System automation, tax obligation cost and value added tax compliance among small and medium enterprises in Dagoretti South sub county

Abstract

Actual revenues and expected revenue always differ with large gap margin resulting in lower-than-expected revenue collection. Kenya Revenue Authority has invested in various technological systems to provide a convenient and efficient way to improve revenue collection, transparency in fiscal administration and management of local and national tax authorities. This study’s purpose is to determine the moderating effect of Tax obligation cost on the relationship between system automation and value added tax compliance among small and medium enterprises in Dagoretti south Nairobi, Kenya. The research was guided by four specific objectives: Tax Invoice Management system, Value Added Tax automated assessment, online filing procedure and digital payments on Value Added Tax compliance among small and medium enterprises in Dagoretti South Nairobi County, Kenya. The study was guided by four theories: Ability to pay Theory, Unified theory of acceptance and use of technology and Innovation diffusion theory and Transaction Cost Theory. The study was adopted explanatory design and the target a population was1781 small and medium enterprises Dagoretti South Nairobi. A sample size of 326 was drawn from this population and a response rate of 81% was recorded since 265 questionnaires were correctly filled and submitted. Primary data collection was employed using structured questionnaires. The data was analyzed using descriptive, inferential statistics and multiple linear regression analysis. The study found that there is a significant positive effect of Tax Invoice Management system. Value Added Tax automated assessment. Online filing procedure. Digital payments and VAT compliance (β=0.249, p-value =0.00001100<0.05,) (β=0.267, p-value =0.00013500<0.05) (β=0.133, p-value =0.00013500<0.05) (β=0.045, p-value =0.0431<0.05) respectively. The study further found that there is a negative and significant effect of tax obligation costs on VAT compliance (β= -0.032, p-value =0.00012355<0.05.) The study further found that there is a negative and significant effect of VAT compliance. The study found that tax obligation costs moderates the relationships between Tax Invoice Management system, Value Added Tax automated assessment, online filing procedure, digital payments and VAT compliance (ΔR 2 =0.006, β= -0.010, p-value =0.039855<0.05), (ΔR 2 =0.008, β= -0.160, p-value =0.0000<0.05), (β= -0.127, ΔR 2 =0.0000, p-value =0.00001133<0.05), and (β= -0.034, ΔR 2 =0.0001, p-value =0.0063300) respectively. The study recommends that KRA should enhance and promote the use of TIMS among SMEs. The Government of Kenya should invest in further development and implementation of automated VAT assessment systems to increase VAT compliance. KRA should streamline and simplify the online filing procedure to encourage higher VAT compliance rates. The Government should promote and support the adoption of digital payment methods to enhance VAT compliance. Lastly, the KRA and Government should implement measures to reduce tax obligation costs, such as offering subsidies for tax management systems and providing access to professional tax advisory services. Future research may be conducted to determine the impact of tax reforms on Value Added Tax compliance.