tend to be low as a share of GDP in absolute terms in low income countries, they are also
low as a share of GDP relative to higher income economies (James Murunga et al., 2016). Finding mechanisms
to improve tax collection is thought-provoking due to lack of good data on tax compliance, corruption and
collusion of businesses and difficulty in finding effective instruments for improving compliance because of
institutional constraints or lack of capacities to carry out required measures in collection of expected tax
revenues in the country (John Njenga et al., 2015).

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Kenya Revenue Authorities, administrative data, only has registered firms which are normally called formal
businesses registered under the registrar of businesses and companies hence the issue of small businesses not
registered and shadow economy that produces counterfeited products are not captured in the administrative
data which is nowadays integrated (Nasiruddin et al., 2012). This leads to huge amount of taxable income
being lost and hence leading to deficit in collection of revenue compared to expenditure carried out by the
government. There is also issue of collusion by businesspersons and transfer pricing activities which
sometimes is not easy to retrieve the amount of money transferred by the branch to the parent company for
tax avoidance purposes (Nasiruddin et al., 2012).
1.1.1 Small and Medium Enterprises
Small and medium enterprises play a major role in developing countries through creation of jobs, styling up
competitions and engaging in creative activities that improves the living standards of many people who are
not able to get formal jobs, or those who are fired before planning for retirement or those who get retrenched
from the public or large-scale sectors (Imam Mukhlis et al., 2014). Small and medium enterprises refer to
businesses whose personnel numbers fall below certain limits, employs fewer than 250 workers and has an
annual turnover not exceeding 50 million and an annual balance sheet not exceeding 43 million euro (Mary,
2015). SMEs are also said to be responsible for driving innovation and competition in many economic sectors,
industrial and social development of a country (Madiha et al., 2017).
Most of the developed countries concedes the importance of SMEs sector in assisting their economies and for
a country like Kenya to achieve its vision 2030, much need to be done on the businesses activities because
they are driving forces for the growth and development of an economy (Mary, 2015). There is need for good
governance, structured entry into business activities, political stabilities to attract investor into an economy,
improve quality of institutions settings and provide a conducive environment for the business activities in the
country and this will reduce the level of unemployment of the willing individuals who are ready to work and
serve the country in its achievement of the outlined objectives and goals (Idrissa, 2017).
Kenya is a natural resource dependent country with about 75 percent of its population depending on natural
resources. The main productive sectors livestock, agriculture, wildlife, horticulture, fisheries and forestry
(Winnie, 2015). The recent discovery of mineral wealth especially gas, oil and rare earth elements is set to
propel the country into league of major income earners. SMEs are one of the main sources to reduce poverty,
expand national economy, generate revenues for the country and create employment opportunities for job
seekers (Madiha et al., 2017).

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A snowballing literature has maintained that the small and medium size economy acts as an incubator for large
enterprise creation, that is, that entrepreneurs operate small registered test-trading the viability of their
innovativeness in the formal economy before deciding to expand and legitimize their projects, and that these
businesspersons using the recognized economy as incubator need help from government through creation of
conducive environment for operations (Idrissa, 2017). This impose obligation to the régime of Kenya to
nurture the economy and find ways of encouraging investment and businesses within the economy, there is
need to do away with culture of corruption, bad governance, improve on quality of institutional settings, and
shape the economy that can create huge opportunities for employment and equality (Idrissa, 2017).
1.1.2 Turnover Tax Compliance
Tax acquiescence can refer to the degree to which the tax payers are making tax payments and producing and
submitting information to tax authorities on time and in the required formats and failures to adhere to that
might lead to in-depth examination or back duty activities done by tax authorities to prove that indeed the tax
paid or claimed is the correct amount (Patrick, 2014). Turnover tax (TOT) refers to simple tax on gross income
of any resident person whose income or turnover amount from the business exceeds Kshs.500000, but does
not exceed Kshs.5 million during any year of financial income (Simiyu, 2014).
Turnover tax is like a sales tax or value added tax (VAT), with differences being it taxes intermediate and
possibly capital goods. It is an indirect tax, and based on the value of the goods in question, rather than being
flat taxes, applicable to a production process or stage. Turnover tax is at a very low rate compared to most
taxes, but it is calculated on gross sales with a rate of 3% without any deduction (Simiyu, 2014).This means
that many businesses can be able to register under turnover tax and increase the tax base of revenue collection
in Kenya. To achieve this, it will depend on the political stability, economic situation, transparency and
accountability of the government and professionalism of Kenya revenue authority official. Das Gupta et al.,
(2004), outlined factors affecting tax compliance as follows: high corruption, high marginal tax, lack of
availability of information and accounting systems, weak regulatory systems, ambiguity in the tax, and
existence of non-adherent culture. Other factors that affect tax compliance level are education, justice
(fairness) of the administration, administration bureaucracy and taxation systems, (Alberto, 2014).
Taxation can generate political exchanges that entail bargaining and consultation if it is grounded on a
sustained balance of power between tax payers and tax revenue authority, and hence taxing procedures should
be carried out in most transparent and accountable techniques and apply code of ethics when dealing with tax
payers because it is their money which are sometimes earned through sweat and hard-work (James, 2011). For
scholars working on tax policy, the issue of taxation of the SMEs has generally not been successful. It has

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been considered too difficult, requiring considerable effort with few returns. SMEs comprises many small-
scale operators, each with low turnover and transact on cash basis hence difficulty to tax them due to lack of
evidence and records. Reasons why governments tend not to put much effort into raising revenue directly from
this sector are: high collection costs, capacity constraints, the incentive problem and the ‘devil’ deal. (Patrick,
2014).
Self-assessment system (SAS) has become the key administrative approach for both corporate and individual
taxation in Kenya including the USA, UK, German and Australia. The approach emphasizes taxpayers’
responsibility to report their financial income and determine their own tax liability and this calls for due
diligence to be applied during preparation of financial reports and that’s why the government of Kenya
mandate for auditing of public sector businesses and audited reports can be used as information to government
in verifying the declared incomes by various businesses to tax revenue authority. It’s tricky for small
enterprises which does not require auditing activities on their financial statements hence this leads to tax
avoidance activities and tax evasion. Central to the motivations of self-assessment system introduction is an
increase in the efficiency of tax collection for the administrative and efficiency in provision of information to
taxpayers; however, of more vital importance is the need to enable this without having an unacceptable
detrimental effect on the other key characteristics of a well-designed tax system of equity, wider administrative
efficiency, and having value of trust in the financial statement prepared by the organization and reduce the
issues of in-depth examination and memorandum of appeal documents which increases compliance cost
because the business has to incur extra cost on getting experts to prepare a new financial statements (Mohd,
2010).
Tax noncompliance not only poses a serious threat to effective tax and voluntary compliance, but it also has a
negative impact on the economic growth and development. Kenya Collected taxes of 1.365 trillion shillings
in the financial fiscal year, setting a new standard or high record but missing by 9 percent on targeted tax
collection due to tax fraud, evasion and some criminal activities (Sarkar, 2017). This is as results the
compliance level is not that good due to various factors such as transparency of the government,
accountability, good governance, corruption culture of our country and mismanagement of resources and this
can be mitigated by application of standards and ethics in our dealings to develop the country (Chepkurui et
al., 2014).
1.2 Problem Statement
Taxpayers’ behavior towards payment of tax has evoked great attention among many Revenue authority in
the world especially in the developed countries and Kenya being a developing country experiences huge

