EFFECTS OF SIXTH CORPORATE PLAN ON COMPLIANCE
MAUREEN WANJIRU NJOROGE
A research project submitted to the Department of Domestic Taxes Studies in the Kenya School of Revenue Administration in partial fulfilment for the requirement for the award of the Postgraduate Diploma in Tax Administration
DECLARATIONThis proposal is my original work and has not been presented for a post graduate diploma in any other academic or non-institution
Ms. Maureen Njoroge
This proposal has been submitted for examination with my approval as the Supervisor
Mr. Thaddeus Ogwoka
ACKNOWLEDGEMENTFor the good health and sustenance through my life, I thank the Almighty God for His love and mercy.
Special gratitude goes to my beloved parents for their love and support in undertaking my academic courses. May the Lord bless them abundantly. Much gratitude to my colleagues whose insight, guidance and comments shed light greatly to the completion of this study.
LIST OF TABLESTable 1: Definition of SMEs
LIST OF FIGURESFigure 1: Conceptual Framework
ACRONMYITAX – Integrated Tax system
KES – Kenya Shilling
KNBS – Kenya National Bureau of Statistics
KRA – Kenya Revenue Authority
MSEs – Micro and Small Enterprises
MSMEs – Micro, Small and Medium Enterprises
OECD – Organization for Economic Co-operation and Development
SMEs – Small and Medium Enterprises
VAT – Value Added Tax
ABSTRACTIt is important to understand the significance of having well thought out policies established through consideration of taxation canons that help facilitate an optimal tax system in any country. Different Organizations have different approaches to attain their goals of efficiency and effectiveness in their operations. There is an increasing need by the government to collect much revenue by way of taxes to face the increasing financial expenditures budgeted by the country. The aim of the research is to analyse the relationship between corporate policies and compliance. The research project sets out to study the strategic planning practises at the Kenya Revenue Authority (KRA); mainly the Sixth corporate plan of Trust and Facilitation; How its implementation has affected the informal sector Small and Medium Enterprises (SMEs) level of compliance. Theoretical review will focus on Economic deterrence, psychological based theory, the slippery slope framework and the trust heuristic approach. The study will adopt a descriptive research design and the target population comprising of a total of 262 SME business income earners in Mombasa, Kongowea location. A probability sampling design by using a stratified random sampling technique to select a sample size of 126 respondents will be used. The main data collection instruments will be the questionnaires containing both open ended and close ended questions with the quantitative section of the instrument utilizing both a nominal and a Likert- type scale format. A pilot study will also be carried out to test the reliability and validity of the questionnaires. Descriptive statistics data analysis method will be applied to analyse data aided by Statistical Package for Social Sciences (SPSS) to compute responses frequencies, percentage mean and standard deviation results. Finally, Multiple Linear Regression model will be employed to establish the significance of the independent variables on the dependent variable. The findings will be presented using tables and charts.
TABLE OF CONTENT
TOC o “1-3” h z u DECLARATION PAGEREF _Toc495571320 h iACKNOWLEDGEMENT PAGEREF _Toc495571321 h iiLIST OF TABLES PAGEREF _Toc495571322 h iiiLIST OF FIGURES PAGEREF _Toc495571323 h iiiACRONMY PAGEREF _Toc495571324 h ivABSTRACT PAGEREF _Toc495571325 h vCHAPTER ONE: INTRODUCTION PAGEREF _Toc495571326 h 11.1 Background PAGEREF _Toc495571327 h 11.2 Problem of the statement PAGEREF _Toc495571328 h 21.3 Research objectives PAGEREF _Toc495571329 h 31.3.1 General Objective PAGEREF _Toc495571330 h 31.3.2 Specific objectives PAGEREF _Toc495571331 h 31.4 Research questions PAGEREF _Toc495571332 h 41.5 Justification of the study PAGEREF _Toc495571333 h 41.6 Scope of the study PAGEREF _Toc495571334 h 41.7 Limitations of the study PAGEREF _Toc495571335 h 5CHAPTER TWO: LITERATURE REVIEW PAGEREF _Toc495571336 h 62.1 Introduction PAGEREF _Toc495571337 h 62.2 Theoretical Literature review PAGEREF _Toc495571338 h 62.2.1 Economic Based Theories PAGEREF _Toc495571339 h 62.2.2 Psychology Theories PAGEREF _Toc495571340 h 62.2.3 The “Slippery Slope” Framework PAGEREF _Toc495571341 h 72.2.4 Trust Heuristic Approach PAGEREF _Toc495571342 h 72.3 Empirical Literature PAGEREF _Toc495571343 h 72.4 Conceptual Framework PAGEREF _Toc495571344 h 122.4.1 Tax payers’ Attitude and Behaviour PAGEREF _Toc495571345 h 132.4.2 Taxpayers’ Education PAGEREF _Toc495571346 h 142.4.3 Fairness and trust PAGEREF _Toc495571347 h 152.5 Critique of the existing literature PAGEREF _Toc495571348 h 152.6 Summary PAGEREF _Toc495571349 h 162.7 Research Gap PAGEREF _Toc495571350 h 17CHAPTER 3: RESEARCH METHODOLOGY PAGEREF _Toc495571351 h 183.1 Introduction PAGEREF _Toc495571352 h 183.2 Research Design PAGEREF _Toc495571353 h 183.3 Target Population PAGEREF _Toc495571354 h 183.4 Sampling Frame PAGEREF _Toc495571355 h 183.5 Sampling Design and Sample Size PAGEREF _Toc495571356 h 193.6 Data Collection Instruments PAGEREF _Toc495571357 h 193.7 Data Collection Procedures PAGEREF _Toc495571358 h 193.8 Pilot Testing PAGEREF _Toc495571359 h 193.9 Data Analysis PAGEREF _Toc495571360 h 19REFERENCES PAGEREF _Toc495571361 h 21APPENDICES PAGEREF _Toc495571362 h 26APPENDIX 1: Glossary PAGEREF _Toc495571363 h 26APPENDIX 2: QUESTIONNAIRE PAGEREF _Toc495571364 h 27
CHAPTER ONE: INTRODUCTION1.1 Background
Imbedded in corporate policy are the company’s mission statement, objectives and the principles by which strategic decisions are to be made. It also forms the basis for measuring performance and ensuring accountability at all levels of the company.
Corporate planning is designed to help public and non-profit organizations (and communities) respond effectively to their new situations. It is a disciplined effort to produce fundamental decisions and actions shaping the nature and direction of an organization’s (or other entity’s) activities within legal bounds. These decisions typically concern the organization’s mandates, mission and product or service level and mix, cost, financing, management and organizational design. Corporate planning practices were designed originally for use by organizations CITATION Bry11 l 2057 (Bryson, 2011).
The crucial strategic planning practices at Kenya Revenue Authority which are implemented aim at; creating a workforce that adheres to KRA core values and vision; upgrading the work environment to enhance staff morale, efficiency and effectiveness; achieving revenue targets through a revamped enforcement strategy, innovative approaches to enhance collection in sectors with low tax compliance and scaling up compliance within the SME sector; and improving customer service through benchmarking against service delivery standards of upper middle income economies CITATION Mut10 l 1033 (Mutune, 2010) CITATION Wel15 l 1033 (Ngeno, 2015)According to the Sixth Corporate planCITATION Ano15 l 1033 (KRA, 2015) , the main agenda is the process of changing the tax compliance approach to focus more on customer facilitation rather than the traditional enforcement. This re-orientation will focus on building trustful relationships internally (amongst staff) and externally (with citizens) as the key driving forces to sustain tax compliance enhancement in the long term.
The sixth Corporate Plan for the Kenya Revenue Authority primarily aims to increase the client trust worthy, ethical conduct, competence and ensure effective and helpful operation from the taxpayers. The plan aims to embrace technological advancement to improve the level of revenue growth in Kenya. The plan also focuses on the effective and efficient control of the Kenyan borders to improve the custom operation in the regions.
Furthermore, the mission of the sixth plan of the Kenya Revenue Authority seeks to develop a new and an effective approach to the taxpayer tax compliance and engagements in the country. The plan thus focuses on the improvement of both the taxpayer’s level of corporation and the operation of the staff members of the corporation across the country. The plan also pays great attention to the need for the development of the close relationship between the Kenya Revenue Authority, the county governments and the central government of the Republic of Kenya.
In Kenya, SMEs play a key role in economic development and job creation. The term micro and small enterprises (MSEs) or micro, small and medium enterprises (MSMEs), is used to refer to SMEs in Kenya. These SMEs are further categorized into medium-sized companies, small enterprises and micro-enterprises, as indicated in Table 1(see appendix). Small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ fewer than a given number of employees. This number varies across countriesCITATION OEC05 l 2057 (OECD, 2005). Despite SMEs being widely acknowledged, there is no standard definition of SMEs.
