DETERMINANTS OF TAX COMPLIANCE AMONG

SMALL SCALE BUSINESSES IN THIKA TOWN

BY

ERIC GATHUNGU MWAURA

UNITED STATES INTERNATIONAL UNIVERSITY-

AFRICA

SUMMER 2019

DETERMINANTS OF TAX COMPLIANCE AMONG

SMALL SCALE BUSINESSES IN THIKA TOWN

BY

ERIC GATHUNGU MWAURA

A Research Proposal Report Submitted to the School of

Business in Partial Fulfillment of the Requirement for the

Degree of Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY-

AFRICA

SUMMER 2019

ii

STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any

other institution, or university other than the United States International University in

Nairobi, Kenya for academic credit.

Signed____________________ Date________________________

ERIC GATHUNGU MWAURA (ID 655282)

The research project has been presented for examination with my approval as the appointed

supervisor.

Signed_____________________ Date________________________

Dr. Elizabeth Kalunda

Signed_____________________ Date_________________________

Dean, School of Business

iii

COPYRIGHT

All rights reserved. No part of this project may be reproduced or transmitted in any form

or by any means, electronic or otherwise, without prior written permission from the

author.

© Eric Gathungu Mwaura, 2019

iv

ABSTRACT

The general objective of this study was to assess the determinants of tax compliance among

small scale businesses in Thika Town. The study was guided by three specific objectives

being: to determine the effect of tax penalties on tax compliance among small scale

businesses in Thika Town; to evaluate how taxpayers perceptions on tax laws affects tax

compliance among small scale businesses in Thika Town and to determine how automation

of tax filing affects tax compliance among small scale businesses in Thika Town.

The study methodology was based on explanatory research design with causal links

between the determinants and tax compliance as to when, where, how why and what

analysis in presenting qualitative and quantitative features. The area of the study was Thika

Town with the main interest skewed to small scale businesses in the region that were

estimated to be 1,200 from the records of the Thika Town Government in cadres of retailers,

general merchants, kiosks, fruit vendors, informal traders, transporters, agri-processors,

hoteliers among others. The analysis adopted Yamane formula to derive the sample size of

300 respondents from a target population of 1,200 taxpayers who own small scale

businesses in Thika Town. The inquiry used primary data consisting of open and closed

ended questionnaire to collect data with a five point Likert scale ratings. The data was

captured in Statistical Package for Social Sciences (SPSS) version 24 for final analysis and

generation of the outputs with merits on friendly user interface, easy to capture bio data,

descriptive statistics such as mean, variance and standard deviation and inferential statistics

such as multiple regression analysis from the Likert scale.

The findings of the research indicated that tax penalties, taxpayers’ perception on tax laws

and automation of tax filing had a strong positive correlation to tax compliance. The results

noted that the coefficient of determination indicated three variables had a joint significant

impact on tax compliance. It further showed that taxpayers’ perceived social pressure on

payment of taxes greatly influences tax compliance. Finally, the results noted that taxpayers

were in full approval that tax automation simplifies tax administration and reduces costs of

tax reporting therefore improves tax compliance

v

The study concluded that tax penalties registered a strong positive association to tax

compliance hence the need to ensure consistent compliance to tax filing, SMEs owner to

have proper records of transactions and fair judgement to all taxpayers. Taxpayers’

perception on tax laws had a positive association to tax compliance concluding on the need

for government to invest in public goods and educate taxpayers. Automation of tax filing

registered a strong positive association to tax compliance with concluding remarks on the

need to automate transactions and advocate for strong internet connections.

Finally, areas that need improvement on tax penalties is the need to ensure all state

agencies play their role very well. KRA should continuously advocate for record keeping

by providing online and offline services to enable taxpayers have proper records that they

can use to secure funding. There is much needed support from the government to value the

hero and heroine as an example to others who can rise in the same line of service to the

nation. Tax amnesty should be well communicated to enable those willing to comply and

start a fresh. Much is needed and KRA must spearhead and provide tax automation services

at a negotiated fee given that taxpayers are asset to the nation at large.

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AKNOWLEDGEMENT

I would like to thank The Almighty God for the strength, health and wisdom granted to me

throughout the writing process. I would like to acknowledge Dr. Elizabeth Kalunda for

cordial support and guidance she offered me throughout this research project. Thank you.

vii

DEDICATION

This project is dedicated to my father, mother, family and friends for their unwavering

support and motivation throughout my masters and their encouragement that helped me

complete this research project.

viii

TABLE OF CONTENTS

STUDENT’S DECLARATION ....................................................................................... ii

COPYRIGHT ................................................................................................................... iii

ABSTRACT ...................................................................................................................... iv

AKNOWLEDGEMENT.................................................................................................. vi

DEDICATION................................................................................................................. vii

TABLE OF CONTENTS .............................................................................................. viii

LIST OF TABLES ............................................................................................................ x

ACRONYMS ................................................................................................................... xii

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

1.0 INTRODUCTION................................................................................................... 1

1.1 Background of the Study .......................................................................................... 1

1.2 Statement of the Problem .......................................................................................... 5

1.3 General Objective ..................................................................................................... 6

1.4 Specific Objectives ................................................................................................... 6

1.5 Significance of the Study .......................................................................................... 7

1.6 Scope of the Study .................................................................................................... 7

1.7 Definition of Terms ................................................................................................... 8

1.8 Chapter Summary ..................................................................................................... 8

CHAPTER TWO ............................................................................................................ 10

2.0 LITERATURE REVIEW ..................................................................................... 10

2.1 Introduction ............................................................................................................. 10

2.2 Tax Penalties and Tax Compliance. ........................................................................ 10

2.3 Taxpayers Perceptions on Tax Laws and Tax Compliance ..................................... 14

2.4 Automation of Tax Filing and Tax Compliance ...................................................... 18

2.5 Chapter Summary ................................................................................................... 22

CHAPTER THREE ........................................................................................................ 24

3.0 RESEARCH METHODOLOGY ........................................................................ 24

ix

3.1 Introduction ............................................................................................................. 24

3.2 Research Design...................................................................................................... 24

3.3 Population and Sampling Design ............................................................................ 25

3.4 Data Collection Methods ........................................................................................ 28

3.5 Research Procedure ................................................................................................. 29

3.6 Data Analysis Method ............................................................................................. 30

3.7 Chapter Summary ................................................................................................... 30

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

4.0 RESULTS AND FINDINGS ................................................................................. 32

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

4.2 Demographic Information ....................................................................................... 32

4.3 Tax Penalties ........................................................................................................... 35

4.4 Taxpayers Perception on Tax Laws ......................................................................... 41

4.5 Automation of Tax Filing ........................................................................................ 45

4.8 Chapter Summary ................................................................................................... 50

CHAPTER FIVE ............................................................................................................ 52

5.0 DISCUSSION, CONCLUSION AND RECOMMENDATIONS ...................... 52

5.1 Introduction ............................................................................................................. 52

5.2 Summary ................................................................................................................. 52

5.3 Discussion ............................................................................................................... 53

5.4 Conclusions ............................................................................................................. 60

5.5 Recommendations ................................................................................................... 61

REFERENCES ................................................................................................................ 63

Introductory Letter

Questionnaire

x

LIST OF TABLES

Table 3.1 Study Population .............................................................................................. 25

Table 3.2 Sample Size ....................................................................................................... 28

Table 3.3 Reliability Analysis ........................................................................................... 30

Table 4.1 Response Rate ................................................................................................... 32

Table 4.2 Gender Representation ...................................................................................... 33

Table 4.3 Level of Education ............................................................................................ 33

Table 4.4 Number of Years in Business ............................................................................ 34

Table 4.5 Age Group of the Respondents ......................................................................... 34

Table 4.6 Response on the level that tax penalties, tax law perception and tax automation

impact tax compliance ...................................................................................................... 35

Table 4.7 Tax Penalties and Taxpayers Attitudes Towards Tax Compliance .................... 36

Table 4.8 Tax Penalties and Taxpayers Proper Record Keeping Towards Tax Compliance

........................................................................................................................................... 37

Table 4.9 Do Penalties Lead to Timely Payment of Taxes ............................................... 38

Table 4.10 Coefficient of Correlations .............................................................................. 39

Table 4.11 Coefficient of Determination .......................................................................... 39

Table 4.12 Analysis of Variance (ANOVA) ...................................................................... 40

Table 4.13 Simple regression model ................................................................................. 40

Table 4.17 Coefficient of Correlations .............................................................................. 43

Table 4.18 Coefficient of Determination .......................................................................... 44

Table 4.19 Analysis of Variance (ANOVA) ...................................................................... 44

Table 4.20 Simple regression model ................................................................................. 45

Table 4.24 Coefficient of Correlations .............................................................................. 48

xi

Table 4.25 Coefficient of Determination .......................................................................... 49

Table 4.26 Analysis of Variance (ANOVA) ...................................................................... 50

Table 4.27 Simple Regression Model ............................................................................... 50

xii

ACRONYMS

MSMEs Micro Small and Medium Enterprises

SMEs Small and Medium Enterprises

SACCOs Savings and Credits Cooperative Societies

GDP Gross Domestic Product

KRA Kenya Revenue Authority

SAS

PAYE

VAT

Self-Assessment System

Pay As You Earn

Value Added Tax

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Globally, income taxes are the main source of revenue to governments and the revenue

authorities when meeting their budget agenda. Revenue bodies continue to devise

functioning policies to enhance tax compliance to all cadres of taxpayers. Policy attention

on tax compliance and enforcement is gaining momentum after the financial crisis of 2008

and global recession. Special attention is being directed not only to high income earners,

large corporations but also to small and medium scale enterprises in matters to do with tax

compliance (Slemrod, 2016).

Tax compliance represents multi-faceted measures of taxation relating to payment,

reporting and filling of taxes (Stam & Verbeeten, 2017). The puzzle of tax compliance has

brought in mixed reactions from different quotas on the administration. For instance, over

the last 15 years the European Union has established long term growth strategies meant to

increase the level of tax compliance through sustainable development in knowledge based

economy. The strategy is aimed at strengthening long-term economic growth and helping

to focus on inclusive growth and income inequality via tactical taxation approach (Lignier,

Evans & Trannam, 2014).

According to Slemrod (2016), the United States has come to the forefront in driving

momentum aimed at minimizing cases of income tax evasion and ongoing crackdown to

tax avoidance, tax evasion and correcting the imbalance in the tax system via policy

formulation and implementation. Indeed, achieving high levels of voluntary tax

compliance and maintaining high score of compliance is a main concern to fiscal policy

makers in developing and developed nations (Abdul, Razak & Adafula, 2013). Irrespective

of the form and nature of any nations’ economy, the objective of taxation remains

uncontested for the purpose of raising revenue to finance government projects.

2

Abrie and Doussey (2016) researched on the tax compliance obstacles encountered by

SME’s in South Africa and acknowledged the role that they play in the economy. The study

highlighted on the tax administration process being subjected to SMEs whereby tax

compliance is a stumbling block to the SME’s growth and the government must consider

reducing the compliance requirement by lessening the number of tax heads and helping

SMEs administer taxes in an effective manner.

Machogu and Amayi (2016) studied the effect of taxpayer education on voluntary tax

compliance among the SME’s in Mwanza Tanzania. It emphasized on the role SME’s play

in the economy and linked on the taxpayer’s level of education to tax obligation and

taxpayers’ right. The findings showed that a large number of educated taxpayers adhered

to paying their taxes timely so as to avoid penalties and fines for late filling. The study

recommended that the taxation must be taught to all levels of education with the main

emphasis of promoting tax compliance among taxpayers.

Madola (2014) points out that voluntary tax compliance has no state enforcement to

taxpayers to comply with the required tax law. The citizens do it voluntarily and always

provide relevant and accurate information relating to their income as opposed to

involuntary tax compliance. Involuntary tax compliance goes against the wish of tax

administrators who view their role as being the facilitator to provide efficient information

on taxation and help reduce tax gap and noncompliance.

Tax compliance in Kenya is a challenging affair not only to the less educated individuals

but also to the educated citizens who form the base of taxpayers through the involvement

in income generating activities. This makes tax compliance among SME’s mostly operating

in the informal sector to be very low. Brown (2017) affirmed that the potentiality for

discriminatory tax treatment based on structural elements in the OECD tax treaty ranked

Kenya among low income countries with low compliance and hard task of ensuring

efficient and effective tax administration.

Muhika, Njeru and Waiganjo (2017) assessed on the influence of tax compliance

requirements on formalizing small and medium scale enterprises involving 1,200 SMEs

operating in Nairobi. The study sampled 369 respondents and used primary data for the

3

analysis. The result indicated that tax compliance requirement is one of the essential tools

for promoting business formalization that becomes advantageous when scaling up business

operations.

SME’s in Kenya are faced with stiff hurdles in the context of taxation. Odongo (2014)

noted that tax compliance among the SMEs is concavely related to poor business record

keeping, low sales turnover, changes in form of business ownership, business transitions

and unstable business operations. Large segment of SMEs owners aren’t aware of taxation

processes and computations accrued from transactions.