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number of challenges in collection of revenue from small and medium size enterprises across the region for
them to contribute to the successful implementation of Vision 2030 (Mary, 2015). This increased attention to
the challenges of taxing small businesses in the economy and much of this current attention has remained
focused on technical issues of revenue maximization, policy design, education and sensitization of business
people on tax issues. When considering the merits of committing insufficient resources to taxing small sector,
deliberation has frequently concentrated on limited revenue potential, high cost of collection and potentially
perverse impacts on small businesses. Developing an environment conducive to small and medium enterprises
growth while ensuring tax compliance is a challenge that most countries face (Simiyu, 2014).
Kenya Revenue Authority faces many challenges, just to name a few, low taxation compliance, revenue
collection cost, tax avoidance and evasion, inherited culture of corruption, governance issues and other internal
externalist such as mismanagement of resources and collusion of human resource and cybercrime activities
(Franzoni, 2008). This issue can be solved through improving governance, enhancing transparency and
accountability, improving quality of services to tax payers, nurturing ethics at the work place and carrying out
sensitization on tax compliance. Kenya is ranked low compliance countries with hard task of ensuring
efficiency and effective tax administration to ensure there is high compliance level which will lead to high
revenue collection (Mary, 2015).
The SMEs is not only a provider of goods and services but also in promoting competition, innovation and
enhancing the enterprise culture which is necessary for private sector development and industrialization
(Simiyu, 2014). Other studies have concentrated on factors influencing tax compliance level in SMEs
perceptive. SMEs are increasingly economically important and should effectively respond to challenges of
creating sustainable and productive employment opportunities, promoting economic progress and poverty
eradication in the country (Mary, 2015). Kenyan government has come up with reforms to address the
challenges resulting in a general increase in tax incomes (Wanguri, 2017), however, turnover tax is not
gathering in the expected increment in collection of revenue (Simiyu, 2014) and therefore, this study need to
fill knowledge gap on: Factors affecting turnover tax compliance among small and medium size enterprises.
The study will also aim at providing suggestion that can be instigated by KRA to increase compliance level
which might results into high tax revenue collection and self-budget expenditure for recurring incidentals and
other outflow on infrastructure, project development, and free education system among other activities.
1.3 Research objectives and questions
This study seeks to establish the factors affecting turnover tax compliance among small and medium-size
enterprises in Langata tax zone. The general objective is to determine the factor affecting turnover tax

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compliance and collection of turnover tax revenue from SMEs. The possible solutions can be implemented to
other small-scale businesses countrywide to possibly provide the solution to challenges faced by KRA in
meeting the target for tax revenue collections in Kenya.
1.3.1 Research Objectives:
1. To examine the compliance level of filing turnover tax returns.
2. To determine effect of KRA investing in research in correlation to turnover tax collection.
1.3.2 Research Questions:
1. What is the compliance level of filing turnover tax returns among SMEs?
2. What are the effects of tax research towards turnover tax collection?
1.4 The scope of the study
Small and medium size enterprises have been increasing with trends. As businesses get born daily, there is
need for government through Kenya Revenue Authority to be at par with information, be creative and
innovative so that they can collect revenue from these upcoming businesses and find ways of reaching shadow
economy. Kenya is one and as a result, all citizens whether residents or nonresident should register at least to
one of Country multiple tax system which runs from income tax, value added tax, corporate tax, or turnover
tax. The research study shall cover targets SMEs operating in Langata zone in Nairobi county because the
problem of tax compliance is rampart as evidenced by absence of tax revenue authority in supervision and
monitoring of preparation of financial statements and determination of tax liabilities by taxpayers.
The study shall use empirical approach on finding out factors that can improve ways of collection of turnover
taxes from SMEs. Both secondary and primary data will be used in the study, secondary data are to be collected
from already written scholar’s work and primary data collected randomly from sample of 200 business within
Langata Zone in Nairobi to carry out analysis and obtain verdicts.
1.5 Justification and significance of the research
The main reason why this research study is being carried out is to solve the problem that KRA is facing in
meeting tax revenue collection targets. The study will also be useful in providing solutions that can be used to
reach businesspeople in the collection of tax revenue and the business will find this study relevant in

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understanding their obligation in paying revenue to the government and understand the reason to why all
citizens should be obligated to have a fiscal contract with the government through taxation.
This study intends to fill up the knowledge gap by explaining the factors that can be used to improve tax
compliance and collection of turnover tax in Langata Zone. Those who would wish to find out why KRA has
not been successful in collection of turnover tax in Kenya will find the evidence provided by this study useful
for their knowledge (Simiyu, 2014).Beneficiary of this research study will be;
a. The students
Students will use this research materials as their reference point and knowledge gained can be applied in order
field of studies. The study aims to provide useful information to the student who will be interested in
examining small and medium-size businesses on the issue of taxation.
b. The Kenya Revenue authority
The Kenya Revenue Authority will find this research very useful, and the verdicts can be used to increase the
tax base from the economy, this is because the collection of turnover tax from this SMEs has been posing the
great challenge and the gains have been diminishing with the passage of time hence KRA not meeting tax
revenue collection targets due to issues of tax avoidance, tax evasion, ignorance of tax payers, collusions and
rampart culture of corruption.
c. Researchers
The researchers from other areas facing the same challenges will find this research useful in solving such
problems; they will be interested in findings of this study as a beginning for furthering their argument in a
manner that will find the results for the relevance of this discoveries and apply findings in their dominions.
d. Small and medium size businesspersons
The study will capture the information from taxpayers themselves, and this will enable taxpayers to provide
original data that can provide solutions on challenges of turnover tax collection and this will be a learning
experience to the business people.

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CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
The chapter acknowledges materials of other scholars on taxation and turnover tax. The researcher provides
the concept of the study and furthermore explains five theories of taxation that provide the theoretical
background of the research topic. The theories to be discussed in this study are: the sacrifice theory, ability to
pay theory, the proportionate theory, benefit theory and the cost of service theory. The study appreciates the
findings of another researcher who contributed a lot in filling the knowledge gap in the field of taxation. The
study highlights challenges that face Kenya Revenue Authority in the collection of turnover tax ending up
with a conceptual framework that will simplify the relationship between literature and research objectives.
2.1 Concept of the study
Taxation is the key source of revenue that government of Kenya uses to provide public goods and services
such as education, health care, water, security, and social security, among others (Hang Nguyen, 2012). What
is taxation? Taxation refer to compulsory contribution of revenue from income of the business or individual
to government to enable the government carry out its activities to the public and tax system is characterized
by adequacy, simplicity, neutrality and equity (John, 2012).Taxation of commercial transactions that adopted
accrual basis or cash basis has always been a controversial and complex matter to administer for revenue
authorities (Hang Nguyen, 2012). Globalization of trade in the marketplace, along with the emergence of new
advanced and growing technology, including the network or internet, has imposed many new challenges for
these taxing revenue authorities because the systems in place were designed with more simple business model
in mind and that’s why revenue authorities has to rely on audit reports or carry out in-depth examination or
request for memorandum of appeal from the taxpayers hence increasing the compliance cost in terms of
finance and time (Hang Nguyen, 2012).
Turnover tax refers to type of tax introduced by finance Act 2007 through the provision of the income Tax
Act, Cap 470, under section 12x as read with section 34. The effective date of implementation was 1st
January
2008 and the tax are applicable to any resident person whose turnover from business does not exceed Kshs. 5
million during any year of income and it was meant to simplify the tax procedure, make returns filing easier,
reduces cost of compliance, and simplify tax computation (Simiyu, 2014).

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Tax compliance as quoted by (Stephan Muehlbacher, 2011) is referred to a decision under uncertainty with a
safe option of an honest tax report and a risky option of evading all or part of tax due. The decision is
determined by four parameters overall: income, tax rate, audit probability, and penalty rate. However, those
finding have been challenged by many researchers and slippery slope” frame (Kirchler et al., 2008) attempt
to integrate the puzzling findings and concepts. It is suggested that the effectiveness of economic and non-
economic factors depend on the relationship between taxpayers and tax authorities (Stephan Muehlbacher,
2011). Based on Stephan findings, there two circumstances under which taxpayer experiences; in a trustful
climate, confidence building measures may be more important than in a relationship that is based primarily
on power of authorities, where deterrence may be the right policy. Two different forms of tax compliance are
assumed in this framework: voluntary and enforced compliance (Stephan Muehlbacher, 2011). This study will
test on turnover tax compliance on reward system, research, fines and penalties.
2.1.1 The sacrifice theory
Sacrifice theory states that taxes paid out of income are a result of sacrifice or foregone luxury goods such as
entertainment and other enjoyment activities that a taxpayer must forego. There are public goods and private
goods, private goods are sacrificed by an individual to pay taxes for public goods such as infrastructures and
maintenance of other activities by the state (Ibrahim, 2013). People goods are enjoyed by everyone including
those who do not have disposable income and hence they are just joy riders.
This theory advocate that everyone should give up the equivalent amount of utility when paying income taxes,
economists tend to assume either that every taxpayer has the same utility function or that there is a benevolent
social planner, whose wellbeing is used when scheming the sacrifices to be made by taxpayers (T., 2006).
2.1.2 Benefit Theory
The state should levy taxes on individual according to benefit they receive from the government. This means
that the higher the benefit provided to an individual by the government, the more the recipient should pay.
The obligation of paying taxes depends on the benefits received from the state. However, this theory faces
various critics from scholars; tax is a compulsory contribution made by taxpayers to the public authorities to
meet the expenses of the government. The provision of general benefits hence no direct benefits to an
individual, the poor will pay more because they receive services compared to rich taxpayers hence it’s against
the principle of justice (Simiyu, 2014).
The taxes which taxpayers pays should reflect the benefit that he/she receives from the mix of goods and
services supplied by the state. This mean that large corporate organization such as multinational and high-

