Abstract:
The Kenyan government establishes annual targets for the amount of taxes it intends to
collect in order to settle its debt. The Kenya Revenue Authority (KRA) has however
not met the treasury's targets for revenue compliance in spite of several restructuring
efforts made in recent years to improve revenue compliance. For example, the PAYE
tax revenues for the financial year 2022–2023 were Ksh. 441.60 billion, or 96% of the
objective of Ksh. 459.26 billion, meaning that the target was missed by 17.66 billion.
PAYE tax receipts in 2021–2022 were Ksh. 407.83 billion, similar to the previous
financial year, but Ksh. 7.69 billion, or 98% of the total, fell short of the target. Because
of this, the government is unable to sufficiently meet the requirements of its people,
which include social security, roads, water, healthcare, education, and security. The
study examined Pay As You Earn compliance among small and medium-sized
businesses in Thika, Kenya, and how it is affected by psycho-economic aspects and the
moderating effect of digitalization of tax systems. Specific goals included determining
the impact of tax knowledge, compliance costs, taxpayer impression on small and
medium-sized businesses in Thika town's Pay As You Earn compliance and to ascertain
how the digitalization of tax systems has affected the relationships between taxpayer
perception and Pay As You Earn compliance, tax knowledge and Pay As You Earn
compliance, and compliance cost and Pay As You Earn compliance. Four taxation
theories—the attribution theory, the benefit theory, the Allingham and Sandmo Theory
(AS Theory), and the Technology Acceptance Theory—were used to support the study.
An explanatory sample design was used in the study. The small and medium-sized
businesses with licenses in Thika town were the study's primary focus. In an attempt to
obtain respondents from the sample, the study employed the stratified random sampling
technique. With a sample size of 301 small and medium-sized businesses, the target
population consisted of 1223 small and medium-sized businesses. Primary data were
used in the investigation. Structured questionnaires were used to gather primary data.
The data was analyzed through descriptive analysis, correlation and regression analysis.
Regression analysis was used in the study to validate the psychological, economic, and
digitalization of tax systems as well as income (PAYE) tax compliance. The
hierarchical regression was used to determine the moderating effect of digitization of
tax systems on the relationship between Tax knowledge, Compliance cost Taxpayer’s
perception and Pay As You Earn compliance. The study found that there is positive and
significant effect of tax knowledge on PAYE tax compliance (β1 =0.543, p<0.05), there
is a negative and significant effect of tax compliance costs on PAYE tax compliance
(β2 = - 0.244, p<0.05), and there is positive and significant effect of taxpayer’s
perception on PAYE tax compliance (β3 = 0.244, p<0.05). The study found that
digitization of tax systems moderates the relationship between tax knowledge
compliance costs, taxpayer’s perception and PAYE tax compliance (β5 = 0.529,
p<0.05). (β6 = 0.079, p<0.05). and (β7 = 0.102, p<0.05). respectively. The
recommendations for policy makers and academic institutions were as follows; KRA
should work towards simplifying and streamlining the tax compliance processes,
reducing unnecessary administrative burdens. This could involve revisiting and
simplifying tax regulations, providing clear guidelines, and leveraging technology to
automate routine compliance tasks. KRA should explore ways to minimize these tax
compliance costs by reviewing and optimizing administrative requirements, providing
user-friendly platforms, and offering support services to assist businesses in meeting
their obligations more efficiently. Future research should be carried out to determine
the effect of tax incentives on tax compliance.