It is relevant to establish a broad information base on key determinants of tax compliance

among SME’s to be in a position to address issues of tax malpractices involving tax

avoidance and tax evasion. Developed nations in Asia, Europe and North America are

setting trends in bringing societal morale on matters relating to tax compliance of

individuals and businesses by publicly publishing individual tax compliance status

(Dwenger, Kleven, Rasul & Rincke, 2016). Developing economies like Kenya still have a

long way to go. This is reflected in a weak revenue administration and collection system.

Most of the taxpayers’ attitudes towards the authority is negatively correlated and greatly

influences on the tax compliance behavior.

Majority of the citizens are questioning on the legitimacy of the tax authorities and tend to

have low response on matters to do with tax compliance and willingness to comply with

the current authority. This is exemplified by (Blaufus, Kay and Bob (2017) on tax privacy

and tax compliance which exhibit a reciprocal altruism in taxpayers’ behavior, motivations,

intentions and tax administration response to compliance. The influence of shaming

noncompliance subjects’ taxpayer to contagion increases tax evasion as opposed to giving

no information on tax evasion behavior. Thus tax compliance policy on public disclosure

must be well handled to support noncompliance.

Emmanuel (2015) conducted a study on the tax motivation, tax policy and optimal tax

compliance in an environment with effective tax laws for the SMEs. Throughout, revenue

bodies use different models that focus on the characteristics of a tax system and the interest

of the taxpayers more so the SMEs sector. The models that have been put in place to reach

4

a balanced scorecard and have a set of tax policy mechanisms that addresses on the

immediate need of the SMEs who account to over 60% of the revenue collected and job

creation. The best tax policy must be combined together because for the exclusion of the

total amount method in the administration of tax and the requirement of equity, and the

optimization of the social welfare as the main aim of the policy designers. The formulation

of such models must be aimed at reaching the thresholds of an effective taxation system to

SMEs which includes: openness, flexibility, affordability, stability and efficiency.

SME’s are internationally recognized for their critical role in promoting economic growth,

job creation and revenue generation to the government inform of taxes. Small and medium

scale enterprises are defined as business operations involved between one to five persons

with very simplified activities that can be managed directly on a person to person basis

(Torkkeli, Saarenketo & Kuivalainen, 2016).

In Kenya, the Micro Small and Medium Enterprises (MSMES Act, 2012) provided on the

measurement factors implied based on the number of employees and annual turnover. The

qualification criteria were based on business employing ten to fifty employees with a yearly

turnover of 500,000 to 5 million Kenyan Shillings. The term small scale businesses

integrate a wide mix of meaning and its definition varies from state to state based on the

standard of reporting. Small scale traders are defined as small institutions, businesses or

suppliers operating in a formal or informal setup with little planning whose sales do not

exceed a certain level in each taxation (Endres, 2014). Small scale business traders in the

urban areas form an important part of the formal and informal economy and are part of the

small and medium enterprises. In Kenya, and other developing nations, SMEs are viewed

as the key drivers of economic and social development and are mostly considered to be the

important part in revenue generation to the government through taxation.

Thika is an administrative town in Kiambu County and it is estimated to generate over 60%

of its revenue from the SMEs. The constituency has over 1,200 registered SMEs involved

in retail, general merchants and kiosks, fruit vendors, transport business, agriprocessors

and hotels. The critical role of the SMEs taking active role in tax compliance is to be part

of economic development and foster provision of public goods and services to enhance

5

delivery of services. This necessitates the essence of understanding the role of SMEs in the

economy and availing supportive measure to help them in tax compliance transformation.

1.2 Statement of the Problem

Tax revenue is termed as the primary source of government funding and plays a critical

role in socio economic and political development of any nation across the world. A large

section of SMEs operating in informal sector tend to exhibit low tax compliance even

though they are eligible to pay taxes. This robs off revenue from many governments over

the globe making them unable to meet budgetary allocation and provision of essential

services to her citizens. In most instances, taxable individuals aren’t happy of the tax

burden making most of them shy away in disclosing relevant information on tax

compliance (Oladipupo & Obazee, 2016).

Several studies have been presented globally and locally on determinants of tax compliance

among the SMEs. Alshirah, Abdul and Samsudin (2016) studied determinants of sales tax

compliance in small and medium scale enterprises in Jordan. The study was intended to

signal the severity of tax gap to be addressed by the revenue body. The number of SMEs

recorded was 166,000 and the study used secondary data for the analysis. The study

findings indicated that 87% of SMEs did not comply in paying their sales tax. The study

recommended the government to adopt Fischer tax compliance model that integrates

economic deterrence’s and social –psychology concepts.

Hofmann, Voracek and Kirchler (2017) studied the effect of tax compliance across

sociodemographic categories involving a survey of 111 countries. The study assessed

demographic factors such as sex, age, education and level of income. The four meta

analyses comprising of 459 samples. The study variables registered a positive correlation

on age and negative correlation on education and income. The study was limited in the

findings as it was pronounced in western countries with little impact of socio-demographic

categories on tax compliance only in a controlled tax research.

Gobena and Van Dijke (2016) analyzed the effect of power, justice and trust on tax

compliance among Ethiopian business owners. The study aimed to envision how

6

procedural justice fosters voluntary tax compliance in a legitimate government. The

findings established a positive correlation between justice, cognitive trust and tax

compliance among business owners. Thus, the study recommended that tax authorities

must be very lenient when handling small business owner to enhance their tax compliance

level.

Locally; Zachary, Kariuki and Mwangi (2017) studied tax compliance cost and tax

payment by small and medium enterprises in Embu County, Kenya. The study concluded

that there was a significant and direct relationship between tax compliance costs and tax

payment by SMEs in Embu County. Gitonga and Memba (2018) investigated determinants

of tax compliance by public transport savings and credit cooperative societies in Kenya: A

case study of Thika Town. Findings indicated that tax compliance was influenced by tax

deterrence sanctions, tax compliance costs, and tax knowledge levels. However, the study,

did not find a significant relationship between the tax system and tax compliance levels by

public transport SACCOs in Kenya. Nduruchi, Makokha and Namusonge (2017)

conducted a study on determinants of Tax Compliance among SMEs in Bungoma County,

Kenya. The study revealed that there was a negative and significant relationship between

tax compliance and cost.

However, little has been done on assessing the determinants of tax compliance among

small scale businesses in Thika Town with a specific consideration to how penalties

influence tax compliance, how perceptions on tax laws affects tax compliance and how

automation of tax filing affects tax compliance.

1.3 General Objective

The general objective of this study was to assess the determinants of tax compliance among

small scale businesses in Thika Town.

1.4 Specific Objectives

1.4.1 To determine the effect of tax penalties on tax compliance among small scale

businesses in Thika Town.

7

1.4.2 To evaluate how taxpayers perceptions on tax laws affects tax compliance among

small scale businesses in Thika Town.

1.4.3 To determine how automation of tax filing affects tax compliance among small scale

businesses in Thika Town.

1.5 Significance of the Study

This study is significant to a number of users as presented below:

1.5.1 Government

The Kenya government can use the findings and recommendations from this study to come

up with policies and strategies that would make tax computation easy hence, increase

taxpayers’ compliance.

1.5.2 Academicians

The results of this research can be used as a base for future research. Through this,

academicians can able to identify other factors that affect tax compliance amongst SME’s

and identify research gaps that need to be filled.

1.5.3 SME’s

Findings and recommendations of the study provided more information to SME’s

regarding penalties and consequences that they may incur due to failure to pay taxes. It

also influence SME’s attitude toward tax hence, increase their perceptions towards tax

compliance.

1.6 Scope of the Study

The study was done in Thika Town. The study was carried out from the month January

2019 to June 2019. The study was based on explanatory research design and population of

1,200 taxpayers who own small scale businesses with sample size of 300 taxpayers was

selected. The study used questionnaires for data collection on specific objectives relating

to tax penalties, tax laws and tax automation on tax compliance.

8

1.7 Definition of Terms

1.7.1 Tax Compliance

Tax compliance is a multi-faceted measure involving an individual or organization willing

and having the ability to pay taxes on time and timely reporting of correct tax information

(Slemrod, 2016).

1.7.2 Non Compliance

Non-compliance is defined as failure by taxpayers to meet tax obligations whether

deliberate or unintentional (Kasper, Kogler & Kirchler, 2015)

1.7.3 Tax Penalty

Tax penalty is a punitive measure that the tax law within a defined national jurisdiction

such as how Kenya imposes it to her citizens and non-citizens for the performance of an

act that is prescribed to be failure to adhere, present, falsify or perform the needed tax

obligation as required by the state of their jurisdiction (Kamil, 2015).

1.7.4 Small Scale Businesses

Small scale businesses represent small institutions, individual owned organizations or

suppliers operating in a formal or informal setup with little planning whose sales do not

exceed a certain level in each taxation year (Endres, 2014).

1.7.5 Tax Laws

Tax laws are administrative apparatus clearly developed in response to levy and tax

collection and applied on different tariff as a basis of taxation to respective individual or

organizations in a stipulated proportion (Kasper, Kogler & Kirchler, 2015).

1.8 Chapter Summary

The chapter began by presenting an introduction and background of the study. The chapter

brings in the relevance of tax compliance among small businesses in Thika Town as the

general objective. The specific research objectives were; to determine the effect of

penalties on tax compliance among small scale businesses in Thika Town, to evaluate how

perceptions on tax laws affects tax compliance among small scale businesses in Thika

9

Town and to determine how automation of tax filing affects tax compliance among small

scale businesses in Thika Town. Chapter two discussed literature review of the study

reflective objectives by drawing similarities and comparisons of the current study to past

studies. Chapter three established the study methodology upon which the present study was

based. Chapter four highlighted on the results and findings of the study in qualitative

establishment. Chapter five captured the study discussion, conclusion and

recommendations.

.

10

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This chapter expounds on the relevant literature studies to reflect on the general research

objective which was to assess key determinants of tax compliance among small scale

businesses. The chapter presented relevant study reviews on how tax penalties impact tax

compliance, how taxpayers perceptions on tax laws affects tax compliance and how

automation of tax filing affects tax compliance.

2.2 Tax Penalties and Tax Compliance.

2.2.1 Effect of Tax Penalties and Taxpayers Attitudes towards Tax Compliance.

An analysis was conducted by Kamil (2015) so as to establish the effect of tax penalties,

tax awareness, tax knowledge, tax authorities on individual tax compliance in Jakarta

Indonesia. The research variables were to help in the assessment of the variable relationship

on matters of tax penalty, tax awareness, and tax knowledge to individual tax compliance

that manages industries and visits tax offices to file their taxes. The study used

questionnaires and adopted accidental sampling method by involving 550 respondents

from Jabodetabek and Bandung. The findings indicated that tax knowledge has a negative

and significant effect on individual tax compliance as they utilize on the loopholes to avoid

tax liabilities. Tax penalties had a positive and significant relationship to individual tax

compliance given that the more the effective application of tax penalties the higher the

compliance. Tax awareness registered a positive association to tax compliance. The

recommendations were that there is need to invest in tax offices so as to provide intensive

counselling to the individual taxpayers to raise awareness on complying with tax policies

to avoid penalties. Failure to present such material information may attract additional

charges that are within the defined limits of scale and imposed to taxpayers in a mandatory

model.

11

Gordon and Wen (2017) presented an inquiry titled effect of tax penalties on fluctuating

incomes of Canadians. The review was to weigh how progressive personal income taxes

lead to more taxes compared to individuals with constant income of same average value.

The study used longitudinal data to deduce and estimation of tax penalties in six panels of

data from the year 1993 to 2010 from statistics Canada. Each panel (1993, 1996, 1999,

2002, 2005 and 2008) of a survey had 15,000 Canadians from ten provinces. The panels

involved different times with different tax policies being adopted with fluctuating penalties.

The results indicated that tax penalties pose a substantial challenge to some individuals

who are in low income groups. The conclusion was that income averaging is viewed as the

best alternative of mitigating tax penalties on fluctuating and irregular incomes to be based

on total income so as to enhance tax compliance among all social status in the Canadian

society.

A research was presented by Swistak (2016) on tax penalties in SME tax compliance, a

case study of Polish small scale businesses. He observed that small scale businesses must

be in consistence to the applicable tax policy and compliance. This arises on the attention

of the nature of the management in conducting business in a competitive and most rigorous

manner in fulfilling their tax obligations. Further, Swistak (2016) noted that a lot of small

scale businesses are failing to make stable operations posing a threat to the compliance

level on matters to do with the taxation. The research used questionnaires and collected

data from 320 small business owners. The findings indicated that the tax penalties had a

negative association to tax compliance whereby the government tax penalties keep

increasing with current stand of USD 1,000. This has barred many small scale businesses

to formalize their ventures and there is need to review on tax penalties.