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income earners who contribute much on the income tax through the graduated scale should be able to get more
goods and services from the government compared to the poor, less income earners and small enterprises in
the country. This theory goes against the principle of fairness or justice of the taxation (T., 2006).
2.1.3 Ability to pay Theory
This theory is based on the taxable capacity of an individual. The theory follows accepted a principle of equity
or justices in taxation. Taxpayers pay taxes depending on their capability. Rich, medium and fewer income
earners pay taxes depending on their disposable income. Poor people can be exempted from paying taxes, in
Kenya, it will be very difficult in identifying rich people and people. Considering that they even shop the same
clothes (second hand-mitumba), pay the same basic needs.
There are three alternatives views on how to measure the benefit to users, that is, the gross profit view, the
consumer surplus view and the user cost view. This theory on perspective on income as the basis, ownership
of property or tax based on expenditure means that it is very subjective because tax payers who earn high
income might decide to buy less properties and those less income earners might have a large family and decide
to spend more on consumer goods compared to high income earners (Joewono, 2009).
2.1.4 The cost of service theory
This is from school of thought that argues that if the state charges the actual cost of the services rendered by
the people, it will satisfy the idea of justice or equity in taxation. This theory cannot be applied in some extent
in those cases where the services are rendered out of prices and are relatively easy to determine such as postal,
standard railway transport, the supply of electricity and services of water supply in the county. Furthermore,
most of the expenditure incurred by the government cannot be fixed for each taxpayer in the country because
it cannot be exactly determined, there is quid pro qua in a tax (Appah Ebimobowei and Ebiringa, 2012).
2.1.5 Proportionate theory of taxation
The proportionate theory of taxation has a steady tax rate; this means that if the tax rate is 20%, it applies to
all taxpayers. The tax is proportionated to the income of an individual taxpayers. This can be unfair to low-
income earners because they will have to pay higher amount compared to rich income earners hence it’s
against the principle of justice or equity. Practically, as the income of an individual increases, the marginal
utility of the income decreases.
This tax system can be applied in paying turnover tax since the rate for turnover tax is flat at 3% on gross sales
without deducting any expenses. However, this tax system is unfair to less competitive entities who might

20
have a gross margin of less than 3% percent such examples are vendors, street traders, hawkers and other
small businesses carried out at a lower income location like in rural areas or in slums (Naughton, 2015).
2.1.6 The expediency Theory of Taxation
The theory assert that every tax proposal must pass the test of practicability. The tax proposal must only be
considered after weighing it with the authorities, that is Member of Parliament. The economic, social
objectives of the state and the effect of a tax system should be treated as irrelevant in consideration of the tax
proposal. This theory might sound truthful because it will be useless to have a tax which cannot be
administered and collected with efficiency (Chigbu et al., 2011).
2.2 Empirical Literature Review
The main purpose of taxation is to mobilize the revenue required to finance the expenditure on public goods
and services. Due to pervasiveness influence of taxes on economic decisions of businesses and individuals,
and on social equity, the tax system should achieve the appropriate level of revenue collection as efficiently
and as possible. A well-designed tax system should be effective in collection of revenue, efficient in its effects
on economic decisions of businesses and households, and equitable in its impact on various groups in society
(Clifford, 2010). Taxation is a sovereign right of the government used to transfer resources from private to
public use to achieve the economic expenditure on goods and services and meet political goals of the country
(Patrick, 2014).
Tax policy is concerned with the reasoning behind how much revenue is collected, what the revenue is being
used for, and whether the state or government is collecting revenue in most efficient and effective way to
minimize the cost incurred in the collection of revenue from individuals and businesses (Patrick, 2014).
Kenya, just like most developing countries are confronted with the need to provide or improve public
infrastructure, health services, educations and other activities such as Huduma centers in the country with the
aim of enhancing economic development. For these budgetary demands to be met, these countries are
increasingly focusing on domestic resource mobilization through taxations, fines, fees, penalties and other
source of funds towards economic growth and development (John Njenga et al., 2015).
Raising domestic revenue is considered the most feasible way to achieve fiscal sustainability. Taxation creates
a fiscal contract between the citizen and the government. This means that is the citizens pays taxes, there is
need for transparency, accountability and efficiency in use of public funds by the government (John Njenga
et al., 2015). The willingness of small and medium size enterprises to pay taxes is very important and should

21
not be taken for granted or ignored. This people need to be involved in policy making and government should
socialize with taxpayers to increase their loyalty and patriotism towards tax compliance. Tax education and
rewarding system need to be strategized to taxpayers and these two influences compliance by businesspersons
(Alberto, 2014).
Reaching SMEs for taxation purpose has been very challenging activities to most Revenue Authorities across
the world because many of them operate on cash basis hence there are no records and bank accounts statement.
Small businesses have been viewed in recent research as more likely to evade taxes since the owner and
beneficiary of tax evasion is more likely to also be responsible for keeping the books of accounts and filing
tax returns for the financial year (Wanguri, 2017). The descriptive research design of (Wanguri, 2017) argues
that the number of fines and penalties paid and tax consulting or filing expenses associated with integrated tax
management system have a possible and significant relationship with tax compliance. The study suggests that
KRA should increase the fines and introduce stringent penalties for noncompliance since this would encourage
businesspeople to respond positively towards payment of taxes to the Authority.
In Kenya, tax revenue collected from 1980 to 2017 has been less than the government expenditure forcing the
government to borrow from foreign financial institutions and domestic banks. Kenya’s tax effort is less
compared to the potential that it has in collecting taxes from the businesses and citizens, meaning the country
is not utilizing its tax capacity fully. This therefore, implies that the country has potential of raising more tax
to reduce the imbalance in its budget. There is need for political will, efficient legal system and consistency
in implementation of tax policy in the country (James Murunga et al., 2016).
Recent research Suggest that tax compliance can be increased through government services, the most cited
advantages of being register for tax included better access to government services, better access to financing,
and better opportunities for growth. Businesses need to make profits and have an impact on society, the
government need to provide a conducive environment for the business to access services required and be able
to have a political stability in the country which will influence the growth of the businesses (Ilic, 2009).
Attitude of taxpayers influences the level tax compliance. Satisfied taxpayers with the public services
provisions are more likely to register for taxes whereas unsatisfied individuals will find ways of avoidance
and tax evasion activities. Other factors that influences tax compliance are related to ethnic groups and tax
knowledge. Ethnic group that is treated unfairly by the ruling officials are less likely to have a tax compliant
attitude (Merima Ali et al., 2012) .
The researcher has argued that it is not possible to understand fully an individual’s compliance decisions
without considering in some form of ethical dimensions. There is much direct and indirect evidence that ethics