Small and Medium Enterprises being profit generating establishments are also expected to pay their dues. The important question however is, how the Kenya Revenue Authority’s sixth corporate plan affects compliance from the SMEs. Small and medium enterprises are volatile establishments that need special treatment. Putting their nature into consideration, every little resource at their disposal can make a world of difference. For this reason, a number of Kenyan SMEs choose to remain in the informal sector because they feel the cost of compliance is too high. And a considerable number of those who pay only do so because they are coerced by the authorities.
1.2 Problem of the statementThe sixth corporate plan of the Kenya Revenue Authority mainly contains four strategic goals. The four priorities of the plan include the enhancement of the revenue mobilization in the country; seeking to improve Revenue collection by enhancing tax compliance, increasing the base of income in the country; to reduce the cases of tax evasion and fraud, and the plan seeks to ensure the development of the corporate intelligence and regulations of the risks associated with the tax collection approaches and fraud measures in the country. Additionally, seeks to increase the level of transparency and fairness among the employees of the Kenya Revenue Authority and the taxpayers (citizens). Its mandate is also to improve and ensure full electronic customer service delivery within the Kenya Revenue Authority.
Taxation is a main source of revenue for public expenditure in Kenya. However, tax revenues have, for quite some time, remained low relative to the number of both registered and non-registered firms and individuals who legally qualify to pay tax. Continued low revenue collection levels for government is detrimental to economic development of the nation. Fortunately, the large registered firms usually pay their taxes. It is no secret that a large segment of the informal sector, especially the SMEs exhibit low tax compliance levels, resulting in great loss of revenues meant for public expenditure. Additionally, despite the compliance measures put in place by KRA to improve compliance, there is no significant effect as there is still untapped revenue. Mombasa comprises of diverse population in which many people fall under the informal (Jua kali) sector where tax compliance is a real issue that needs to be addressed by the revenue agencies.
The non-compliance may be unintentional, where the taxpayer is not aware of his/her tax obligations or fails to fulfill his/her tax obligations due to ignorance of tax laws and procedures or may be intentional due to the compliance attitudes. It is for this reasons that research needs to be undertaken to know the effects that the sixth corporate plan has on compliance from small and medium enterprises. It is also instructive to note that there is little research that has been done in this area.
1.3 Research objectives1.3.1 General ObjectiveTo establish the effects of Kenya Revenue Authority’s sixth corporate plan on compliance from the small and medium enterprises in Mombasa.
1.3.2 Specific objectivesTo investigate whether the taxpayers’ attitude influences compliance behaviour among SMEs
To determine the effect of taxpayers’ education on compliance from SMEs
To establish the effect of fairness and trust concept on compliance among SMEs
1.4 Research questionsHow does taxpayer’s attitudes influence compliance behaviour among SMEs?
What is the effect of taxpayers’ education on compliance from SMEs?
What is the effect of fairness and trust concept on compliance among SMEs?
1.5 Justification of the studyThe study aims at investigating the effectiveness of the 6th Corporate plan on increasing tax compliance practices among SMES to bring about overall revenue productivity.
The results of the study can greatly help the KRA who will be able to have information that will guide it to improve on the Seventh Corporate Plan, as the goal of tax administration is to continue with their quest for the country to be independent financially; develop policies that will help enhance tax compliance amongst SMEs and possibly improve its literacy campaigns to improve taxpayers’ ability to understand tax laws for example rates of tax, filing and paying dates, and improve peer attitude i.e. a belief that neighbors are reporting and paying tax honestly.
The government will be able to understand the structural requirements and legislation needed to improve the necessary infrastructure to support SMEs. It will help the government demystify that tax is not a punishment to its people but an obligation.
In conclusion, Researchers will find the findings of this study important as it will act a reservoir of knowledge for further research by add more insight into the relationship between corporate policies and compliance.
1.6 Scope of the studyThe study will focus on all sampled 126 micros, small and medium business income earners and how their operations affect the compliance level. This study will be carried out in Mombasa region.
1.7 Limitations of the studyTime will be a limiting factor for this research therefore adequate time that is required especially in the collection of data. Inadequacy of data from SMEs to be used to answer the research objectives sufficiently especially those who don’t keep proper accounts. Limited resources on the part of the researcher is also another limitation. The researcher lacks adequate funding for conducting the research.
CHAPTER TWO: LITERATURE REVIEW2.1 IntroductionThis chapter reviews the existing literature on the effects of KRA’s sixth corporate plan on compliance by different authors and scholars. The chapter presents the theoretical and empirical literature review and later a summary.