Pui et al., (2017) analyzed the taxpayers’ perceptions on tax evasion behavior in Malaysia.

The research was necessitated by the fact that tax evasion is illegal and there is need to

have taxpayers’ attitude on tax morality in a case of self-assessment tax system. Data was

collected form 400 taxpayers via the use of the questionnaires. The findings indicated that

tax knowledge is very critical factor in tax system and affects taxpayers’ attitude of tax

morality.

12

2.2.2 Effect of Penalties and Taxpayers’ Proper Record Keeping towards Tax

Compliance.

McKee, Siladke and Vossler (2018) examined the behavioral dynamics of tax compliance

through the assessment of taxpayer assistance services available in non-disclosed

transactions with fewer records in US. The analysis involved 700 participants with large

and diverse behavioral dynamics on business and tax reporting. The concept of tax liability

becomes uncertain and tax support agents makes services available to the involved parties

who are the taxpayers in the SMEs sector. The analysis on the study findings reported by

McKee et al., (2018) showed that presence of information regime has a positive impact on

the behavioral response of the taxpayers towards bookkeeping with high level of tax

compliance. This conclusively recommends that the tax bodies should have a strong

support system in enhancing business record keeping that will be in charge of information

dissemination to taxpayers’ transactions records at personal level as it has a strong and

positive correlation to tax compliance. Strong emphasis must be created on taxpayers’

knowledge and education on matters relating to tax penalties and record keeping. This has

to involve engaging taxpayers and tax authorities as there is a positive correlation between

tax knowledge with the attitudes towards legal tax avoidance and negatively correlated

with the attitude towards illegal tax evasion. Thus, taxpayers’ knowledge and education on

tax records is very relevant towards tax compliance.

Presenting on the relevance of record keeping, competition and corporate tax evasion

involving 300 small scale businesses in Malaysia, Gokalp, Lee and Peng (2017) tackled

the question by studying firms operating in the informal and formal sector with different

institutional backgrounds. They compared on the incentives and key challenges originating

from the informal sector. The findings indicated that businesses operating in the informal

sector have very little documentation which largely attributes to firms evading paying their

fair share of taxes. The recommendation was that revenue administrators should ensure tax

compliance through proper business documentation with tax incentives so as to attract

institutional change and foster tax compliance especially to the businesses operating in the

informal sector. The growth of such businesses poses a great threat to formal businesses

that have proper records and are overburdened in competition and unfair business practices.

13

Blaufus, Bob, Otto and Wolf, (2017) reviewed on the effects of tax privacy on tax

compliance in Germany involving 250 businesses in an experimental investigation. The

study applied tax compliance game on public disclosures. Tax privacy ranging from

complete privacy to full disclosure was assessed. The disclosure level yielded contagion

effect where individuals observes noncompliance of others and influences them to imitate

and apply with no tax records shown. The second effect was shame effect that increased on

tax records and compliance among tax evaders. Surprisingly, the results showed that

disclosing of the tax information anonymously increases tax evasion compared to proving

information on tax evasion behavior.

Hassan, Nawawi and Azlin (2016) analyzed on the ways of improving tax compliance via

tax education in Malaysia. The analysis presented an in-depth need to have tax education

as a central focus to the tax authority in enhancing long term compliance. The research

randomly sampled 60 respondents and found out that taxpayers use the information

provided by tax authority including procedures on having business record, complete set of

accounting and knowing more about tax. The findings showed positive result on tax

education to compliance and suggested on the need give taxpayer more exposure on tax

education.

2.2.3 Do Penalties Lead to Timely Payment of Taxes?

Information on tax payment period is a very essential element in voluntary tax compliance

to tax system by small scale businesses in particularly helping them to determine the

liability due and accurate taxes to pay like V.A.T. Evidently, Oladipupo and Obazee (2016)

presented a study on tax knowledge, penalties and tax compliance in SMEs in Nigeria. The

survey involved 120 businesses of which the questionnaire data was analyzed using

ordinary least squares regression method. The result showed that tax knowledge which

included timely tax payment had a positive and significant impact on tax compliance. It

further recommended that tax knowledge has high tendency to promote tax compliance

than tax penalty and governments through the revenue authority should increase on public

knowledge on tax matters and tax education to help business advance in compliance

irrespective of time.

14

An investigation was done by Saad (2014) in regards to tax knowledge, tax penalty, tax

complexity and tax compliance in Malaysia. This was motivated by the fact that tax

penalties are imposed as a result of serious violation of tax policies and involves civil and

criminal procedures. The study targeted 2,267 potential participants of which 30 were

selected and interviewed via telephone with qualifying criteria of paying tax in due time.

The result indicated that majority of the respondents were aware of tax violation penalties

and also being restricted on the broad knowledge of types of tax, tax rates and the objectives

of tax.

Muhika, Njeru and Waiganjo, (2017) examined the influence of tax compliance

requirement on formalizing of SMEs in Kenya. This was necessitated by the fact that most

SMEs are constrained in growth due to lack of capital, lack of documentation and majority

have failed to file returns accruing to penalties of which late filing of tax returns attracts a

penalty of 5% of the tax due or Ksh.20,000 whichever is higher and late payments of taxes

leads to a penalty of 20% of the outstanding tax (KRA, 2016). The study sampled 369

SMEs operating in Nairobi Central Business District using Yamane formula. Open and

close ended questionnaires supplemented interview checklist. The study findings indicated

that tax compliance is key to fostering business formalization operations with payment of

tax on time to avoid penalties. Further, there was a positive association between; tax

administration, tax revenue, fiscal exchange as tax compliance requirements to SMEs

formalization.

2.3 Taxpayers Perceptions on Tax Laws and Tax Compliance

2.3.1 Subjective Norm on Tax Compliance

Subjective norm represents the perceived social pressure to get involved or not to be

involved in a certain type of practices or behavior (Jimenez & Iyer, 2016). Jimenez and

Iyer, (2016) reviewed tax compliance in social settings with considerations to the influence

of social norms, trust in the government and perceived fairness on taxpayer compliance in

US. The analysis was necessitated by the call to enable the government manage budget

deficits through voluntary tax compliance. The establishment indicated that traditional

model of improving tax compliance such as audits were deemed to be very expensive.

15

Social factors were catered for and their influence to individuals’ tax compliance needs.

The findings from the 217 US taxpayers showed that influence of social aspects on tax

compliance were supported. This further indicated that social norms do influence

compliance intentions indirectly via personal internalization to subjective norms. Thus, the

support of personal norms in relation to tax compliance increases, personal subjective

norms increases leading to consecutive increase in compliance intentions among the

taxpayers. This was very relevant to the revenue service through modeling a less costly and

more effective working strategies to increase on taxpayer compliance.

Taxpayers’ perception of subjective norm on the tax policy being effective may be as a

result of meeting the expenditure of a national government and imposed to the citizens to

pay and adhere to tax compliance directly or indirectly. According to the research findings

involving 62 social groups in Malaysia on social tax policy and compliance level, there is

need to have proper communication on the essence of specific tax and the attributed

benefits to the citizens in the long run. The main issue of worry to taxpayers is what they

directly get as a return for their payments of taxes in the form of services that have been

publicized. The taxation policy on public goods and services and the provision of the same

public products can be stated as a legal relationship that exists between the government

and the citizens who pay taxes (Kasper, 2015). Citizens who pay taxes directly or those

attached on the use of specific products expect fair and right treatment when their benefits

are being stretched further.

Gangl, Torgler and Kirchler (2016) assessed on the patriotisms and its impact on

cooperation with the state in the experimental study on tax compliance in Austria. The

examination involved a sample of 84 Austrian state personalities and reviewed on their

pride of national achieves relating to national flag, national landscapes and national

achievements being emphasized by the state on its tax policy. The findings indicated that

manipulative patriotism indirectly increases tax compliance, the highest rank related to the

national achievements increases trust and voluntary motivation to cooperate. This

concludes that tax policy makers must consider building the patriotism of the citizens

through different models that will motivate them and attract them towards tax compliance.

16

2.3.2 Perceived Fairness of Tax Laws

Perceived fairness in the administration of the tax system has been thumbed as one of the

main attributes of good tax model in the economy with a critical role in tax reporting

behaviors’. Contrary, a tax system perceived to be unfair and inequitable is more likely to

make taxpayers evade tax payment and render tax system less successful. The taxpayers

are more likely and willing to comply with the set tax laws when the tax authorities make

consideration of being fair in their tax laws as exemplified regarding reward and tax

compliance decisions in US (Fochmann & Kroll, 2016). The research examined 127 firms

subjected to rewards and no rewards in aggregate perspective. The findings indicated that

rewards have negative overall effect on tax compliance. Contrary, rewards affect the

decision of taxpayers asymmetrically. The study recommended that if a high compliance

rate of taxpayers is preferred, rewards should not be used by the tax authority.

A research was conducted by Walters and Bolger (2018) on the procedural justice

perceptions, legitimacy beliefs and compliance with the law in Canada. The survey

reviewed 64 published studies with a sample of 95 cases assessed between 1990 to 2018 in

which procedural justice was applied in correlation to legitimacy of tax compliance. The

analysis relied on pooled data on ruled cases of procedural justice to their legitimacy. The

findings indicated that legitimacy beliefs are very instrumental in promoting compliance

with the tax law. In addition, procedural justice perceptions appeared to directly predict on

to the tax compliance laws.

An analysis was carried out by Khlif, Guidara and Hussainey (2016) on sustainability level,

corruption and tax evasion in Tunisia. The inquiry was aimed at exhibiting the applicability

of tax laws in different jurisdictions as an avenue to determine the nature of the tax and the

model of implementation in a progressive or retrogressive approach. Fair tax laws being

the important debate and a critical issue to the public, businesses and the economy at large

owing to the impact it has on the tax compliance. The sample size involved 65 developed

and developing nations. Data on sustainability and corruption was obtained from Global

Competitiveness Report from 2012 to 2013. The result indicated presence of negative

association was very significant for low corruption countries and insignificant for high

17

corruption settings. The analysis recommended that governments must develop tax laws

and have tax regime that discourages corruption.

Muller (2015) presented an inquiry on responsible tax laws as a corporate social

responsibility with a case of multinational enterprises and effective tax in India. The

research involved 82 firms selected from automotive, services, chemicals, pharmaceuticals

and financial information technology. This was mainly driven by the fact that most of the

foreign enterprises operating in developing nations exploit multinationalism to avoid

paying taxes to the host governments. The review of the article exemplified on the

responsible tax as a CSR tool, in the process of the assessment the author noted if foreign

based enterprises pay higher taxes than local firms and their subsidiary presence attached

to corporate social responsibilities. The results noted that foreign firms operating locally

pay higher taxes and their compliance level is high. They also view taxation in developing

nations as a part of the public relations and the tax laws should fairly capture well on the

scope of taxation to the foreign enterprises.

2.3.3 Taxpayer Education

Taxpayer education is said to be one of the main strategies meant to improve the service

delivery to the taxpayers and enhance voluntary tax compliance. Taxpayer education entails

training, provision of tax support services to taxpayers, counseling taxpayers and impacting

the right taxpayers with the right information based on the role of tax education in

compliance in United Kingdom (Mascagni & Santoro, 2018). The study involved used

secondary data with in-depth interviews with officials from tax administrators in Kenya,

Rwanda, Uganda, Tanzania and Nigeria. The analysis established that taxpayers with better

tax education are able to navigate on complex tax systems hence tax education poses a

negative association to tax compliance. The findings recommended on the need to review

tax education and how to improve it to all.

A review was conducted by Mascagni, Santoro and Mukama (2019) on tax compliance

drawn from taxpayer education programme in Rwanda. The research was motivated by the

fact that taxpayer education is meant to improve tax compliance and remain largely

unexplored in literature. It used a survey data from 920 respondents in Kigali with rigorous

18

evaluation of taxpayers’ education on tax compliance knowledge and perceptions on tax

training. The findings indicated that taxpayers’ education result into significant increase in

tax knowledge which emanates from low baseline of understanding to well perceived

information on compliance. Further, the results showed that training new taxpayers

contributes a lot to bringing into the habit of tax filing declarations.

Kwok and Yip (2018) evaluated on the tax education good or evil for boosting tax

compliance in Hong Kong. This was to clarify suggestions from many researchers who

viewed that tax education foster compliance while others argued that tax knowledge

inspires tax evasion. The analysis explored on tax education and whether it improves tax

compliance using 600 respondents from Hong Kong. The research model consolidated on

the information and findings showed that taxpayers comply if they are able and willing to

positively perceive tax system as being fair and morally believe that is right to comply.

2.4 Automation of Tax Filing and Tax Compliance

2.4.1 Cost Reduction

Tax automation involves advancing in modern technologies to drive taxation through an

integration of information sharing so as to enhance efficiency and effectiveness of tax

compliance and revenue administration. An assessment was presented by Kochanova,

Hasnain and Larson (2017) on the e-government merit for business in United Kingdom.