22
differ across individuals and that these differences matter in significant ways for their compliance decisions.
Compliance strategies has so many factors to be considered: level of education, attitudes of individuals,
structure of institutions, compliance cost, governance issues, and among other issues that affect taxpayers
(James, 2011).
Literature on tax compliance has considered experimental design, economic theory, and survey results.
Analysis has focused on individual taxpayers, the behavior of business taxpayers should probably be similar,
and if anything, the elasticity of tax compliance to the tax burden and impact of tax for business taxpayers
should be probably higher than for individuals (Mwangi, 2014). Taxpayers can “vote with their feet” by
migrating or moving between different jurisdictions, so the governments throughout the world must take note
that such investment can be “footloose” and that can overly heavy tax burdens can deter investment and
ventures by either encouraging it to search for locations that offer good conditions by offering the highest
expected after-tax rate of return or by discouraging entrepreneurship in favor of wage labor and other
unattractive policies in the country (Ilic, 2009)
Tax morale and tax compliance levels appear to be influenced by the fairness of tax administration, the fiscal
perceived fiscal exchange, and the overall attitude towards the respective governments. There is highest tax
morale in the U.S, Switzerland and Austria and relatively lower tax morale in Spain, Portugal and Belgium.
Kenya is considered lower tax morale country. The researches argue that there is strong negative correlation
between the size of the shadow economy and the degree of tax morale. There is need for trust in the local
government to use revenues to provide services, trust in the authorities to establish fair procedures for revenue
collection and distribution of services and trust in other citizens to pay their share of taxes (Ilic, 2009).
(Imam Mukhlis et al., 2014), argues that tax compliance can be built through tax fairness formed through the
life of entrepreneurs themselves. The study suggested that tax fairness can be built through increasing the
understanding about taxes for the SME entrepreneur. The understanding is dealing with the benefits associated
with tax administration, tax penalties, tax type, tax rates, and the tax service. Entrepreneurs should be able to
get education from officials of taxes for them to be informed about their obligations and procedures on how
to file in the iTax systems. SMEs entrepreneurs can understand their tax obligations when there is an aspect
of fairness and tax benefits that can be received.
According to (Wanguri, 2017), Kenya revenue authority should increase the fines and penalties to individuals
and businesses that does not compliance with tax regulations. This will trigger their perception towards
taxation and be able to respond by filing their returns. However, the study does not accurately specify the type
of crime and amount to be penalized to entrepreneurs.

23
The findings of (Simiyu, 2014), were that the small and medium size enterprises entrepreneurs, most strongly
felt that mode of payment of the turnover tax was time consuming and tedious and that they encountered
problems when filing turnover tax returns and they did not understand their obligations and that the tax office
did not value feedbacks about the way the tax system was which greatly affected turnover tax collection.
Simiyu goes ahead to point out that turnover tax was found to be prohibitive and higher than profit margins
therefore affecting tax collection. Small businesses, hawkers, and other kiosk makes small profit margin of
sometimes less than 3% which is the tax rate of turnover in Kenya on gross sales.
Tax compliance poses cost to business and hence sometimes business that has small capital might not comply
with tax regulations hence leading to tax evasion. Although tax evasion is an illegal activity as considered by
Kenyan tax Act, many businesses tend to go informal due to cost required for registration of the businesses,
implementation and compliance cost of taxation, complex system of paying taxes which requires expertise
and its time consuming to taxpayers, this issue can be solved by having a flat tax rate like turnover tax and
reduce complication on having multiple tax systems to businesses and there is also need for tax authorities to
be transparent, accountable and manage the resources from taxation with due diligence. Kenyans are in dire
need of understanding the principal objectives of taxation, taxation approaches, tax crimes and audits
(Peninah, 2016).

24
2.3 Conceptual framework
Revenue from the turnover tax is part of overall objectives of tax authorities. Turnover tax revenue will be
dependent variable and compliance level are affected by various factors such as fines and penalties, rewarding
and revenue authority investing in research. The relationship is simplified in the diagram below:
Source: Author
2.4 Operationalization of variables
Under this section, the variables are to be defined and find specific aspect of measuring them. The variables for
this research are turnover tax revenue compliance (Dependent variable), rewarding system, invest in research,
fines and penalties (Independent variables).
Independent
Variable
Dependent
Variable
Rewarding
system
Turnover Tax
Compliance
Fines and
penalties
Research
• Education
• Sensitize

25
a. Turnover tax revenue compliance
Turnover tax compliance means a business not exceeding Kshs.5 Million making tax payments and producing
and submitting information to tax revenue authorities on time and in required format based on 3% as stipulated
by Tax Act (Simiyu, 2014). Failure to file turnover tax renders the business a penalty of Kshs.2000 plus 2%
interest on tax payable. The study will measure compliance rate by analyzing the feedback provided from the
taxpayers.
Table 2.4: Operational of variables
Objective Variable Indicator Measurement
scale
Tools
analysis
Type of
analysis
To ascertain the extent to which
research on tax impact turnover
tax compliance.
Independent Level of education
and sensitization of
tax payers
Nominal Mean,
percentage
analysis
Descriptive
analysis
To establish the relationship
between fines and penalties and
turnover tax compliance
Independent Functionality of fines
and penalties on tax
defaulters
Nominal Mean
percentage
Descriptive
analysis
To determine the extent to which
rewarding system explain
turnover tax compliance.
Independent Tax break,
Tax holiday,
Tax amnesty
Recognition.
Nominal Average
analysis,
percentage
analysis.
Descriptive
analysis
To examine the compliance
level of filing turnover tax
returns.
Dependent
variable
Rewarding system,
Fines and penalties,
Research on tax
compliance.
Respondent
opinions,
percentage
analysis.
Mean
percentage.
Descriptive
analysis.

26
b. Rewarding system
A reward given to taxpayers for correctly fulfilling their duties and responsibilities in filing returns changes
the relative prices in favor of paying taxes, and against evading tax (Lars, 2007). For this result to occur,
two conditions must be met:
(i) The income effect induced by increasing the wealth position must not work in the opposite direction
to the effects operating without reward.
(ii) The reward may induce strategic behavior by the taxpayers if it is offered in response to the reduction
of evasion behavior. As the rewards considered here depend on being a “good” taxpayer, strategic
behavior is not a rational option.
c. Invest in research
The study aims to look at the effort being put in place by Kenya revenue authority to bridge the gap of meeting
the tax targets. A researcher will have suggestion under this finding to KRA, and it will be upon tax authorities
to implement the suggestions.
d. Fines and penalties
Tax evasion is said to occur when individual deliberately fail to comply with their tax obligations (Luigi).
(Stephan Muehlbacher, 2011), argue that compliance decisions can only partly be explained by the rational
choice approach. We suggest that depending on the climate in a society, compliance stems from two
different factors. In a climate of distrust, where high power of authorities is needed to enforce tax
compliance and increasing fines and audit probabilities may be an effective tax policy. In a climate where
taxpayers trust the authorities of their state, however, other variables gain in importance. Knowledge,
attitudes, moral appeals, fairness and democracy may lead to voluntary compliance. In this case, draconian
fines and intrusive audits can take unintentional effects and would corrupt tax morale. This study aims to
assess the impact of fine and penalties on compliance rate which might lead to high tax revenue collection.
2.5 Research gap
The reach carried out on small and medium enterprises in Nairobi on their compliance level only concentrated
on tax payer’s issues and suggested various factors to be implemented by the Kenya Revenue Authority and
the factors were as follows: Increase level of education, reduce tax rates, and review on mode of payment,
(Simiyu, 2014). This research study intends to find out the impact of penalties, fines, reward and research on
the tax compliance by the small and medium enterprises in Langata zone.

27
2.5 Summary of the literature review
The summation of the above literature, it can be observed that tax collection poses major challenges to both
developed and developing countries. The manner to achieve the efficient and effective method of collection
turnover tax is yet to be uncovered and as researchers we need to continue being logical and innovative in this
area in finding solutions to our countries in finding a reliable method of taxing businesses looking at the fact
that business is also tricky and always finds ways of misrepresenting the financial statements and try to
manipulate figures through creative accounting and earnings management. The issue of the informal sector,
underground businesses, and shadow economy also creates the loophole in the country and as a results revenue
collection through taxation much must be done with collaboration all sectors involved from authorities,
business entrepreneurs and society at large.