2.2 Theoretical Literature review
There are numerous views that exist about the best ways to improve tax compliance. Tax compliance theories classifications include; Economics based theories and Psychology based theories. Regardless, various scholars have proposed different approaches that affect tax compliance. These theories include the Slippery slope approach and Trust heuristic approach.
2.2.1 Economic Based TheoriesThis theory referred as Deterrence Theory places emphasis on incentives. The theory suggests that taxpayers are amoral utility maxi misers – they are influenced by economic motives such as profit maximization and probability of detection. As such, they analyse alternative compliance paths for instance whether or not to evade tax, the likelihood of being detected and the resulting repercussions and then select the alternative that maximizes their expected after-tax returns after adjusting for risk. This process is referred to as “playing the audit lottery” (Trivedi and Shehata, 2005). Therefore, in order to improve compliance, audits and penalties for non-compliance should be increased.
2.2.2 Psychology TheoriesPsychology theories states that taxpayers are influenced by psychological factors to comply with their tax obligations. They focus on the taxpayers’ morals and ethics. The theories suggest that a taxpayer may comply even when the probability of detection is low. As opposed to the economic theories that emphasize increased audits and penalties as solutions to compliance issues, psychology theories lay emphasis on changing individual attitudes towards tax systems.
2.2.3 The “Slippery Slope” FrameworkKirchler, Hoelzl, and Wahl (2008) proposed a related idea in the “slippery slope” model. Their approach is based on the interaction between taxpayers and authorities, and distinguishes enforced and voluntary compliance. Whereas enforced compliance is determined by how taxpayers perceive the power of authorities to prosecute and punish them, voluntary compliance can be achieved if the taxpayers perceive authorities as trustworthy and benevolent. Hence, in a climate where trust in authorities is low, a tax policy based on audits and fines is effective. In a climate of trust, however, tax morale, perceived fairness of the tax system, tax knowledge and social norms are important to foster compliance.
2.2.4 Trust Heuristic ApproachThis model assumes that individuals comply with legal obligations provided that the state is trustworthy and that other individuals, faced with the same obligations, comply with them too CITATION Jul03 l 1033 (Étienne, 2010/3).
The “trust heuristic” can provide the basis for a contingent compliance strategy capable of sustaining cooperative solutions to collective action problems of governance if two conditions are met. First, compliance with laws must be conditional on levels of trust in specific legal arenas. Second, a citizen’s trust in government and trust in other citizens’ willingness to obey the law must reflect the costs and benefits associated with obeying laws CITATION Sch88 l 1033 (Scholz ; Lubell, Trust and Taxpaying: Testing the Heuristic Approach to Collective Action, 1998).
2.3 Empirical Literature
A vast majority of studies have been conducted in developed nations like Europe, Australia, and the United States concerning Tax compliance. However, far fewer studies done often in developing countries and no research in developing countries has integrated deterrence-based and social-psychological perspectives on tax compliance. Yet the tax environment in many developing countries differs in important ways from those in Europe and the US. In developing countries, taxpayers usually do not see paying taxes as a contribution towards building common public goods, but rather as a burden imposed on them by government (Ali, Fjeldstad, ; Sjursen, 2013; Mutune, 2010; Asaminew, 2010; Kimeli, 2008).
Brondolo (2009) conducted a study on the challenges facing tax collection and strategies measures for responding to the challenges among European Union countries during the global financial and the study posited that an economic downturn tends to worsen taxpayer compliance in important aspects. Consequently, tax agencies were encouraged to develop tax compliance strategies that are structured around two objectives: containing the growth in noncompliance and helping taxpayers to cope with the crisis. To achieve these objectives, four sets of measures were identified: expanding assistance to taxpayers; refocusing enforcement on the highest revenue risks; introducing legislative reforms that facilitate administration; and improving communication and outreach program.
In South Africa, studies conducted by an economy watchdog on tax burdens on small and medium enterprises revealed that tax requirements procedures acted as stumbling blocks on tax compliance. This is because complying with taxes tended to swallow up the resources that the SMEs could devote to more economical running of these businesses. A majority of SMEs experience their tax liability as an increasing burden since they lack enough skilled staff to handle tax compliance issues and are therefore, forced to incur “extra” tax costs. Most SMEs do not even recognize the tax incentives and services available to them. The study also noted that changes in tax policies sometimes result in an even more complex tax system. A clear finding was that elaborate tax incentive schemes that require sophisticated systems and skilled staff would often result in increasing compliance costs rather than provide real tax relief. As a result, small businesses (and probably other taxpayers as well) would prefer simple cuts in tax rates and penalties (OECD, 2010; 2005; Ojochogwu ; Ojeka, 2012; Brautigam, Fjeldstad, ; Moore, 2008; Awa ; Ikpor, 2015).