The investigation was motivated by the need to analyze significant challenges facing

developing nations when collecting taxes with high compliance costs incurred and

harassment by tax officials that deter investments, undermines economic growth and brings

about tax evasion. It examined 150 small scale businesses through the assessment of tax

automation cost, time taken to prepare and pay taxes, frequency of firms being visited by

tax officials and perceptions of tax administration costs by taxpayers. The findings showed

that tax automation simplifies the interaction between the revenue body and the involved

institution with little cost incurred and increased tax compliance.

Sawyer (2016) presented an analysis on the complexity of tax simplification in New

Zealand which is deemed to have a simple, coherent and transparent tax system. The study

19

sampled 90 firms in the private sector and subjected them to their independent views on

the tax system of New Zealand and costs incurred. The results indicated that the process is

less costly and that they experience fairness in tax administration given that the private

sector has free access and can share information to the government permitted. This is

backed by the small population operating in a transparent and coherent tax policy process.

Further, Budak and Benk (2016) studied complexity of tax simplifications in Turkey. This

was after the taxation reached a new height in the country where tax rates were considered

to be modest and economical with less complexity. The research involved a random

sampling of 60 respondents who were; business owners, politicians and economist. The

results showed that complexity of tax simplification had a negative impact with drawn

criticism as being expensive. This was supported by majority of the business owners,

politicians and economists.

2.4.2 Time Efficiency

Discussion of tax automation and its resultant effect on time efficiency has received lots of

support from taxpayers compared to the manual process they were used to initially. It has

led to timely filing and processing of payments and enhanced on the tax compliance as

depicted by Adema and Haas (2017) on efficient and effective municipal tax administration

in Kampala Capital City Authority. The research motive was to bring low cost alterations

to tax administration so as to bring efficiency, flexibility and economy. The study sampled

75 respondents from Kampala Capital City Authority of which until 2011 they were

working using a lengthy manual in revenue collection that resulted in unreliable data base,

unclear procedures, narrow tax bracket and cumbersome process. The reform in tax

collection through the adoption of new technologies brought about transparent process and

timely billing.

An investigation conducted by Muturi and Kiarie (2015) to examine the effect of online

tax system on tax compliance among small scale taxpayers in Meru County. Specific

objectives revolved around online tax registration, online tax filing and online tax

remittances by sampling 60 small scale taxpayers in the region. Data was collected via use

of questionnaires and analyzed in SPSS version 20. The findings indicated that positive

20

association among all the independent variable to tax compliance. This was acknowledged

that itax has brought about timely processing of tax records and recommended that Kenya

Revenue Authority should enhance internet connectivity in the rural areas to foster and

promote online tax revenue remittance with collaboration of telecommunication firms.

Owino, Senaji and Ntara (2017) analyzed the effects of innovation in revenue collection

process on organizational performance with a case study of Nairobi City County. This was

composed with the intention of presenting how organizations are modernizing their

systems with the increased effort to bring in time efficiency and effectiveness of the

organizations operations. The specific objective was to establish the extent to which time

efficiency in online receipting influences organizational performance. The research used

questionnaires and sampled 111 respondents from the top management, middle

management and lower management. From the findings it was evident that having

modernized system was linked to time efficiency in receipt processing and had a positive

correlation to organization performance.

Shao, Luo and Liao (2015) examined the factors influencing electronic filing adoption

intention by the business users in China. This was based on the causal effect of the Chinese

government having heavily invested in human resource, materials and transition towards

electronic government services. The motivation was necessitated by low participation of

the Chinese in accessing e-government services particularly business users given that it

had time efficiency. It leveraged on the technology organizational environmental

framework to incorporate timely electronic invoicing and filing as part of the services. The

results indicated that technology adoption significantly and positively impacted on the

invoicing and e-filing intentions of the business users by being time efficient. The

recommendation is that businesses should promote the adoption of computerized invoicing

and e-tax filing as one of the means of enhancing compliance and timely service delivery.

Previously, there used to be a lengthy procedure when filing tax returns and the non-digital

system that is used to file the returns had its shortcomings which the untruthful taxpayers

utilized to underpay the government taxes. The all-inclusive system of managing taxes

requires the taxpayers to fill the introduction forms, fill the tax returns forms and pay all

21

their pending tax expenses online. The collection of data is digitized, which is important in

improving the rates of compliance and speeding the collection of revenues by the national

government. The major tax responsibilities in the tax automation and tax compliance are

taxes PAYE, corporation tax, VAT, the tax with-held amongst other local levies that are

susceptible to the lack of compliance because of the initial non-digitized system of filling

tax returns. Muturi and Kiarie (2015) assessed the effects of online tax system and tax

compliance among the SMEs taxpayers in Meru County. The inquiry sampled 60

respondents and the objectives were skewed towards online tax registration, online tax

filing and online tax remittances. The results indicated a model of fitness with coefficient

of determination at 81.6% on the joint significance of the entire independence variable to

tax compliance. This was largely attributed to time efficiency accompanied.

2.4.3 Ease of Use

The process of tax automation has not only enhanced revenue collection and tax

compliance but also eased tax filing. Perceived ease of use relates to the extent to which

taxpayer believes that using the system enhances his or her job performance. Mostly, new

systems are designed in an environment that directly impacts the users free of effort

(Huang, 2018). There are a number of internal and external factors that are very significant

to the ease of use of tax system. These range from computer literacy, level of education,

support infrastructure, self efficacy among others (Alghamdi & Rahim, 2016).

An analysis was presented by Allen (2017) on a new discipline for emerging areas of tax

information and operations managements so as to help Certified Public Accountants add

strategic value to their organization. This was questioned by the need to have enterprise tax

technology and pervasive impact on business success. The research involved 100

manufacturing companies in Uganda of which 77% had no tax technology strategy. The

23% of the companies that had tax technology strategy reported support in ease of use from

their tax professionalism and those who had little information as the system was direct to

use with few technical knowhow.

Tax automation involves having a timely electronic invoicing system that issues the digital

receipts through an integrated system with the tax records so as to capture transactions in

22

real time. This has received huge support from business owners. According to TranNam

(2016) tax reforms and tax simplification of the Australian businesses through real time

electronic invoicing laid emphasis on ICT skills and tax software in tax education to the

small scale business owners. The respondents were those who had been in tax classes and

computerized their invoicing whereby he used the snowball sampling on 78 firms. In the

findings, it was evident that taxpayers who are skilled and had information on the use of

electronic invoicing were deemed to use the online tax system hence they had high

compliance level and little errors.

In conclusion, the evidence presented on tax automation as a factor that influences tax

compliance among small scale business generated a mixed effect. More so having

automated receipting system and tax filing through a computer generated system gives the

best analysis of each and every transaction that can be tracked from all the parties involved.

This gives more than one source of tax data reliability to be used by revenue bodies in tax

audits as well as helping to understand the compliance level of small scale businesses. The

recommendation is that tax bodies such as KRA should invest in digital systems that are

very flexible to use, helps to save costs and are timely in information processing. Tax

compliance is a cultivated endeavor and the revenue body must provide adequate services

to small scale businesses in ensuring there is consistency in tax compliance.

2.5 Chapter Summary

The current chapter dealt in presenting the literature review on the study topics based on

determinants of tax compliance among small scale businesses. The review discussed on the

key aspects relating to tax penalties as a factor that impact tax compliance among small

scale businesses, how taxpayers’ perceptions on tax laws affect tax compliance among

small scale businesses and how tax filing automation as a factor that impact tax compliance

among small scale businesses. The review drew tax determinants to compliance in the

global, regional and local studies for comparison and result findings as per the study

reflective objectives. The next chapter presented the research methodology. This involved

describing the research design, the population and sampling design. The methods of data

collection were also described in the analysis. The chapter ended by accentuating the

23

research procedures and the methods of data analysis and interpretation so as to get an

extensive report for the study findings and study recommendations.

24

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Introduction

Chapter three on the research methodology presented an in-depth analysis of the study

variables. The chapter specifically gave the procedure of carrying out the fieldwork by

defining on the concept and showing its significance to the study. The chapter widely

covered on the research design, target population, sampling design, data collection method,

research procedures, data analysis and finalized with the chapter summary. Relevance of

the research topic was elaborated to assist the research have a structured model in the

process of data collection, data analysis and interpretation of the data findings.

3.2 Research Design

Research design represents an organized structure of inquiry that seeks to answer research

questions and help the researcher to make a summary and organize data in a meaningful

way (Paul, 2017). Research design was important to the study in providing a detailed guide

on how the study was arranged, conducted and the collected data analyzed. Thus, the

research design bonded the major parts of the research study and addressed on the intended

questions under analysis.

The analysis employed an explanatory research design to help assess on the determinants

of tax compliance among small scale businesses in Thika Town. This was because of the

discretional focus on the why aspects. Explanatory research design sought to identify

causal links between the determinants or the main variables pertaining to the research

problem being investigated. The factors that cause tax compliance among the business

owners are related to tax penalties, taxpayers’ perception on tax laws and tax automation.

Therefore, the study had questions as to why when developing the causal explanation and

structured in detail to have a deeper understanding for a given phenomenon.

According to Harri, Cartwright and Torok (2013), on genome sequencing in a descriptive

analysis outlined the relevance of analyzing a phenomenon in a systematic approach and

25

generating results to present a holistic picture of the real issues and the lives activities of

people under investigation.

Maxwel (2015) presented a broad overview on explanatory research design not only to

illustrate people’s activities, organizations, events and settings but also on the phenomena

of the study. A complete definition of the study description has to generate the content of

what, when, where and how but also the why question that is compulsory in explanatory

research. Mugenda (2012) expounded on the scope of descriptive research studies attached

on past concepts on the nature of the research problem that captures on the qualitative and

quantitative features.

3.3 Population and Sampling Design

3.3.1 Population

Mugenda (2012) defined population as a set of elements, individuals, events, cases or

objects with special and observable characteristics that the researcher wants to find out

general analysis for decision making. Target population represents the combination of all

the population that researcher has in consideration to obtaining the study target population

that included small scale businesses in Thika Town. The data on the small businesses was

obtained from the County Government of Kiambu and presented in the table below.

Table 3.1 Study Population

Category Population Total Percentage

Retailers 276 23%

General Merchants and Kiosks 336 28%

Fruit vendors and informal traders 132 11%

Transport business 192 16%

Agri-processors 204 17%

Hotels 60 5%

Total 1,200 100%

Source: Thika Town Government (2018)

26

3.3.2 Sampling Design

The sampling design for the study specified on the possibility of a particular sample from

being drawn on a whole population. Thus, any statement made about the sample should be

also true to the population as stipulated by (Mugenda, 2012). The sampling method applied

to the study was stratified random sampling. The sampling design aided the researcher in

first establishing the stratification and drawing a direct inference on the nature of the study

population, their proximity to government administrative offices and compliance level.

3.3.2.1 Sampling Frame

Sampling frame is defined as the study elements or units that are readily accessible by the

researcher at the time of conducting a research study. It involves information that is

generally applied to identify a sample population for statistical treatment in the study

through the inclusion of a numerical identifier on each of the individual characteristics in

the current study (Berger & Torres, 2016)

The information used in the study was obtained specifically from the records of those

businesses that are registered and renewed their licenses. The study included a sampling

frame of 1,200 taxpayers with licensed small scale businesses.

3.3.2.2 Sampling Technique

Dang & Pheng (2015) defined sampling technique as a process of selecting a group of

elements, people, sets or behavior and arranging them with same characteristics to involve

in a study. The sampling technique ought to have a verifiable approach to be used when

drawing samples in a model that are significant in hypothesis testing. The study grouped

the population into their categories of business activities and used stratified simple random

sampling technique. Stratified sampling technique was mostly preferred in the study as it

gave a clear scope to the selection of a representative sample from each stratum. The strata

were relevant in giving a categorical analysis of the samples based on the nature, form and

type of the business activities among the small scale businesses operating in Thika. This

broadly consisted of; general merchants and kiosks, fruit vendors and informal traders,

transport operators, agri-processors and hotels

27

3.3.2.3 Sample Size

A sample is a subset of population about which the findings have to be generalized.

Broadly, it is a representation of individuals, items, elements or sets drawn from a target

population in the study with identifiable and similar characteristics which can be re-

examined to give a general overview of the target population (Nassaji, 2015). Appropriate

sample size must exhibit a critical value that is used to make an inference on the calculated

critical value and estimated critical value for precision considerations in a study. The

sample size must also indicate a high confidence level in that other studies to be conducted

in similar environment will lead to consistency in the findings and generalization. The

sample size result must also have variability in the nature of the heterogeneous population

with highest level of precision in analysis. The study applied Yamane (1967) formula to

calculate a representative sample size for the given population as described below.

n= {[N/(1+N(e)2 )]}

Where n = sample size

N= population size

e= level of confidence determined at 95%

n={[1200/(1+1,200(0.05)2 ]} = 300

Therefore, the sample was 300 taxpayers who own small businesses in Thika Town.