28
CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY
2.1 Introduction
The research targeted small and medium size enterprises in Langata zone. Taxation is key for mobilization of
revenue or resources that can be used by government to meet public expenditure and projects required to be
carried out. This chapter describes research design, population, sample design and sample size to be used, data
collection procedures, data collection techniques, validity and reliability, data analysis and presentation
method to be used to achieve the objectives of the study.
2.1.1 Research design
The study was conducted using descriptive research design as it was intended to get information from
respondents and use the evidence for improving ways of collecting turnover tax from taxpayers. This design
was preferred because the subject was carried out in a completely shadow economy environment. A
descriptive study describes phenomenon of how things are in the population (Gachiku, 2015). (Gachiku,
2015), quoted that descriptive research is important because it acts as a pre-cursor to quantitative research
designs and the general overview gives some valuable pointers as to what variables are worth testing
quantitatively. It constitutes the blue print or guide for collection, measurements and analysis of data. This
design helps in producing data that is holistic, contextual, descriptive, in-depth and rich in details (Gachiku,
2015).
3.1.2 Population
The study targeted small and medium size enterprises in Langata zone. Langata zone is within Nairobi, and
that is an area of interest because it is considered to have largest slum in Kenya (Kibera). It’s an area of which
KRA must dig more because of issues of informal sectors or shadow economy done in slums or rural areas
and cash basis transaction mode (Okombo, 2012).The study relied on city council and KRA information to
determine the number of SMEs in Langata zone.
3.1.3 Sample design and sample size to be used
The researcher aimed at using stratified probability sampling whereby there was no predefined location to
choose for getting the sample hence increasing validity and reliability of the findings. This means that every
business has a chance of being selected for the research purpose. The study targeted 180 number of business

29
were selected randomly within the region, and this represents 10% of the total population (city council figures
1800 registered businesses in Langata zone.
The researcher employed judgmental and stratified random sampling techniques in any one stratum stratified
random sampling preferred because it eliminates bias and hence population had equal chances of being
selected. The sample size was reached at by multiplying the total population 1800 by 10%. Therefore, 180
entrepreneurs formed the study sample.
3.2.4 Data collection procedures and techniques
The study used two types of data collection, primary data, and secondary data. Primary data were collected
from the entrepreneurs using questionnaires and interview approaches, secondary data or information was
obtained from other already done research and articles and played a role of assisting in the interpretation of
the data collected.
Primary data
Primary data are referred to unprocessed facts from the field. The applied interview using structured and semi-
structured questionnaire and interviews. The un-structured questionnaire is relatively cheap and quick to
administer and can clarify any area that you need more information. Face to face conversation was used to get
valid information from the entrepreneurs, and for the busy venture, the study anticipated the use of “drop and
pick” approach depending on the willingness of the business people.
Questionnaire as a technique for data collection
The researcher used the questionnaire as a research instrument for collection of data from respondents. The
questionnaire was both structured and semi-structured. Structured questionnaire refers to predefined questions
outlined for the respondent to answer and semi-structured questionnaire accommodates for the opinion from
respondent on how KRA official can improve on an area for tax collection.
It is understood questionnaire has some limitations such as inadequate to understand some forms of
information, ask only a limited amount of information, lacks some form of validity, there is the level of
subjectivity that is not acknowledged and level of researcher imposition (Stefan, 2016). The researcher was
as open as possible so that to reduce biasness and use two structure form, structured part and un-structured
part for the questionnaire.

30
3.2.5 Validity and reliability
Validity refers to the accuracy of the study or specific measure of the study whereas reliability refers to the
extent to which results are consistent over time and an accurate representation of the total population under
study (Gachiku, 2015).
Depending on the sample size, the credibility of the study was estimated to be 95% confidence level. This
means that there was an error of 5% due to calculation, statistics, and responses error collected from
respondents from the business people or other factors that might have influenced the outcomes of this study
(Katema, 2016). Test-re-test method was applied to enhance validity and reliability of the study.
3.2.6 Data analysis and presentation method
The descriptive data analysis approach was adopted, and data analyzed into percentages, mean and
interpretation done from the analysis. The excel spread sheet played the critical part in analyzing data with the
help of statistical package for the social sciences (SPSS). Excel Spread sheet is easy and convenience to find
in any laptops, regression analysis was employed to fulfill the objective of the study.
Turnover tax compliance= β0 + β1 χ1 + β2 χ2 + β3 χ3 + є
Є= error term
β0 = the constant
X1= Rewarding system
X2 = Fines and penalties
X3= Research
3.2.7 Data management and ethical consideration
The objective of the research was explained and openly made known to the respondent to lobby their informed
consent. High level of concealment on the data provided by respondents through feedback form was
maintained, and assurance made to them that information obtained will only be used for study.

31
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION
4.1 Introduction
This chapter provides findings, analysis, presentation, and interpretation of data collected from registered
small and medium-size enterprises in Langata tax zone, based on factors affecting turnover tax compliance.
The researcher sought to answer the research question: What is the compliance level of filing turnover tax
returns among SMEs? And to what extent are effects of tax research towards turnover tax collection? The
chapter similarly provides scrutiny of the suggested solutions of how KRA can improve turnover tax
compliance from small and medium-size enterprises.
4.2 Response rate
The researcher targeted 180 tax registered enterprises in Langata zone. A total of 80 questionnaires were
distributed to sole-proprietors, owners or managers of small and medium-size businesses and out of 80
questionnaires distributed, seventy-four respondents were returned filled. For established businesses with
security measures, the researcher used softcopy questionnaire to collect data from those businesses, through
this means, the researcher targeted 100 respondents but managed to obtain 94 feedbacks only, some clients
were hostile and even threatened to beat the researcher up. This was attributed to political instability
experienced in the country from August to December 2017. As a result of the above highlighted issues, the
researcher managed to obtain 168 fully filled and handed back from respondent out of 180 targeted hence
making it 93.33% as response rate (response filled and handed back/Total targeted respondent *100%).
(Gachiku, 2015), observed that a 50% response rate is adequate, 60% good, while above 70% rated very well.
Therefore, this implies that based on this assertion of 50 %, 60%, and 70%, the response in this case of 93.33%
is very good. This response was made a reality after industrious work of calling respondent and reminding of
the importance of filing those questionnaire for researcher to collect later in the day and for softcopy, the
researcher encountered various hostility, but communication skills acquired from class helped in seducing the
respondent to comply with the need of the study. The researcher worked tirelessly during weekends (Saturday
and Sunday) and attend evening classes and work during the day to obtain a living.

32
4.2.1 Respondents profile
Respondents from the accountants 70 (45.6%), 44 (26.2%) were male accountants while 26 (9.5%) were
female accountants. Senior management 22 (13.1%), 16 (9.5%) were male while 6 (3.6%) were female senior
managers. There are cases where researcher had to collaborate with interns due to the fact that senior
management or accountants were a bit busy or valued other activities and from the data collected 28(16.7%)
respondents were interns working either in accounting department or finance departments depending on the
structure of the business, 18 (10.7%) were male while 10 (6.0%) were female interns. The researcher
encountered cases of business structure owners which are the most common in the Langata zone, however, as
desire to fulfil the objective of the research, the study only managed to get 48(28.6%) response from the
business structure owners, 39 (23.2%) being male whereas 9(5.4%) were female structure owners.
Table 4.2.1 Summary of respondent profile.
Respondent profile Responses (168 response filled)
Accountants Management Interns Owners
Frequency Per% Frequency Per% Frequency Per% Frequency Per%
Gender Male 44 62.9 16 72.7 18 64.3 39 81.3
Female 26 37.1 6 27.3 10 35.7 9 18.7
Total 70 100 22 100 28 100 48 100
Employees experience in the business
Experience in
the business.
0-1 6 8.6 2 9.1 28 100 6 12.5
1-2 9 12.9 6 27.3 0 0 10 20.8
2-3 32 45.7 9 40.9 0 0 12 25
Above 3 23 32.9 5 22.7 0 0 20 41.7
Total 70 100 22 100 28 100 48 100

33
The period business has been
in operations.
Range of years Frequency Percentage
0-3 46 27.4
3-8 65 38.7
8-12 49 29.2
12-above 8 4.8
Total: 168 100
Nature of the business in terms of number of employees.
Type of business Range Frequency Percentage
Small businesses 0-50 126 75
Medium size businesses 50-250 42 25
Large businesses 250 and above 0 0
Totals Range 168 100
As indicated in the table above 117 (69.6%) of the total filed and returned questionnaires were male while
female respondents were 51 (30.4%) of the total retuned questionnaires. About nature of the business most of
the business were in their early stages (0-3years) making a total of 46(27.4%) hence they need good protection
from the government through incentives and favorable legislations. Langata zone seems to have a huge number
of small business running from Mabati structure, kiosk and permanent buildings and from the above table it
can be deduced that 75% of 168 are small business having less than 50 employees.
A closer look from the table will be deduced that most of the business are run by many from the accountants
to the business owners. Being an area of mixed status of living standard, from interview conducted by the
researchers, women were busy doing house chores or washing clothes of middle class people in the area and
some of the business people run the business as the side hustle to compensate the salary they get from
employment.

