Effect of tax reforms on voluntary tax compliance among small and medium enterprises in Kenya: a case of Nairobi County

A thesis submitted in partial fulfillment of the requirement for the Degree of Master of Commerce at Strathmore UniversityDespite the crucial role played by SMEs in raising tax revenues and the tremendous growth experienced in this sector, the tax gap within this sector is still very high reaching about 33.1% to 35%. This has been attributed to among other factors low voluntary compliance levels. To deal with this trend, the government has over the years instituted various tax reforms. Nevertheless, the impact of these tax reforms on voluntary compliance levels is mixed and hence, this study sought to clarify these findings. The aim of the study therefore, was to assess the effect of tax reforms on voluntary tax compliance among SMEs in Nairobi County, Kenya. The study sought to establish the effect of technological tax reforms on the voluntary tax compliance among small and medium enterprises in Nairobi County, Kenya; to determine the effect of administrative tax reforms on the voluntary tax compliance among small and medium enterprises in Nairobi County, Kenya; to examine the effect of tax payer education reforms on the voluntary tax compliance among small and medium enterprises in Nairobi County, Kenya; to find out the effect of tax policy reforms on the voluntary tax compliance among small and medium enterprises in Nairobi County, Kenya and to establish the joint effect of tax reforms on the voluntary tax compliance among small and medium enterprises in Nairobi County, Kenya. The study covered the reforms undertaken for the period 2008 to 2018. The study was guided by the economic deterrence theory, the Allingham and Sandmo theory and the fiscal psychology models. The study applied a mixed methods research design. The study targeted all the 8983 licensed SMEs within the Nairobi CBD and 27 KRA officials handling tax issues within the Nairobi CBD region. In selecting the sample, simple random sampling and purposive sampling were used. Primary data using semi-structured questionnaires and structured interview guides was collected. The data analysis was undertaken using qualitative and quantitative approaches. A multiple linear regression model was used to show the link between tax reforms and tax compliance among SMEs in Nairobi County. The study findings showed that all the tax reforms had a positive and significant isolated or individual effect on voluntary tax compliance among businesses under study. Results on the combined effect of tax reforms on voluntary tax compliance among these businesses revealed that technological tax reforms, administrative tax reforms, taxpayer education reforms and tax policy reforms had a joint positive and significant effect on voluntary tax compliance among SMEs in Nairobi County. The study therefore concluded that implementation of effective tax reforms simultaneously was likely to improve the level of voluntary tax compliance among SMEs. Several recommendations were made in line with the findings obtained