Palil ; Mustapha (2010) studied the tax Knowledge and tax Compliance determinants in Self-Assessment System in Malaysia. He concluded that in the self-assessment system in Malaysia, tax knowledge has a significant impact on tax compliance and the level of tax knowledge varies among respondents. Males, Malaysian, residents of Eastern region, high income earners and taxpayers who have attended tax courses appear to be the most knowledgeable taxpayer groups. The results also indicate that tax compliance was influenced by probability of being audited, perception of government spending, penalties, personal financial constraints, and referent group. These results were validated through a multiple method of questionnaires (direct and hypothetical questions) and analysis (stepwise multiple regressions and multiple regressions)
Mutascu ; Danuletiu (2013) investigated the relationship between tax revenues and literacy level, using a panel model approach in Romania. The data set covered the period 1996 to 2010 and included 123 countries. The estimations suggested that the assumed function is nonlinear, with Inverted-U and U-shaped curves. More precisely, a very low literacy level was associated with reduced tax revenues. Furthermore, the government inputs increase as the literacy level increases, reaching a maximum point. Beyond this level, the tax revenues decrease even if the literacy has an ascendant tendency, registering a minimum level. Finally, the tax revenues increase in a parallel manner with the literacy index.
Cvrlje (2015) investigated the effects of tax literacy as an instrument of combating and overcoming tax system complexity, low tax morale and tax non-compliance in Croatia. Tax literacy in the financial dimensions possesses specific tax oriented financial knowledge on accounting and numeracy skills, required for managing tax calculations. Tax literacy was intended to help individuals receive information about taxes, to explain those taxes within a domestic system as well as regional and international system. The aim of this paper was to stress out that the complexity of the taxation system as well as some other problems like those that low tax morale and low tax compliance might be combated through promotion and implementation of tax literacy initiatives and programs. By acquiring basic knowledge of taxation and public expenditures, individuals become able to efficiently manage their personal finances and understand the basic logic of possible effects of fiscal policy. On the other side, if individuals are not taught the basic concepts of taxation, and never acquire needed numeracy skills, they might be more prone to problems like indebtedness or non-compliance of their tax obligations.
Furnharn (1983) noted that the taxpayer’s behaviour may be influenced by many factors, which are brought about by their attitudes. These factors are many and differ from one individual to the other and from one county to the other. They include: cost of compliance, the general taxpayers perceptions of the tax system, motivation such as reward, perceived behavioural control and Protestant work ethics, taxpayers’ understanding of a tax system/tax laws, ethics/morality of the taxpayer and tax collector, enforcement efforts such as audit, demographic factors such as sex, age, education, use of informants, and equity of the tax system.
Mararia (2014), examined the effect Integrated Tax Management System (ITMS) of the year 2007 on tax compliance by Medium and Small Taxpayers. The researcher identified the variables for this research to be Tax compliance, Tax compliance cost, Tax knowledge and education and perceived fines and penalties. The target population of comprised of 200 taxpayers. A total sample size of 100 was selected. A descriptive survey design was used and random sampling technique to create a sampling frame. Data is collected using self–administered questionnaires and an interview guide. The study findings provided direct evidence that Adoption of integrated tax management system is a contributory factor in tax compliance. From the study findings, there was enough proof to conclude that Adoption of integrated tax management system is associated with high levels of tax compliance. The study also provided evidence that tax compliance cost, Tax knowledge and Education, and tax fines and tax payer attitude and behaviour are contributory factors in tax compliance. Lastly, to enhance tax compliance governments should enhance Adoption of E filing systems such as integrated tax management system, reduce tax compliance costs and enhance tax fines and penalties as well as tax knowledge and education.
Wasao (2014) investigated the effects of online filing system on tax compliance among small taxpayers in East of Nairobi Tax District. The objective of the study was answered using three research questions that revolved around online tax registration, online tax filing and online tax remittances, and how each was affected by online system in order to enhance compliance. The study adopted quantitative and descriptive methods and data was collected using a structured questionnaire and a sample of 160 respondents. The study findings established that online system do affect tax compliance level among small taxpayers in East of Nairobi as far as registration, filing and payments were concerned. The study recommended that a further study should be done to establish how online system not only affect compliance in mines and minerals sector but also other tax districts of small taxpayers, which are considered more/less, advanced than East of Nairobi Tax District.