34
4.3 Data presentation
Findings were analyzed by statistical package for the social sciences (SPSS), spreadsheet excel 2016. The
researcher intended to fulfill the scope and the objectives of the study. Expert of SPSS was used in analyzing
the data with reference to research objectives on compliance level and Kenya revenue authority investing in
research through use of cheap labor such as graduate students, undergraduate and unemployed killed people
in the country. The findings were presented as follows:
4.3.1 Analysis of examining the compliance level of filing turnover tax.
The tax compliance requirements according to income tax law is in Kenya relating to businesses are :acquiring
of personal identification number (PIN) for yourself and for the business, keeping up to date books of accounts,
determining the taxable income as stipulated by the regulations, filing of returns on income prescribed dates,
accurate determination of tax liability, payments of fines and penalties as a results of delay in making payment
for overdue taxes and allowing of audit by tax officers in the case of in-depth tax examination or back duty
taxation if deemed so (Marti, 2010).The researcher asked respondent to give information based on the above
compliance requirements to facilitate and enable the determination of the levels of turnover tax compliance.
Based on requirement of having personal identification number, the respondents were asked if they had PIN
or not (1 being yes & 2 being no) and from the data 62% (104 respondent) said that they PIN while 38% (64
respondent) indicated that they did not have that requirement. The researcher critically interrogated further to
find out the reason for 62% having this requirement and 20% (21 respondent) of those having that requirement
provided unusual answer in that they were forced to get the PIN during urbanization of slums so that they
could get houses in Langata and along railway line. This clearly indicates that that 79.8% (83 respondent) or
49.4% (83 respondent) acquired the PIN for the right reason for complying with revenue authority regulations.
The researcher also inquired from the respondent to find out if they clearly knew that they can file returns
even if they do not have an income during that tax filing period or year and from the data 22.62% of the
respondent agreed they knew that policy and they normally file nil returns in case they did not make any
income during that financial year and 77.38% had no information about that since there businesses are always
booming during other years except the period for election where some of the businesses are burnt down and
properties destroyed.
Taxation without records of books of accounts can be a very hectic issue and affect the issue of tax compliance.
The researcher enquired if the business kept its books of accounts for record purposes and reports are published
regularly for financial users to make economic decisions on their analysis, 7.74% strongly agreed that they
publish reports to be economically used by stakeholders, 55.36% agreed, 36.90 were neutral on the

35
questionnaire and never wanted further interrogations. The researcher also asked on whether the business
intends to record and keep the books of accounts for record purposes, 41.07% strongly felt they it is good for
them to keep books of account even it is just records of income and expenses, 35.71% agreed and 23.21%
were neutral, the researcher had a task of informing the respondent of importance of keeping records for their
business.
On the issues of fines and penalties, the respondent felt that KRA fails to provide clear information on the
types of taxes and how to file taxes but just expect to get taxes by the end of financial year or returns of every
month such as PAYE, VAT, and TOT, among others. The question of filing returns if there was a well-
executed fines and penalties policies, 54.17% were neutral on their responses and this is an alarming
percentage meaning that they were not sure if they would cheat or not on filing returns if their penalties and
fines, 38.10% disagreed that they would not cheat if there were fines and penalties whereas 7.74% strongly
disagreed pointed out that they have never cheated on complying with tax revenue authority on the issues of
taxation.
This was part A of the questionnaire about tax compliance and point scale ranged as follow: 1-Strongly Agree,
2-Slightly Agree, 3-Neutral, 4-Slightly Disagree, and 5- Strongly Disagree:
Table 4.3.1.1 Compliance
Source: Researcher 2017

36
It is the statutory requirement that public firms publish and avails information for the users of financial
information and from findings, the mean of 2.29 was obtained, most of selection ranging from 2-3. It was
found that if there is the reward, business people are willing to file books of accounts for records (mean of
1.82), the company will more committed to following tax regulation if there is the reward (mean 1.72), if in
doubt about the unclear source of income the business will not report such income (mean 1.38) suggesting
that many businesses will not disclose certain incomes and asked whether they pay fewer taxes if they know
they would not get any reward (mean 1.82). This reveals that many businesses pay fewer taxes because they
are motivated by rewards or recognition as tax compliers.
Based on the above analysis, it can be deduced that the turnover tax compliance level from the small and
medium size enterprises is low since many businesses operate on cash-basis and hence no records of books of
accounts, other businesses run on shadow economy hence have not registered to be tax complier and some of
the business people have PIN which is a good thing, but they do not use it for being tax complier through even
filing nil return to tax revenue authority systems.
The summary on the turn over tax compliance is provided on the table below giving percentage vertically as
follows:
Table 4.3.1.2 Compliance requirement analyzed into percentages.
Scale Analysis Tax regulation Tax reports Books uncertain income Paying tax
1 Strongly agree 21.43 7.74 41.07 66.07 39.29
2 Agree 61.90 55.36 35.71 32.74 40.48
3 Neutral 16.67 36.90 23.21 0.00 19.05
4 Disagree 0.00 0.00 0.00 0.00 1.19
5 Strongly
disagree
0.00 0.00 0.00 1.19 0.00
Staff is highly committed to following tax regulations if there is the reward from KRA? This was a technical
question to find out if a business is ready to follow tax regulations if there was the reward from KRA and

37
50.60% (1) strongly agreed, 26.79% (2) agreed and finally 22.62% were nonaligned and chose three as their
opinion.
If in doubt about whether to report a certain source of income (e.g., sportpesa income), you would not report
the income to tax revenue, iTax? From the table above, 66.07% strongly agreed that they would not report an
income they are not sure about since they consider it having been taxed when earned on the first time, 32.74%
(2) agreed and 1.19% (5) strongly disagreed and explained that they would seek clarification from tax experts
to get their views.
You pay less tax if you know that you would not get any reward or appreciation from KRA? The findings for
this question were 39.29% (1) strongly agreed that they pay less tax if they know that they could not get any
reward or appreciation from tax revenue authority, 40.48% (2) agreed, 19.05% (3) were neutral, and finally
1.19% (4) disagreed and said that they declare correct returns even if there is no rewards or appreciation from
KRA.
Tax reports are published regularly and available for review by users such as lenders, business partner? The
respondent answered as follows 7.74% (1) strongly agree that they publish financial information for the users,
55.36% (2) agreed on the publication of the statements, 36.90% (3) were neutral and indifference in their
opinions.
4.3.2 The effect of Kenya revenue authority investing in research.

38
Source: Author 2017.
From the above table, it can be observed that there are specific lines of authority is established in the businesses
to ensure compliance with KRA regulations and tax obligations (mean 2.14 with the standard error of 0.054).
SMEs admitted that it is honest and diligence filing returns (mean 2.09) and this is to improve if KRA starts
treating them well though recognition, inclusiveness in decision making and reduce many side shows done by
revenue officials.
Small and medium-sized enterprises consider that KRA does not provide feedback to business taxpayers. No
training is done unless business themselves arrange for training at their own cost (mean 4.54). These
businesspeople established that if those feedbacks are to be provided. it will increase the level of tax
compliance (mean 1.75 strongly agree) and there is also issue that KRA has not carried out research to find
out was of mitigating non-tax compliance, (mean 4.38, strongly disagree that KRA has researched to find a
clear solution of reducing tax avoidance and evasions). Furthermore, these business class people believe that
if a study is to be carried and sensitization is done correctly on tax compliance and obligation, then turn over
tax compliance will increase (mean 1.76, strongly agree that research on taxes and providing awareness will
increase tax compliance). The percentage for the above explanations are provided in the table below:
Table 4.3.2 Investment in research selection percentages. Source: Researcher 2017.
Scale Analysis Responsibility Ethics Feedbacks Feedbacks Measures Research
1 Strongly agree 9.52 10.71 0.00 46.43 1.19 45.83
2 Agree 75.60 69.64 0.00 32.14 0.00 32.74
3 Neutral 5.95 19.64 16.07 21.43 19.64 21.43
4 Disagree 8.93 0.00 14.29 0.00 33.33 0.00
5 Strongly
disagree
0.00 0.00 69.64 0.00 30.95 0.00
Source: Author 2017.