28

Table 3.2 Sample Size

Category Target

Population

Total

Percentage

Sample

Size

Percentage

of Total

Population

Retailers 276 23% 69 23%

General Merchants and Kiosks 336 28% 84 28%

Fruit vendors and informal traders 132 11% 33 11%

Transport business 192 16% 48 16%

Agri-processors 204 17% 51 17%

Hotels 60 5% 15 5%

Total 1,200 100% 300 100%

3.4 Data Collection Methods

Sreejesh, Mahopatra and Anusree (2014) defined data collection methods as a means by

which information is obtained from the selected subjects of investigations. There are indeed

many methods of data collection and the choice of the current study was based on the

research topic, nature of the questionnaires, objectives of the study, design and the expected

results. The study collected data using primary method via questionnaires. Saunders, Lewis

and Thornhill (2012) argue that the questionnaire includes all the methods of data

collection whereby each respondent under consideration is required to respond to the same

set of questions in a predetermined order.

The questionnaire consisted of open ended and closed ended. The questionnaire was guided

by having background information of the respondents to mark appropriately on the

demographic information that fits their classifications. The other parts were ranked in a

Likert scale where (1) represented strongly disagree, (2) disagree, (3) neither agree nor

disagree, (4) agree and (5) strongly agree. The researcher considered a direct interaction

with the respondents on a one to one basis for introduction before adopting a drop and pick

later technique for the collection of qualitative data. The techniques were relevant in that it

29

gave the respondents appropriate time to complete the questionnaires, the researcher can

managed a wide geographical coverage and ease in questionnaire administration.

According to Marshall and Rossman (2014), structured and unstructured questionnaires

contain several questions that have a common set and categorical responses whose main

objectives is to help analyze on the distribution of the characteristics, beliefs and attitudes.

For ease in administration, the questionnaire was divided into four sections with the first

section captured the bio data of the respondents, the second section was statement on the

assessment of tax penalties, the third section captured taxpayers perception on tax laws and

the fourth part was on tax automation.

3.5 Research Procedure

Research procedure is defined as the process of analyzing data by capturing and outlaying

results (Deng & Pheng, 2015). This procedure involved sharing of the developed

questionnaire with the university research supervisor for cross examination and consent.

The researcher obtained an introductory letter from the university that permitted him to go

to the field and collect data under the institution’s knowledge. The field work started by

incorporating a pilot study of 6 questions being issued in every category of selected

business. The main aim of conducting a pilot study was to analyze respondents’ ease of

answering the questions and amending those that seemed ambiguous. Understanding the

model being used when administering the final questionnaire, the study adopted a drop and

pick approach. The researcher involved five research assistants to enhance quality of the

data collected for the study.

A construct composite reliability co-efficient (Cronbach alpha) was applied to test on the

reliability of the research instrument being consistent in the measures. For the study to be

valid, Cronbach Alpha of more than 0.7 has to be attained. For this study; tax penalties,

taxpayers’ perception on tax laws and automation of tax filing resulted to Cronbach’s Alpha

of 0.834, 0.866 and 0.775 respectively hence valid for the study as shown in table 3.3

30

Table 3.3 Reliability Analysis

Variables Number of Items Cronbach’s

Alpha Value

Decision

Tax Penalties 12 0.834 Accept

Taxpayers Perception on Tax Laws 12 0.866 Accept

Automation of Tax Filing 12 0.775 Accept

Tax Compliance 12 0.842 Accept

3.6 Data Analysis Method

Data analysis and interpretation involved re-examining the collected research data before

analysis to deduce and give meaningful information appropriate for interpretation and

explanation (Marshall & Rossman, 2014). The filled questionnaires were verified for

completeness and consistency where errors and omissions were corrected, coded and

analyzed. Qualitative data was sorted into patterns, categories and themes so as to enable

the researcher make a general statement in terms of the observable attributes in the study.

The coded data was computed in Statistical Package for Social Sciences (SPSS) version 24

for final analysis and generation of the outputs. The choice of the SPSS for analysis was

based on its user friendly interface and easily to link with Microsoft office utility. The study

derived the bio data, descriptive statistics and inferential statistics. Descriptive statistics

involved frequencies, mean, standard deviation and variance while inferential statistics

involved correlations, coefficient of determination, analysis of variance and simple

regression.

3.7 Chapter Summary

Chapter three reviewed on the study methodology by discussing on the study research

design, population and sampling design incorporated, sampling frame for the study,

sampling techniques, sample size and finalizing with data analysis. The study main

objectives will be integrated in research questionnaire to involve; tax penalties as a factor

that influences tax compliance, taxpayers’ perception on tax laws as a factor that influences

31

tax compliance and tax automation as a factor that influences tax compliance. The next

chapter presented the findings relating to demographic information of the respondents,

descriptive statistical analysis and inferential analysis based on the study objectives.

32

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

The main study objective was to establish the determinants of tax compliance among small

scale businesses in Thika. The study focused on how tax penalties influence tax

compliance, how taxpayers’ perceptions on tax laws influence tax compliance and how

automation of tax filing influences tax compliance.

4.2 Demographic Information

The general information of the respondents was to show the bio data that is very meaningful

in establishing on the individual capacities and the study topic. The general information

included; gender, level of education, number of years in business and age group of the

respondents.

4.2.1 Response Rate

The study had a response rate of 71%; out of which 300 questionnaires that were given to

respondents, 212 were returned fully filed. In addition, the chapter gave a representation of

the findings in line with the study questionnaire to capture demographic and descriptive

analysis of the respondents.

Table 4.4 Response Rate

Cadre Frequency Percentage

Response 212 71

Non response 88 29

Total 300 100

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4.2.2 Gender Representation

The below table 4.2 show that 51% of the total respondents were men and 49% were

women. The gender parity was miniature indicating gender inclusion in small and medium

business setup.

Table 4.5 Gender Representation

Frequency Percent

Valid Male 108 51

Female 104 49

Total 212 100

4.2.3 Level of Education

Referring to the table 4.3 above, the respondents were asked to indicate their level of

education. From the study findings, 29% of the total respondents had diploma and

professional qualifications, this was followed by 27% who had secondary certificate, 21%

had degree, 12% had primary certificate and 11% had above other combinations. The

findings proved that the respondents were in position to better understand determinants of

tax compliance.

Table 4.6 Level of Education

Frequency Percent

Valid Primary Certificate 26 12

Secondary Certificate 56 27

Diploma and Professional 62 29

Degree 45 21

Others 23 11

Total 212 100

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4.2.4 Number of Years in Business

Table 4.4 was to establish the number of the years’ respondents have been in business.

From the computation, 33% have been running their SMEs for a period of 3 – 5 years, 23%

have been in business for over 10 years and a tally of 22% for 1 – 2 years same as 6 – 9

years. The analysis showed that most of the respondents were aware of changes in tax

policies, tax penalties, tax automation and things to do with tax compliance. Long exposure

in business helped the study obtain relevant information based on respondents’ experience

Table 4.7 Number of Years in Business

Frequency Percent

Valid 1 -2 years 47 22

3 - 5 years 69 33

6 - 9 years 47 22

Over 10 years 49 23

Total 212 100

4.2.5 Age Group of the Respondents

Referring to table 4.5 shown below, majority of the respondents were in age group of 26 –

39 years represented by 46%, this was followed by age class of over 40 years represented

by 34% and lastly was the age class of 19 – 25 years represented by 20%. most of the

respondents were economically active and independent hence appropriate in giving key

information on their experience in taxation.

Table 4.8 Age Group of the Respondents

Frequency Percent

Valid 19 - 25 years 42 20

26 - 39 years 98 46

Over 40 years 72 34

Total 212 100

35

4.2.6 Response on the level that tax penalties, tax law perception and tax automation

impact tax compliance

According to table 4.6, the respondents were asked to rank their opinion based on the level

that tax penalties, tax law perception and tax automation impact tax compliance. From the

analysis, 35% were in support to great extent, 26% to a very great extent, 25% agreed to a

moderate extent, 8% to a little extent and 6% not supporting at all. The analysis showed

that the stated tax determinates have a higher influence on tax compliance.

Table 4.9 Response on the level that tax penalties, tax law perception and tax

automation impact tax compliance

Frequency Percent

Valid Not at all 13 6

Little extent 17 8

Moderate extent 52 25

Great extent 75 35

Very great extent 55 26

Total 212 100

4.3 Tax Penalties

4.3.1 Tax Penalties and Taxpayers Attitudes Towards Tax Compliance

The study assessments on the individual variables relating to tax penalties and taxpayers

attitudes towards tax compliance showed that consistent application of tax penalties

increases tax compliance, this had the highest mean of 3.87 and standard deviation of

1.103. Having alternative and fair tax penalties does moderate the taxpayers’ attitude and

increases tax compliance as evidenced by overwhelming support with a mean of 3.57 and

standard deviation of 1.088. Statement relating to taxpayers’ knowledge on tax penalties

affecting tax morality and increasing tax compliance had a mean of 3.40 and standard

deviation of 1.181. The probability of a business being audited and detected and charged

36

with tax penalties greatly influences tax compliance had a mean of 3.14 and standard

deviation of 1.407.

Table 4.10 Tax Penalties and Taxpayers Attitudes Towards Tax Compliance

Descriptive Statistics

N Mean S.D Var

Consistent application of tax penalties increases tax

compliance

Presence of alternative and fair tax penalties

moderates taxpayers attitude and increases tax

compliance

Probability of a business being audited and detected

and charged with tax penalties greatly influences tax

compliance

Taxpayers knowledge on tax penalties affects tax

morality and increases tax compliance

212 3.87 1.103 1.216

212 3.57 1.088 1.184

212 3.14 1.407 1.979

212 3.40 1.181 1.396

4.3.2 Tax Penalties and Taxpayers Proper Record Keeping Towards Tax Compliance

Secondly, the result presented the effect of penalties and taxpayers’ proper record keeping

towards tax compliance and established that majority were in support of full disclosure of

business transactions increases tax compliance that had a mean of 3.52 and standard

deviation of 1.470. Assessment relating to having systematic business record keeping

enhances tax computation and increases tax compliance was approved with a mean of 3.44

and standard deviation of 1.279. Statement on the presence of punitive tax penalties to non-

disclosure has increased tax compliance got the support with a mean of 3.43 and standard

deviation of 1.393. Presence of relevant transactions records being used in waiver of tax

penalties hence increasing tax compliance was supported by the respondents with a mean

of 3.28 and standard deviation of 1.246.

37

Table 4.11 Tax Penalties and Taxpayers Proper Record Keeping Towards Tax

Compliance

Descriptive Statistics

N Mean S.D Var

Systematic business record keeping enhances tax

computation and increases tax compliance.

Full disclosure of business transactions increases tax

compliance

Presence of punitive tax penalties to non-disclosure has

increased tax compliance

Relevant transactions records are used in waiver of tax

penalties hence increases tax compliance

212 3.44 1.279 1.636

212 3.52 1.470 2.162

212 3.43 1.393 1.941

212 3.43 1.393 1.941

4.3.3 Do Penalties Lead to Timely Payment of Taxes

The results on penalties leading to timely payment of taxes showed that having tough tax

penalties on late payment of taxes boosts tax compliance with a mean of 3.72 and standard

deviation of 1.187. The assessment on respondents’ view on paying their taxes in due time

to avoid penalties and interest charged had a mean of 3.48 and standard deviation of 1.408

given that those who do not adhere to set taxes dates like VAT, PAYE are penalized. Details

relating to KRA cautions tax defaults in due time to avoid increase in penalties and thus

enhances tax compliance was realistic with a mean score of 3.42 and standard deviation of

1.340. Lastly, statement relating to default in tax payments in due time leads to suspension

of taxpayers’ PIN hence increases tax compliance was rated average with a mean of 2.91

and standard deviation of 1.379.

38

Table 4.12 Do Penalties Lead to Timely Payment of Taxes

Descriptive Statistics

N Mean S.D Var

Tough tax penalties on late payment of taxes

boosts tax compliance

I pay my taxes in due time to avoid penalties and

interest charged.

Default in tax payments in due time leads to

suspension of taxpayers’ PIN hence increases tax

compliance

KRA cautions tax defaults in due time to avoid

increase in penalties and thus enhances tax

compliance

212 3.72 1.187 1.409

212 3.48 1.408 1.982

212 2.91 1.379 1.902

212 3.42 1.340 1.795

4.3.4 Coefficient of Correlations

The study used inferential statistics to compute on the variable association in terms of the

probabilities. This involved computing; correlation, coefficient of determination, Analysis

of Variance (ANOVA) and simple regressions.

Correlation represents the association between the determinant variable and response

variable with a range of plus or minus 1. The analysis in the above table was used to

determine the nature of the association between tax penalties and tax compliance. From the

assessment, it was clear that the correlation between tax penalties and tax compliance was

(r=0.661, p<0.05) indicating a strong positive association.

