Tax structure, tax service quality and value added tax Compliance among small and medium enterprises in Westlands Subcounty, Nairobi, Kenya

Abstract

Value added tax compliance has remained a challenge, especially when it comes to SMEs operating in Kenya. The high level of informality of this sector provides an incentive for most of the SMEs to evade payment of VAT, situation that has constrained the amount of tax revenues available to finance fiscal budget. For instance, in the financial year 2022/2023, the shortfall between actual and targeted VAT collected stood at Kshs. 24 billion. It is hoped that strengthening of VAT compliance among SMEs in Kenya including those in Westlands would be critical in countering the aforementioned VAT shortfalls between actual and targeted collections. The link between tax structure and value-added tax compliance among small and medium-sized businesses in Westlands Sub County, Nairobi, Kenya, was shown to be moderated by tax service quality, according to this study. More precisely, the goal of this study was to determine how tax service quality affected the relationships between small and medium-sized businesses in Nairobi, Kenya's Westlands Sub County and the probability of detection, tax complexity, tax penalty and sanctions, costs compliance, and value-added tax compliance. The deterrence theory, planned behavior theory, responsive regulatory theory, fiscal exchange theory, and service quality theory served as the study's pillars. Explanatory design was used. A representative sample was selected from each of the four categories based on the type of business activity undertaken by the 261 owners of the aforementioned SMEs, from whom data was collected. The data was gathered via a questionnaire. The outcomes of the data analysis, which included multiple regression analysis and descriptive statistics like means and standard deviations, were shown in tables and figures. Regression of coefficients showed that probability of detection had a positive and significant effect on VAT compliance of SMEs (β=0.358, p=0.000), tax complexities had a negative and significant effect on VAT compliance of SMEs (β=- 0.131, p=0.001), tax penalties had a positive and significant effect on VAT compliance of SMEs (β=0.500, p=0.000) and that costs of compliance had a negative and significant effect on VAT compliance of SMEs (β=-0.134, p=0.005). Further, the findings revealed that tax service quality had an enhancing moderation effect on its relationships with probability of detection (β= 0.086, ρ<0.05) and tax penalties and sanctions (β= 0.094, ρ<0.05), and had a buffering moderation effect on its relationships with tax complexity (β= -0.078, ρ>0.05), cost of compliance (β= -0.052, ρ>0.05) and value added tax compliance. These results demonstrate the significant relationship that exists between value-added tax compliance, tax service quality, and tax structure. The study provided specific policy, managerial, and practice suggestions in light of these findings. To improve VAT compliance among SMEs, policymakers should develop new audit detection technologies that would raise the probability of detection. The research further argues that as the government depends on revenue to carry out its economic and development goals, taxpayers should not be burdened with the responsibility of complying with applicable tax laws and regulations, as this could lead to an increase in non-compliance.