39
Based on analysis on the table 4.3.3.2, 9.52 % strongly agree that management laid down the measure to
ensure compliance. Furthermore, 75.60% also agree on the same while 5.95% were neutral and 8.93%
disagreed since the business was in the startup process and it takes times to set up measures or processes for
tax compliance.
The issues of honest and ethical consideration for tax compliance, 10.71% (1) strongly agreed they follow all
regulation and honestly declare their returns, 69.64% (2) decided that they follow the rules established and are
ready to say good returns is there is proper management of funds from the government. Also, 19.64% (3) were
neutral and failed to provide clear stand pointing out that KRA should account for all monies and state be able
to manage well resources.
On the question of feedback on whether revenue officials provide feedback to the business enterprises, 16.07
were neutral and refused to provide their clear stand, 14.29% disagreed on the same, and 69.64% profusely
disagreed and argued that if the KRA provides feedback, it will increase tax compliance from the enterprises.
From the analysis it seems KRA has not put in measures to mitigate the issues of tax evasion, 1.19$% strongly
agreed that KRA has put in measures to mitigate. 19.64% were neutral, 33.33% disagreed saying that there
are no measures to mitigate tax evasions. This was seconded by 30.85% who strongly opposed saying that
KRA just sit offices waiting for filed returns for them to share fat salaries. These entrepreneurs argued that
thorough research on taxations would increase turnover tax compliance, 45.83% strongly agreed, 32.74%
decided on the same while 21.23% were indifference and could not provide their clear stand, but argued that
paying taxes depends on many factors such political affiliations, government services and management of
funds.
4.3.3 Independent Variables
Table 4.3.3.1 Reward system
On the left is the percentages of selections of scale for reward system questions as answered
by respondent from small and medium size enterprises.
Tax compliance regulation is adhered to regularly by the business? 21.43% picked one as they
strongly agree that they always follow tax regulations, 61.90% choose two as they agree on
following tax regulations and 16.67% were neutral and landed on choice 3. This illustrates
that businesses are always willing to follow the regulations and rules stipulated by the
Reward
50.60
26.79
22.62
0.00
00

40
government, but the issue of compliance to filing returns depend on administrative operations, reward, and
recognition from the tax authority.
The business intends to prepare books of accounts and files correct returns to KRA if there is a reward? Table
4.3.1.3 further indicates that 41.07% (1) strongly agree that business will file the correct returns if the tax
revenue authority were giving the reward to tax payers, 35.71% (2) agree on the same, and 23.21% (3) are
neutral on the reward perception and seems undecided on filing correct returns.
4.3.3.2 Fines and penalties
Part B of the questionnaire dealt with issues related to fines and penalties, how they affect turnover tax
compliance and effectiveness of fines and penalties on improving the level of compliance among small and
medium-size enterprises. This section had point scale as follows: 1-Strongly Agree, 2-Slightly Agree, 3-
Neutral, 4-Slightly Disagree, and 5- Strongly Disagree. Data was collected using questionnaire, interview and
softcopy information and these were the findings:
Table 4.3.2.1 Fines and penalties findings.
Source: Author.
According to table 4.3.2.1, SMEs that would cheat if they knew that there are penalties and fines to be imposed
to their transactions or operations; (mean 3.54 without a standard deviation or level of error being 0.049). This
means most of business people were neutral in that they are undecided and explained that there is no clear
system of implementing fines and penalties to enterprises since the officials are very corrupted and are mostly
bribed. On the issue of tax evasion is necessity despite fines and penalties being in place and a mean of 2.28
suggesting that majority of enterprises avoid taxes as a necessity, and they agreed that economy is affected by

41
inflations and other factors such culture of ignorance and greasing other people’s hand before obtaining
services.
Enterprise people considered 3% rate of turnover on gross sales or revenue to be too high giving a mean of
1.85 meaning that they agreed and suggested ways of improving the system of turnover tax since it does not
consider if someone made the profit or not and some sellers do not even get a margin of 3% on the sales.
Business people suggested that Kenya revenue authority should establish a mechanism for tracking sales and
knowing which one make a margin of 3% or loss.
On the issue of considering KRA doing its job in penalizing or fining non-tax complier, the finding was a
surprise providing a mean of 4.52 meaning they strongly disagreed. This means that KRA should go into
drawing board and establish ways of punishing tax defaulters, because it is becoming common in this 21st
century knowing that there are issues of cash on bail. Therefore, hence wealthy businessmen can avoid taxes
and invest in another financial instrument for higher returns, and once they are taken to courts they can afford
to pay cash bails. However, small and medium-size enterprises consider that paying taxes to KRA is a good
thing for the development of the country. The mean of 2.17) indicating that businesses are willing to pay taxes,
however, they arguably said that management of Kenyan funds is wanting and an issue of unethical and
government mismanagement of funds should be addressed by all officials.
Table 4.3.2. Fines and penalties percentage results
The following were the questions summarized in the table and respondent calculated into percentage using
spreadsheet.
Scale Analysis Cheat Necessity Evasions High rate KRA Paying tax
1 Strongly agree 0.00 21.43 31.55 30.36 0.00 41.67
2 Agree 0.00 30.36 66.67 54.76 0.00 20.83
3 Neutral 54.17 47.02 1.79 14.88 22.62 16.07
4 Disagree 38.10 1.19 0.00 0.00 23.81 21.43
5 Strongly
disagree
7.74 0.00 0.00 0.00 32.14 0.00

42
Based on the table above, 54.17% (3) were neutral on the issues of cheating if there were penalties and fines
imposed to non-tax complier, but there is also a significance percentage for those who disagreed. This indicates
that if fines and penalties are to be executed well, it might act as a driving force for tax compliance.
The table provides finding on tax avoidance as the economic necessity, and 21.43% (1) strongly agreed,
30.36% (2) agreed, 47.02% (3) were neutral, and 1.19% (4) disagreed. This indicates that due to economic
conditions, businesspeople tend to avoid taxes to save some incomes for growth and expansion of the business
or to meet some obligation and some enterprise owners suggested that they do not see value in paying taxes
since they do not obtain services required from the reigning government.
Small and medium-size enterprises strongly agreed that 3% turnover tax on gross sales or revenue is too high
(30.36% choose 1, 54.76% choose 2 and 14.88% choose 3) indicating that tax revenue official must go back
on drawing board and analyze the situation since enterprises felt that some of the product sold does not even
have a profit margin of 3% hence turnover tax rate is detrimental to the progress of their business. SMEs
suggested that there is the need for KRA to involve them in decision making to find a lasting solution on tax
compliance.
Enterprises felt that it is bad running ups and down with government on an issue of taxes since it is a
compulsory obligation, but rather, there should be a mechanism of knowing profitable sales which should be
taxed, and non-profitable sales should not be taxed at all. However, businesses understand there might be a
loophole when profitable businesses to be taxed and non-profitable enterprises not to be taxed since there are
pretenders and culture of declivity in our society hence a clear mechanism need to be established.
Table 4.3.4 Analysis of various issues raised by respondents
This section dealt with analysis of the finding of part D of the questionnaire which provided a diverse approach
and answers were based on the nature of structured and unstructured questions as follows:
Table 4.3.4.1 Analysis of various issues raised by respondents
Scale Analysis Analysis KRA
services
Information Monitoring Compliance Register Answered