39

Table 4.13 Coefficient of Correlations

Correlations

Tax Compliance Tax Penalties

Tax Compliance Pearson Correlation 1

Sig. (2-tailed)

N 212

Tax Penalties Pearson Correlation .661** .1

Sig. (2-tailed) .002

N 212 212

**. Correlation is significant at the 0.01 level (2-tailed).

4.3.5 Coefficient of Determination

The coefficient of determination was used to present on the study model of fitness with the

joint significant impact of determinant variable does influence the response variable. From

the table an R of 0.661 was obtained pointing strong positive correlation between the

variables. Further an R Square of 0.437 was established. This implied that 43.7% of the

variation in tax compliance can be explained by tax penalties and the rest 56.3% be

explained by other factors.

Table 4.14 Coefficient of Determination

Model R R Square Adjusted R Square

Std. Error of the

Estimate

1 .661a .437 .187 .34418

a. Predictors: (Constant), Tax Penalties

b. Dependent Variable: Tax Compliance

40

4.3.6 Analysis of Variance (ANOVA)

ANOVA was used to test on the significance of the study variable in the model. The

assessment showed that the p value of 0.00001 was generated which is less than the p value

of 0.05. The calculated p value was less than the estimated p value showing that the model

was statistically significant for the study. Thus, tax penalties are significant predictor of tax

compliance.

Table 4.15 Analysis of Variance (ANOVA)

Model Sum of Squares df Mean Square F Sig.

1 Regression .380 1 .380 3.220 .000b

Residual 24.877 210 .118

Total 25.257 211

a. Dependent Variable: Tax Compliance

b. Predictors: (Constant), Tax Penalties

4.3.7 Simple Regression Model

The analysis showed that tax penalties significantly predicts tax compliance reference to

tax penalties increasing tax compliance by 0.764 units with significance level of 0.000

Table 4.16 Simple regression model

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) 1.334 .530 2.517 .000

Tax Penalties .764 .095 .661 8.042 .000

a. Dependent Variable: Tax Compliance

41

4.4 Taxpayers Perception on Tax Laws

4.4.1 Subjective Norm on Tax Compliance

The study results relating to subjective norm on tax compliance showed that the

government support to personal norms increases tax compliance with a mean of 3.32 and

standard deviation of 1.180. The perceived social pressure on payment of taxes greatly

influences tax compliance had a mean of 3.31 and standard deviation of 1.208. The

respondents agreed that tax policy that is subjective to patriotism enhances tax compliance

which had a mean of 3.26 and standard deviation of 1.161. The response relating to the

government provision of public goods through a social pressure in adhering to tax policy

increases tax compliance with a mean of 3.07 and standard deviation of 1.228.

Table 4.14 Subjective Norm on Tax Compliance

Descriptive Statistics

N Mean S.D Var

Perceived social pressure on payment of taxes

greatly influences tax compliance.

Government support to personal norms increases

tax compliance

Government provision of public goods through a

social pressure in adhering to tax policy increases

tax compliance

Tax policy that is subjective to patriotism

enhances tax compliance

212 3.31 1.208 1.460

212 3.32 1.180 1.391

212 3.07 1.228 1.508

212 3.26 1.161 1.347

4.4.2 Perceived Fairness of Tax Laws

The aspect of perceived fairness of tax laws indicated that tax regime that is not corrupt

greatly influences tax compliance as it was mostly approved by the respondents with a

mean of 3.79 and standard deviation of 1.173. Having a fair and equitable tax system

increases tax compliance was rated with a mean of 3.70 and standard deviation of 1.314,

This assumed the canon of taxation in equality whereby the tax system must be

straightforward and non-technical making it easier in compliance process. Having a

supportive tax policy makes small business to comply in tax payments due to its perceived

42

fairness had a mean of 3.54 and standard deviation of 1.355. Statement referring to the

taxpayers’ willingness to adhere to tax compliance when tax authorities are fair in tax laws

had a mean of 3.47 and standard deviation of 1.287.

Table 4.15 Perceived Fairness of Tax Laws

Descriptive Statistics

N Mean S.D Var

Fair and equitable tax system increases tax

compliance

Taxpayers are willing to adhere to tax compliance

when tax authorities are fair in tax laws.

Tax regime that is not corrupt greatly influences tax

compliance

Supportive tax policy makes small business to comply

in tax payments due to its perceived fairness

212 3.70 1.314 1.727

212 3.47 1.287 1.657

212 3.79 1.173 1.377

212 3.54 1.355 1.837

4.4.3 Taxpayers Education

Taxpayer education showed that majority of the respondents were in support of the idea

relating to continuous public sensitization by KRA on role of taxes is meant to increases

tax compliance which had the highest mean of 4.09 and standard deviation of 0.926.

Statement relating to frequent training by KRA officials on tax matters improves tax

compliance had a mean of 3.63 and standard deviation of 1.048 indicating that information

and understanding technical know-how by the taxpayers is very resourceful towards

enhancing compliance. Assessments on the respondents’ feedback relating to tax education

increases tax knowledge and compliance was moderately supported with a mean of 3.57

and standard deviation of 1.235. Finally, most of the respondents were in disagreement to

the opinion that KRA tax system is easy to understand and boosts tax compliance levels

with the lowest approval mean of 2.80 and standard deviation of 1.307.

43

Table 4.16 Taxpayers Education

Descriptive Statistics

N Mean S.D Var

Continuous public sensitization by KRA on role of

taxes increases tax compliance

Frequent training by KRA officials on tax matters

improves tax compliance

Tax education increases tax knowledge and

compliance

KRA tax system is easy to understand and boosts tax

compliance levels.

212 4.09 0.926 0.857

212 3.63 1.048 1.099

212 3.57 1.235 1.526

212 2.80 1.307 1.709

4.4.4 Coefficient of Correlations

Coefficient of correlation was used to establish the nature of the association between the

independent variable and dependent variable. From the analysis it was determined that

taxpayers’ perception on tax laws had a strong positive association with tax compliance

given (r= 0.608, p < 0.05).

Table 4.17 Coefficient of Correlations

Correlations

Tax Compliance

Taxpayers

Perception on Tax

Laws

Tax Compliance Pearson

Correlation 1

Sig. (2-tailed)

N 212

Taxpayers

Perception on Tax

Laws

Pearson

Correlation .608** 1

Sig. (2-tailed) .005

N 212 212

**. Correlation is significant at the 0.01 level (2-tailed).

44

4.4.5 Coefficient of Determination

Coefficient of determination was calculated to obtain the fitness in variation for the

dependent and independent factors. The assessment indicated that an R square of 0.370 of

variation in taxpayers’ perception on tax laws brings about 37.0% variation to tax

compliance. 63% of the variation is caused by other factors.

Table 4.18 Coefficient of Determination

Model R R Square Adjusted R Square

Std. Error of the

Estimate

1 .608a .370 .133 .24488

a. Predictors: (Constant), Taxpayers Perception on Tax Laws

b. Dependent Variable: Tax Compliance

4.4.6 Analysis of Variance (ANOVA)

The ANOVA F test was used to assess on the significance of the study variables via p value

estimation. From the analysis, a p value of 0.000 was generated which is lower than the

0.05. This indicated that taxpayers’ perception on tax laws is relevant predictor of tax

compliance.

Table 4.19 Analysis of Variance (ANOVA)

Model Sum of Squares df Mean Square F Sig.

1 Regression 3.915 1 3.951 23.659 .000b

Residual 34.977 210 .167

Total 38.892 211

a. Dependent Variable: Tax Compliance

b. Predictors: (Constant), Taxpayers Perception on Tax Laws

45

4.4.7 Simple Regression Model

The simple regression coefficient was computed to find on the unit change for one factor

when holding other factors constant. The analysis showed that taxpayers perception on tax

laws increases tax compliance by 0.143 units with a significance level of 0.001 when

holding other factors constant.

Table 4.20 Simple regression model

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) 1.213 .309 3.926 .000

Taxpayers Perception on

Tax Laws .143 .021 .608 6.810 .001

a. Dependent Variable: Tax Compliance

4.5 Automation of Tax Filing

4.5.1 Cost Reduction

The study result on cost reduction indicated that tax automation simplifies tax

administration and reduces costs of tax reporting therefore improves tax compliance with

a mean of 3.70 and standard deviation of 1.073. Automation of tax filing is less costly and

directly influence tax reporting hence increases tax compliance with a mean of 3.61 and

standard deviation of 1.043. Statement relating to automation of small businesses being

beneficial to the respondents in cutting costs and enhanced compliance registered a mean

of 3.44 and standard deviation of 1.137. Statement relating to tax automation simplifies the

interaction between the revenue body and small scale businesses therefore enhancing tax

compliance recorded the least level of support with the mean of 3.44 and standard deviation

of 1.137.

46

Table 4.21 Cost Reduction

Descriptive Statistics

N SD Mean S.D Var

Tax automation simplifies tax administration and

reduces costs of tax reporting therefore improves

tax compliance

Automation of tax filing is less costly and direct

in tax reporting hence increases tax compliance

Tax automation simplifies the interaction between

the revenue body and small scale businesses

therefore enhances tax compliance

Automation of my business has helped me cut

cost and enhanced compliance

212 2 3.70 1.073 1.150

212 3 3.61 1.043 1.088

212 8 3.44 1.137 1.293

212 5 3.44 1.137 1.293

4.5.2 Time Efficiency

Time efficiency analysis showed that simplification of tax automation being timely and

efficient when filing tax had highest mean of 4.05 and standard deviation of 0.899. It was

clear that tax automation has helped some of the respondents in filing of returns online and

on time with approval mean of 3.98 and standard deviation of 0.986. Statement on tax

automation has allowed businesses to file tax returns in due time within a specified time at

any place had a mean of 3.95 and standard deviation of 1.021. The assessment on tax

automation invoicing that captures time of transaction and being separately computed

easily when due had a mean score of 3.67 and standard deviation of 1.142.

47

Table 4.22 Time Efficiency

Descriptive Statistics

N Mean S.D Var

Tax automation has helped in filing of returns

online and on time

Tax automation has allowed businesses to file

tax returns in due time within a specified time

at any place.

Tax automation invoicing captures time of

transaction that is separately computed easily

when due

Simplification of tax automation is very

timely and efficient when filing tax

212 3.98 0.986 0.973

212 3.95 1.021 1.042

212 3.67 1.142 1.304

212 4.05 0.899 0.808

4.5.3 Ease of Use

The study assessments on ease of use indicated that most of the respondents were aware of

electronic invoicing and acknowledged how it helps in record keeping for tax compliance

with a highest mean of 4.15 and standard deviation of 0.862. The study report on tax

automation and ease of use having increased tax compliance levels had a mean of 4.04 and

standard deviation of 0.958. The respondents’ reviews on KRA being on the forefront to

encourage tax automation and electronic invoicing to enhance ease of tax reporting and

increases compliance had a mean of 3.87 and standard deviation of 1.119. The aspect of

having tax automation and the availability of internet connectivity has eased use of itax

and increases tax compliance had a mean of 3.83 and standard deviation of 1.021.

48

Table 4.23 Ease of Use

Descriptive Statistics

N Mean S.D Var

Electronic invoicing has eased businesses record

keeping and increases tax compliance

Tax automation and ease of use has increased tax

compliance levels

Tax automation and availability of internet

connectivity has eased use of itax and increases tax

compliance

KRA has encouraged tax automation and electronic

invoicing to enhance ease of tax reporting and

increases compliance.

212 4.15 0.862 0.743

212 4.04 0.958 0.918

212 3.83 1.021 1.043

212 3.87 1.119 1.252

4.5.4 Coefficient of Correlations

Pearson correlation was used to assess the nature of the association between tax compliance

and automation of tax filing. The association showed presence of strong positive

correlation of (r= 0.865, p<0.05).

Table 4.21 Coefficient of Correlations

Correlations

Tax

Compliance

Automation of Tax

Filing

Tax Compliance Pearson Correlation 1

Sig. (2-tailed)

N 212

Automation of Tax Filing Pearson Correlation .865** 1

Sig. (2-tailed) .000

N 212 212

**. Correlation is significant at the 0.01 level (2-tailed).

49

4.5.5 Coefficient of Determination

The coefficient of determination was computed to present on the study model of fitness on

the level of impact that determinant variable has to the response variable. From the table

above, an R square of 0.748 was established. This showed that 74.8% of the variation in

tax compliance is influenced by automation of tax filing and 25.2% is represented by other

factors not explained herein.

Table 4.22 Coefficient of Determination

Model R R Square Adjusted R Square

Std. Error of the

Estimate

1 .865a .748 .557 0.19538

a. Predictors: (Constant), Automation of Tax Filing , Taxpayers Perception on Tax Laws ,

Tax Penalties

b. Dependent Variable: Tax Compliance

4.5.6 Analysis of Variance (ANOVA)

ANOVA was used to test on the significance of the study variable in the overall model

used. The assessment showed that the p value of 0.000 was generated which is less than

the p value of 0.05. The calculated p value was less than the estimated p value showing

that the model was statistically significant for the study.