43
1 Excellent Strongly
agree
0.00 28.57 57.74 39.88 22.62 48.21
2 Very
good
Agree 2.38 71.43 20.83 38.69 77.38 42.26
3 Good Slightly agree 5.95 21.43 21.43 0.00 0.00
4 Neutral Disagree 40.48 0.00 0.00 0.00 0.00
5 Poor 51.19
Source: Author 2017
Table 4.3.4.1 analyses the services of KRA, Importance of information to tax payers, effectiveness of KRA
monitoring taxpayers’ filing of return process and other issues related to turnover tax compliance.
Entrepreneurs found an opportunity to rate the services of KRA, 2.38% agreed that Kenya revenue authority
provide very good services to tax-payers, 5.97 percent said services were good, while 40.48 disagreed and
pointed out that has a lot on its plate to handle looking at the fact that there are many cases of corruptions,
mismanagement of funds, and failure to treat loyal tax payers well and 51.19% were very ruthless to KRA
and pointed out that KRA provides very poor services.
Kenya revenue authority needs to provide information to the tax payers, sensitizing citizens periodically on
various media would ripe fruits in future, 28.57% agreed that KRA provide information and education to
taxpayers whereas 71.43% disagreed and pointed out that instead of advertising false government deeds on
televisions in the name government delivery, KRA should use that platform to create awareness among
citizens on how to get personal identification pin and how to file returns.
On the issues of monitoring of business tax filing process, 57.74% strongly agreed that KRA has capacity to
young employee graduate to monitor in various businesses and offer advice in case there are any shortcoming
in the filing process. They went ahead and agreed that monitoring of tax filing process would reduce mistakes

44
and as a results level of penalties will drastically reduce hence acting as a motivating factor to taxpayers.
20.83% agreed while 21.43% slightly agreed on the same issue, pointing out that there is much for KRA to
do and not only monitoring but also improving administrative activities and having an ethical professional
staff to handle activities.
Research managed to get views from the respondents on the issue of compliance even if they do not have
income to declare, 39.88% strongly agreed that they can be tax complier even if they do not have an income
to declare to KRA, 38.69% also supported it while 21.43% slightly agreed pointing out that it is waste of time
and money going to tax platform to file nil returns. Respondent answered the questions honestly and sought
clarification wherever they got stuck so that I could assist them either via a phone call or an SMS.
Table 4.3.4.2 Analysis of various issues raised by respondents
The table below provides analysis of finding from the structured as well as unstructured questions. The
analyzed report was based on importance of monitoring on turnover tax compliance, the effect of provision of
information and communication from KRA to taxpayers.
4.3.4 Summary and interpretations of factors affecting turnover tax compliance.
The study found that the small and medium-size enterprises most strongly felt that research on turnover tax
would help in sensitizing taxpayers on their obligations and duties. KRA has capacities to employ young
graduates who require little pay in educating taxpayers and doing research on finding the most critical way of

45
maximizing collection of turnover tax or reaching the optimal level of turnover tax collections. Research on
taxes entails many things, through research KRA would benefit in getting verdicts, and criticism on tax system
will improve administrative activities, operations and professional dealing with taxpayers.
Through KRA investing in research, issues obtained would be of importance and KRA would be able to start
providing feedback to tax payers. The small and medium-size enterprises most strongly felt that, not only did
the tax office not value feedback about the way the administrative operation was, but also strongly felt that
KRA officials are more corrupt, unethical, and unprofessional in dealing with taxpayers and hence there is the
need for more interrogation on the issue and streamline the operations. Research also would help KRA review
tax rates since SMEs felt that 3% tax rate on gross sale or revenue was too high for some products since other
products have a lower profit margin less than 3% such as clothing industries, Cereal sellers, airtime dealers,
or fruit vendors. Hence there is need to review the tax system in Kenya (Simiyu, 2014).
Reward system had the profound effect on tax compliance. SMEs strongly felt that KRA need to recognize
and reward those loyal tax payers. Furthermore, there are many ways of motivating tax payers, not just
monetary form but even non-financial means such as recognitions, certificate of loyalty, or other means such
as tax-break and tax holidays. Tax payers felt that they just work for the government and government receives
unearned income from taxpayers sweat, this research strongly agree with the findings of (Lars P. Feld, 2012)
who highlights rewards such as certificates, free parking in public parking facilities. There is a lot to be done
by tax payers, to motivate them and this would increase turnover tax compliance. This is in the line of
taxpayer’s satisfactions; government needs to provide services and minimize level of fund mismanagement.
The study agrees with findings of (Obara, 2012) that calls for accountability of tax payers funds and satisfying
them through many ways such as recognitions, tax-breaks, certificate of loyalties and tax holidays.
Concerning fines and penalties, it was found that if fines and penalties effectively executed by tax officers,
turnover tax compliance will increase. Tax payers strongly felt that there is a problem in our court systems,
those who have monies are not put in bars but released on bails or cash bonds. Tax payers felt that tax
defaulters have increased due to the issue of dynamic computerized systems and hence find ways for evading
tax through cartels and collusion with other business people with a practice of price transfer and many
malpractices.
Furthermore, it was found that tax officers accepted bribes when offered by tax payers to reduce tax obligations
and demand for bribes when they visited thus greatly affecting turnover tax collection. This agrees with the
finding of (Simiyu, 2014) who found that turnover tax suffered from tax evasion and illegal practices like
deductions and collusion.

46
The study found out fines and penalties impact highly on tax compliance. Thus, there should be moderate
levels of fines and taxes to employed as this is highlighted by (Lars P. Feld, 2012) who strongly argues that
rewards and punishment are not equally efficient to influence taxpayers’ mindset on being tax complier. This
is because rewards and punishments are processed in different system in the brain and therefore, have
differential effects on behavior of taxpayers in decision of being tax complier. This clearly indicates that
Kenya revenue authority need to provide more rewards such as free parking, tax holidays, tax breaks and
giving out certificates to loyal tax payers, than just concentrating on establishing fines and penalties to tax
defaulters because taxpayers might reach a point of resistance and decline to be tax complier due to poor
administrative services, corrupted tax official, high compliance cost.

48
CHAPTER FIVE
DISSCUSSION, CONCLUSION AND RECOMMENDATIONS
5.0 Introductions
This chapter presents the discussion of findings, limitations of the study, conclusions, recommendations and
discusses areas for further study by other researchers who will be interested in solving the problem that is
facing our country. The government and tax officials will find this outcome very useful in passing bills and
coming up with legislature pertaining tax issues. In addition, the research will play a vital role in increasing
tax compliance level in Kenya if executed and implemented in consideration of ethical issues and
professionalism.
5.1 Summary and discussions
The findings of this study revealed that research on taxation will streamline administrative operation and
processes, and as a results taxpayer will benefit through being informed by the researcher on ways of filing
returns and how to get personal identification number, sensitization on taxations and KRA will be able to find
loopholes in taxation acts and be able to resolve the issue.
High tax rates are the primary problem that entrepreneur face and because of research on taxation, KRA will
be able to revise the tax rates and systems that suits the desire of entrepreneurs through collaboration and
discussions, this is because SMEs felt that 3% rate of gross sale or revenue is very high since some of the
products they deal with do not have a profit margin of 3%. The result is supported by (Simiyu, 2014) who
argued that the government through legislature needs to review the tax rates applied in Kenya since they affect
the compliance level.
Research involves many things, just to mention a few, education, knowledge and creating awareness to
taxpayers. As articulated by (Adesina Olugoke Oladipupo, 2016) on tax knowledge. Tax knowledge had a
positive significant impact on tax compliance. Increasing public knowledge through research on tax matters
and tax education will increase turnover tax compliance.
This study shows that fines and penalties when executed well, they will increase turnover tax compliance.
SMEs felt that revenue officers should cease from taking bribes from taxpayers and stop the issue of cash on
bond in the courts. The government should support the courts and empower them well so that they can execute
law and orders to all citizens. Fines and penalties are the form of punishment, but based on the finding, SMEs
felt that taxpayers can comply and as a long run it will become a habit of every Kenyan citizen to comply with

Turnover tax compliance in Kenya: Juma William

Turnover tax compliance in Kenya: Juma William

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