50

Table 4.23 Analysis of Variance (ANOVA)

Model Sum of Squares df Mean Square F Sig.

1 Regression .937 1 0.937 7.045 .000b

Residual 28.006 210 .133

Total 28.943 211

a. Dependent Variable: Tax Compliance

b. Predictors: (Constant), Automation of Tax Filing

4.5.7 Simple Regression Model

The simple regression model was computed to show the relationship that automation of tax

filing has on tax compliance. The analysis showed when having automation of tax filing

process in place increases tax compliance by 1.798 units with a significance level of 0.003.

Table 4.24 Simple Regression Model

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1 (Constant) 1.491 .530 2.813 .000

Automation of Tax Filing 1.798 .195 .865 9.221 .003

a. Dependent Variable: Tax Compliance

4.8 Chapter Summary

The chapter presented the study findings based on demographic and descriptive analysis

that are organized as per the study objectives. The mode of data presentation and analysis

was relevant to the study in bringing out the nature of the association among the study

variables and the level of rank relating to the respondents’ approval or disapproval in the

51

chapter development. The succeeding chapter presents the study summary, discussions,

conclusions and recommendations. The next chapter presented the discussion, conclusion

and recommendations that are independently developed and linked to preceding chapters.

The summary of the chapter five briefly captured on the demographic information,

descriptive findings and inferential analysis. Tax penalties, taxpayers’ perception on tax

laws and automation of filing were widely discussed with concluding remarks. Finally,

recommendations for improvement were capture to each specific objectives and what needs

to be done in other studies in future.

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CHAPTER FIVE

5.0 DISCUSSION, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction

The chapter gave a study review relating to the discussion, conclusion and

recommendations on matter to do with detailed assessments of the determinants of tax

compliance among small scale businesses in Thika Town. The study summary entailed a

critical link on the findings resulting from tax penalties, taxpayers’ perception on tax laws

and automation of tax filing.

5.2 Summary

The study topic aimed at assessing the determinants of tax compliance among small scale

businesses in Thika Town. Throughout, the study adopted an explanatory research design

and incorporated research questionnaires that addressed on the issues to do with; what are

the effects of tax penalties on tax compliance among small scale businesses in Thika

Town?; how taxpayers’ perception on tax laws affects tax compliance among small scale

businesses in Thika Town?; how automation of tax filing affects tax compliance among

small scale businesses in Thika Town? The study sampled 212 respondents who

represented 71% of the total sample size who did provide their information on the

questionnaires distributed with a tally of 51% being males while 49% were females.

Referring to Mugenda (2012), in a study involving use of questionnaires as a primary

model for data collection with a response rate of above 70% indicates a distinction and

excellent assessment of the study results.

The respondents’ demographic information showed that majority were diploma and other

professional qualification which stood at 29% reaffirming on the respondents’ knowledge

in things to do with tax compliance. Most of the respondents indicated of having been in

small scale businesses for a period of 3 to over 10 years as cumulatively represented by

78% giving a stand for them to have more interactions with KRA departments. The

assessment on the age group of the respondents indicated that majority were of the age

bracket of 26 – 39 years represented by 46%. Evidently, the response rate on the level of

53

tax penalties, tax law perception and tax automation on tax compliance showed a greater

recognition to the stated objectives.

The study assessments on tax penalties and tax compliance was presented of which

statement relating to consistent application of tax penalties increases tax compliance

toppled the list with a mean of 3.87 and standard deviation of 1.216. The correlation

between tax penalties and tax compliance showed a significant positive association with r

= 0.661 p>0.005. Evidently, when holding automation of tax filing and taxpayers’

perception on tax laws constant, tax penalties will increase tax compliance by 1.05 units

with significance level of 0.000

Taxpayers perception on tax laws and its influence on tax compliance was presented with

the highest level of support skewed to continuous public sensitization by KRA on taxes

increases tax compliance, the assessment had a mean of 4.09 and standard deviation of

0.926. Taxpayers perception on tax laws had a strong positive correlation to tax compliance

with r = 0.608 and p > 0.005. When holding tax penalties and automation of tax filing

constant, tax payers’ perception on tax laws will increase tax compliance by 0.52 units with

significance level of 0.002.

Automation of tax filing was established with a descriptive analysis whereby the aspect of

electronic invoicing has eased business record keeping and increased tax compliance was

favorable with a mean of 4.15 and standard deviation of 0.862. There was strong positive

correlation between automation of tax filling and tax compliance with r = 0.865 and

p>0.005. When holding tax penalties and taxpayers’ perception on tax laws constant,

automation of tax filing increases tax compliance by 0.55 units with a significance level of

0.014.

5.3 Discussion

5.3.1 Tax Penalties

The study assessments on tax penalties and tax compliance was presented of which

statement relating to consistent application of tax penalties increases tax compliance

toppled the list with a mean of 3.87 and standard deviation of 1.216. The correlation

54

between tax penalties and tax compliance showed a significant positive association with r

= 0.661 p>0.002. Evidently, when holding other factors constant, tax penalties will increase

tax compliance by 0.764 units with significance level of 0.000.

Evidently, the researcher obtained other relevant information to the context of tax penalties

of which punitive measures are within the jurisdiction of law for civil or criminal cases.

Small scale business owners will tend to adhere to stipulated time frame that most

acknowledged of having tax calendars for VAT, PAYE, income tax given that the case of

late filing of tax returns attracts a penalty of 5% of the tax due or Ksh 20,000 whichever is

higher and late payments of taxes leads to a penalty of 20% of the outstanding tax (KRA,

2016). The attention to tax penalties may arise from legal mischief and being seen as unfair

to the taxpayers in comparison to the social class status in the society and alters their

attitudes towards tax compliance. This is exemplified in a study done by Gordon and Wen

(2018) on tax penalties, tax attitudes and fluctuating income on tax compliance where the

taxpayers behavior (positive or negative) may be majorly influenced by the internal and

external factors of tax environment relating to the rate of tax, policies on tax

documentations and record keeping that determines the advantages of evading payment of

taxes, and the possibility of identifying and actions taken in cases of fraud that determine

the costs (Lisi, 2015).

Tax penalty presents a punitive measure that the tax law within a defined national

jurisdiction such as Kenya imposes to her citizens and non-citizens for the performance of

an act that is prescribed to be failure to adhere, present, falsify or perform the needed tax

obligation as required by the state of their jurisdiction (Kamil, 2015). The failure to present

such material information may attract additional charges that are within the defined limits

of scale and imposed to taxpayers in a mandatory model. According to Swistak (2016)

study on tax penalties and SMEs tax compliance showed a positive and significant

correlation. He observed that small and medium businesses must be in consistence to the

applicable tax policy and compliance. This arises on the attention of the nature of the

management in conducting business in a competitive and most rigorous manner in fulfilling

their tax obligations. Further, Swistak (2016) noted that a lot of small businesses are failing

to make stable operations posing a threat to the compliance level on matters to do with the

55

taxation. Mostly, the owners are responsive to their personal, social, cognitive and

emotional factors rather than on the drafted facts and the implication of failing to adhere

to. Contrary he suggested that having tax penalties and indispensable tax enforcement law

isn’t the only mean of ensuring compliance but as a tool to motivate SMEs in tax

compliance.

Similarly, McKee and Vossler (2018) study on behavior and dynamics of tax compliance

among the 700 taxpayers in US showed direct correlation that reaffirmed on the tax liability

uncertainty and tax support when there is breach of tax policies and non-compliance.

Presence of tax penalty to non compliance is meant to instill fear and acts as a resort to

enhance tax compliance among the participants.

Stringent tax penalties are evidenced by having tough laws by the Kenya Revenue

Authority through tax administration meant to enhance compliance and enable government

meet its budgetary obligation. This can only be achieved when there is possession of greater

material knowledge on taxpayers and small business owners by the revenue body to prove

on their policy and work with relevant law enforcers. This was presented in a

Parliamentary Budget Office (2010) indicating that the revenue body lost approximately

Ksh. 79.3 billion if tax evasion and stringent tax law was addressed among the small

business owners. Referring to the (KRA, 2013) it was reported that the amount of the tax

lost was over Ksh 108 billion which was directly attributed to the informal sector involving

small businesses noncompliance.

It was clear that tax penalties charged inform of threats, waivers, cautions, interests due on

default are heavily related to tax evasion that is very possible and the penalties put in place

are very extreme to make the very few citizens think of evading the payment of taxes.

Through the revenue body assessment and different agencies like the auditor’s report may

unearth a lot on the pending issues and the probabilities that the penalties are either

maximum or minimal. The revenue body may adopt different models of taxation like VAT,

PAYE and turnover tax to assess and predict on the lack of compliance with the taxation

system that may attract different rates of penalties to defaulters in a transparent manner as

presented in the study findings.

56

5.3.2 Taxpayers Perception on Tax Laws

Taxpayers perception on tax laws and its influence on tax compliance was presented with

the highest level of support skewed to continuous public sensitization by KRA on taxes

increases tax compliance, the assessment had a mean of 4.09 and standard deviation of

0.926. Taxpayers perception on tax laws had a strong positive correlation to tax compliance

with r = 0.608 and p > 0.005. When holding all factors constant, tax payers’ perception on

tax laws will increase tax compliance by 0.143 units with significance level of 0.001.

Taxpayers’ perception on tax laws was found to be strongly correlated to tax compliance

in that subjective norms in practice, level of fairness and taxpayers’ education were very

relevant. The respondents’ assessments showed that having working administrative tools

and good governance that values heroes and heroines like Eliud Kipchoge showed a great

sense of nationhood (Kasper, Kogler & Kirchler, 2015). Contrary, having unproportioned

practice in the enforcement of tax law and non-recognition to social norms, corruption and

lack of accountability is said to derail patriotism yielding individualistic nature to less tax

compliance as opined by (Emmanuel, 2012).

Tax perception on tax laws that is unfounded presents an eminent threat to the growth of

the economy, derails development and non tax compliance. Reference to Basley and

Persson (2014) examined on the conditionality of developing countries having a tax system

that tax so little. The level of the tax collected often ranges from 10 to 20 percent of the

Gross Domestic Product (GDP) compared to the average for the high income countries that

is above 40 percent. The study significantly examined the essence of tax law and policies

that are essential to developments in low income nations that need strong policies for their

economies to bulge. The assessment involved the ruling class and sampled business owners

who develop weak tax laws that are unfair and disadvantages many in the economy. In

addition, the political structure is entangled in a weak institution with fragmented tax laws

with room for corruption, lack of transparency, non accountability and polarized media.

This results into low compliance level and small and medium scale enterprises are left out

in the policy formulation only to be impacted at the implementation stage.

57

Perceived fairness was found to be among the canons of taxation that best reflects on

equality and the rule of law that is universally applicable to all irrespective of one’s social

status. Clear understanding is needed to address failures to adhere to the tax obligation and

how it is treated under tax law (Brandy, 2015). Relevant information that is an essential

part of the discussion was on the education of the taxpayers given that an economy with

skilled labour, educated business owners are in better position to know what information

and the manner on how to present it in the process of compliance.

Expounding on the scope of public policy on tax laws, offshore centres and tax competition

as envisaged by (Masciandaro, 2017), the study report presented on the financial crime that

has widened as a result of market expansion and increased integration of financial markets

with weak taxation system. Tax policy makers are involved in money laundering, funding

violence and tax crime in their personal advantage rather than the national wellbeing. New

technologies in taxation have reduced physical proximity to major onshore financial

centres and new generation of offshore financial centres have mushroomed making the

level of tax compliance among the business owners to run beyond the revenue policy in

operation and low levels of tax compliance being recorded. This has a directly negative

association to the tax compliance among the businesses that operates in an environment

that lacks clear tax laws.

Different taxes fall in various times and it is important for the taxpayers to be aware of the

steps to follow, what information to provide, how to read terms and conditions and filing

returns with ease. When the economy has many business owners who aren’t aware of what

need to be done, conducts business in informal manner and none or less record keeping are

likely to limit their compliance level. Taxpayers’ education call for concerted information

on when to pay taxes, where to pay, how to pay and why to pay taxes. Specifically, drawing

references on how taxpayers’ education brings in the efficiency as they will make payment

on employment income before 9th day of every month, make VAT payment before 20th day

of every month and understand relevant tax information that is shared.

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5.3.3 Automation of Tax Filing

Automation of tax filing was established with a descriptive analysis whereby the aspect of

electronic invoicing has eased business record keeping and increased tax compliance was

favorable with a mean of 4.15 and standard deviation of 0.862. There was strong positive

correlation between automation of tax filling and tax compliance with r = 0.865 and

p>0.005. When holding other factors constant, automation of tax filing increases tax

compliance by 1.798 units with a significance level of 0.003.

Study findings indicated that automation of tax filing indicated a strong positive association

to tax compliance. The establishment echoed the need to new technologies of invoicing

that are one of cost and gives the value in terms of reducing unnecessary administration

costs when initiating a transaction to when filing taxes. Operating such a process that is

automated generates records and hence reduces the complexities that arises when

combining manual records to arrive at the amount to be paid that compromises tax

compliance (Budak & James, 2018).

Kamman, Appel and King (2019) studied how technology in tax automation as a roadmap

for state and local tax compliance in Zimbabwe. This was as a result of underutilization of

electronic tax filing system among the tax agencies that ended up costing the government

a lot of revenue loss. The study involved questionnaires shared to 50 state corporations of

which the findings indicated that underutilized electronic filing system had negative

correlation towards filing. The study recommended policy changes in assessing tax

obligations that would subject such institutions to large clients through a one system of tax

filing through the use of technology generated systems for electronic filing, electronic

payment so as to curb tax evasion and tax avoidance.

Comparatively, a study presented by TranNam (2016), established that the tax reform and

tax simplification through automation of the Australian businesses was aimed to bring

efficiency in the tax system. The study found out that there was positive association

between tax automation through electronic invoicing and tax simplification that increases

tax compliance. In addition, the study emphasized on ICT skills and tax software in tax

education to the small business owners to enhance tax compliance given that the

59

respondents were those who had been in tax classes and computerized their invoicing.

There is need to have the revenue system being automated which need to be the driving

factor towards enhanced compliance. The Kenya Revenue Authority must be on the

frontline to ensure business automate their transactions for better record keeping and tax

compliance.

Having an automated tax filing process in a business entity brings the convenience of time

of payment as it may be taxed and presented at source when the income is earned or within

the duration of which the obligation falls due (McCluskey & Franzsen, 2017). Business

owners must bring time efficiency in automated tax filing by adhering to the nature and

type of taxes such as PAYE that must be taxed during payment and given to employee as

net and not gross. This supports the foundation of how automation of tax filing becomes

significant to tax compliance.

Lee (2016) presented a study based on electronic tax invoicing as a mechanism for

improving tax compliance in the Korean Republic. This was upon tough policies on all

invoices for value added tax regime for enhanced transparency in business transactions

mandatory. The electronic tax invoicing was adapted to the level of 99.8% of which

businesses were to issue electronic records which was meant to curb tax evasion. The study

findings indicated positive association between electronic invoicing and tax compliance.

The Korean experience demonstrates the credence of a well-planned and mandatory

electronic invoicing towards enhancing tax compliance.

Simplicity as a canon of taxation must be exhibited in automation process that makes it

easier for the taxpayers to use in capturing details, processing payments and filing taxes.

Throughout the assessments, taxpayers acknowledged of having used the itax system that

was designed to be easy when in use by those who have moderate literature. Simplified

process of filing taxes has been the nightmare to some of the taxpayers when compiling

and filing their tax and tax obligations. Serem, Robert and Philip (2017) added their voices

to the role that KRA is doing to have most of the support being online to enhance tax

compliance.

60

5.4 Conclusions

5.4.1 Tax Penalties and Tax Compliance

The assessments of tax penalties were pegged on taxpayers’ attitudes towards tax

compliance, proper business record keeping and whether penalties lead to timely payment

of taxes. The combined factors of tax penalties registered direct association that was

positive and significantly correlated to tax compliance. Thus, the analysis concludes that

the small scale business owners must ensure that they’re in consistent compliance to tax

filing to avoid penalties and other expenses that accrues to their KRA pin status. The

investigation concludes that the business owners must have sufficient and proper records

in place as they are used as evidence in case of errors when filing returns. The revenue

body must communicate on times of tax payment and have a fair judgment to those who

have not obliged to the set policies. This will help to streamline the operations to both

parties and increase on the level of tax compliance among the small scale business owners

who normally have issues with tax records.

5.4.2 Taxpayers Perception on Tax Laws and Tax Compliance

The study examined how taxpayers’ perception on tax laws that was diversely linked to

subjective norms, perceived fairness of tax laws and the taxpayers’ education that had

strong positive association to tax compliance. From the establishment, the inquiry

concluded that government provisions of public goods like roads, electricity, security,

water and policies meant to support small business owners are pillars to total tax

compliance. The research concludes that having fair and equitable tax system automatically

increases tax compliance as there is free will to adhere to the fair demands of tax authority.

The study also concluded that increasing taxpayers’ knowledge through tax education,

public sensitization and friendlier tax systems does enhance tax compliance to greater

extent.

5.4.3 Automation of Tax Filing and Tax Compliance

Presentation of automation of tax filing with consideration to cost reduction, time

efficiency and ease of use had strong positive correlation to tax compliance combined. The

61

subjective assessment concluded that automation of tax filing simplifies tax administration

and greatly reduces operational and reporting costs making tax compliance easier. The

evaluation concluded that having tax automation captures invoices transactions in real time

bringing efficiency to the businesses. Lastly, the analysis concluded that the availability of

internet connection services has played a big role when it comes to automatic generated

documents and online filing of tax returns via the system.

5.5 Recommendations

5.5.1 Recommendations for Improvement

5.5.1.1 Tax Penalties

The assessments of the research indicated that tax penalties and tax compliance gave a

positive correlation. In a business environment where there is applicable rule of law via the

tax penalties, chances of tax compliance increasing is very realistic. Thus, the study would

recommend the revenue body in conjunction with other law enforcement agencies like

Directorate of Criminal Investigation, Anti counterfeit Agency, Kenya Bureau of Standards

(KEBS) to have a concerted effort in having and making sure business owners comply with

the law and are involved in legal business transactions. There is also need to instill a culture

of record keeping and observing time when it comes to making payment and rendering

services.

5.5.1.2 Taxpayers Perception on Tax Laws

Taxpayers perception on tax laws generated a strong positive correlation with tax

compliance showing favorable terms under perception is relevant to increasing tax

compliance. The analysis recommended that the government must value and give

recognition to those who have uplifted the nation in local and global environment. Support

to such individuals gives sympathy to other citizens and brings a sense of concern that is

eventually directed to having the interest of motherland at heart. There is need to have a

tax system that is very fair and taxpayers are educated by recognized institutions on matters

to do with tax compliance.

62

5.5.1.3 Automation of Tax Filing

The research established the existence of positive correlation between automation of tax

filing and tax compliance. The study recommends that business adheres to having their

transactions backed by modern technology that will help them cut costs; they will also be

in a better position to process their transaction very efficient and timely. There is need to

automate tax filing as it enhances on revenue collection of which the revenue body must

partner with small business owners to see how they can capacitate them in a mutual win

scenario.

5.5.2 Recommendations for Further Studies

The present research was based on assessing the determinants of tax compliance among

small scale businesses in Thika with specific consideration to tax penalties, taxpayers’

perception on tax laws and automation of tax filing. The investigation successfully sampled

212 respondents via the use of questionnaires. However, the study was limited to three

determinant variables that might give little information. Thika Town on its own has certain

features that are unique to the rest of other towns in Kenya making it not viable to

generalize the findings with other areas. Therefore, there is need to undertake other studies

related to the same topic with wide considerations to other determinant variables not

included in the current study.

63

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Introductory Letter

Eric Gathungu Mwaura

To The Respondents

Ref: Research Assistance

I am a final year student at United States International University – Africa studying Master

in Business Administration and am carrying out a research project titled “Determinants of

Tax Compliance among Small Scale Businesses in Thika Town.”

I kindly request for your generous participation in filling the attached questionnaires. The

information obtained will be strictly used for the purpose of academic research. The

respondents are guaranteed that the information provided will be treated as private and

confidential.

Yours Sincerely

Eric Gathungu Mwaura

Questionnaire

Kindly answer the following questions by ticking or marking the boxes using (X) or (✓)

in the boxes that match your choices.

Part I: General Demographics

1. Please indicate your gender

Male [ ] Female [ ]

2. Level of education

Primary Certificate [ ] Secondary Certificate [ ]

College Diploma & Professional [ ] University Degree [ ]

Any Other …………………….

3. How long has your business been operational?

1 – 2 years [ ] 3 - 5 years [ ]

6- 9 years [ ] Over 10 years [ ]

4. Which of the following age groups do you belong to?

Less than 18 years [ ] 19-25 years [ ]

26 – 39 years [ ] Over 40 years [ ]

5. To what extent does tax penalties, tax law perceptions and tax automation impact on

your tax compliance?

Very great extent [ ] Great extent [ ]

Moderate extent [ ] Little extent [ ]

Not at all [ ]

Part II: Tax Penalties and Tax Compliance

Please indicate the degree to which you agree or disagree to the following statement on tax

penalties as a factor that influences tax compliance among small scale businesses in Thika

Town. Use the following Likert scale to rate your views whereby; (1) = strongly disagree,

(2) = disagree, (3) = neither agree nor disagree, (4) = agree and (5) = strongly agree

Statement Relating to Tax Penalties and

Tax Compliance

Strongly

Disagree

(1)

Disagree

(2)

Neutral

(3)

Agree

(4)

Strongly

Agree

(5)

1. Consistent application of tax penalties

increases tax compliance

2. Presence of alternative and fair tax

penalties moderates taxpayers attitude

and increases tax compliance

3. Probability of a business being audited

and detected and charged with tax

penalties greatly influences tax

compliance

4. Taxpayers knowledge on tax penalties

affects tax morality and increases tax

compliance

5. Systematic business record keeping

enhances tax computation and increases

tax compliance.

6. Full disclosure of business transactions

increases tax compliance

7. Presence of punitive tax penalties to

non-disclosure has increased tax

compliance

8. Relevant transactions records are used

in waiver of tax penalties hence

increases tax compliance

9. Tough tax penalties on late payment of

taxes boosts tax compliance

10. I pay my taxes in due time to avoid

penalties and interest charged.

11. Default in tax payments in due time

leads to suspension of taxpayers’ PIN

hence increases tax compliance

12. KRA cautions tax defaults in due time

to avoid increase in penalties and thus

enhances tax compliance

Part III: Taxpayers Perception on Tax Laws and Tax Compliance

Please indicate the degree to which you agree or disagree to the following statement on

taxpayers’ perception on tax law and as a factor that influences tax compliance among

small scale businesses. Use the following Likert scale to rate your views whereby; (1) =

strongly disagree, (2) = disagree, (3) = neither agree nor disagree, (4) = agree and (5) =

strongly agree

Statement Relating to Taxpayers

Perception on Tax Laws and Tax

Compliance

Strongly

Disagree

(1)

Disagree

(2)

Neutral

(3)

Agree

(4)

Strongly

Agree

(5)

1. Perceived social pressure on

payment of taxes greatly influences

tax compliance.

2. Government support to personal

norms increases tax compliance

3. Government provision of public

goods through a social pressure in

adhering to tax policy increases tax

compliance

4. Tax policy that is subjective to

patriotism enhances tax compliance

5. Fair and equitable tax system

increases tax compliance

6. Taxpayers are willing to adhere to

tax compliance when tax authorities

are fair in tax laws.

7. Tax regime that is not corrupt greatly

influences tax compliance

8. Supportive tax policy makes small

business to comply in tax payments

due to its perceived fairness

9. Continuous public sensitization by

KRA on role of taxes increases tax

compliance

10. Frequent training by KRA officials

on tax matters improves tax

compliance

11. Tax education increases tax

knowledge and compliance

12. KRA tax system is easy to

understand and boosts tax

compliance levels.

Part IV: Automation of Tax Filing and Tax Compliance

Please indicate the degree to which you agree or disagree to the following statement on

automation of tax filing as a factor that influences tax compliance among small scale

businesses in Thika Town. Use the following Likert scale to rate your views whereby; (1)

= strongly disagree, (2) = disagree, (3) = neither agree nor disagree, (4) = agree and (5) =

strongly agree

Statement Relating to Automation of Tax

Filing and Tax Compliance

Strongly

Disagree

(1)

Disagree

(2)

Neutral

(3)

Agree

(4)

Strongly

Agree

(5)

1. Tax automation simplifies tax

administration and reduces costs of

tax reporting therefore improves tax

compliance

2. Automation of tax filing is less

costly and direct in tax reporting

hence increases tax compliance

3. Tax automation simplifies the

interaction between the revenue

body and small scale businesses

therefore enhances tax compliance

4. Automation of my business has

helped me cut cost and enhanced

compliance

5. Tax automation has helped in filing

of returns online and on time

6. Tax automation has allowed

businesses to file tax returns in due

time within a specified time at any

place.

7. Tax automation invoicing captures

time of transaction that is

separately computed easily when

due

8. Simplification of tax automation is

very timely and efficient when

filing tax

9. Electronic invoicing has eased

businesses record keeping and

increases tax compliance

10. Tax automation and ease of use has

increased tax compliance levels

11. Tax automation and availability of

internet connectivity has eased use

of itax and increases tax compliance

12. KRA has encouraged tax

automation and electronic

invoicing to enhance ease of tax

reporting and increases

compliance.

Thank you