Kanyi (2014) examined the reform efforts of the country with respect to revenue generated, and reviewed the strengths and weakness of the tax system as it has evolved over the years from 2003/2004 to 2012/2013. The primary objective was to evaluate the effects of Tax Policy Reforms on Tax Revenue in Kenya while the specific objectives of the research study were to establish the relationship between domestic taxes policy reforms and tax revenue in Kenya and to determine the effects of customs policy reforms on tax revenue in Kenya. The methodology used was a correlation study design. From the results, regression model of Total tax revenue on, Domestic Taxes and Customs showed that all the coefficients of the model were positive and significant at 5% level of significance. Therefore, Total tax revenue can be predicted using Domestic Taxes and Customs Duty.
Spicer and Lundstedt (1976) pointed out that also self-employed taxpayers have more possibilities to avoid taxes than employed taxpayers do. However, self-employed taxpayers have also more opportunities for tax evasion and opportunities might further increase with the number of different income sources. Hence, in compliance decisions the level of income might interact with its source. Kirchler, Muehlbacher, Hoelzl, ; Webly (2009) have studied a different aspect of the income source if earned by hard work or an effortless job – in experiments. Participants were less compliant when they reported income earned by low effort than when they reported hard-earned income. It seems that taxpayers are reluctant to lose their hard-earned money by “gambling” with tax authorities.
Vogel (1974) demonstrated the importance of how one’s economic status affects tax compliance. Taxpayers who reported improvement of their economic status were less compliant than others who reported deterioration of their financial well-being. A positive relation of SMEs income and tax compliance also found empirical support. Other studies found no relation of income level and tax compliance. Warneryd & Walerud (1982) and Porcano, (1988) concluded that Self-reported compliance behaviour was not related to income among Swedish and American taxpayers. Collins and Plumlee (1991) also found decreased compliance among participants with higher income. Fishlow and Friedman (1994) found decreased compliance at low income-level SMEs in archival empirical data from Argentina, Brazil and Chile, three countries with low economic growth and high inflation rates.
Slemrod (1985), who analysed archival data from the United States’ Treasury tax file for 1977, reported a negative relation of income earned by SMEs and tax compliance. Consistently, Weck-Hannemann and Pommerehne (1989) found lower compliance among high income earning SMEs in archival data on Swiss taxpayers. Baldry (1987) manipulated participant SMEs income (among other variables) and found lower compliance at higher income-levels.
Another factor affecting compliance by taxpayers is the concept of Trust. Trustworthiness in compliance context refers to willingness of a citizen to obey laws despite the temptation to free ride CITATION Tru l 2057 (Scholz, Trust, Taxes and Compliance, 1998). Without trust, there is little basis for social cooperation and voluntary compliance with laws that could potentially benefit everyone; thus deterrence/economic based theory providing a reasonable guide for governance.
According to Carter ; Weerakkody (2008), there are two objects of trust. First, one must trust the entity providing the service. Secondly, one must trust the mechanism through which the service is provided (Tan and Theon 2001). Hence, E-government users should evaluate the characteristics of the government agency and characteristics of the underlying technology before using an electronic-service CITATION Pav03 l 1033 (Pavlou, 2003). Therefore, trust in e-government has two components: trust in a specific entity (trust of the government) and trust in the enabling technology (trust of the Internet) (Carter and Belanger 2005; Pavlou, 2003).
According to Shapiro (1987), institution based trust is essentially trust in the Internet: trust in the security measures and performance structures of this electronic medium. E-government adoption is dependent upon citizens’ belief that the Internet is a reliable technology. Warkentin, Gefen, Pavlou, & Rose (2010) state that trust in the agency has a major impact on the use of a technology. In order to support e-government initiatives, citizens must believe government agencies possess the technical skills necessary to execute and secure e-government systems. Transparent, accurate, reliable interaction with e-government service providers will augment citizen confidence and acceptance of e-government services.
2.4 Conceptual FrameworkThe study conceptualizes that the level of attitude of the taxpayers towards tax systems (independent variable) had a direct and positive influence on the compliance (dependent variable). The more positive the attitude of the taxpayers towards taxation, the more the tax compliance behaviour; while more negative the attitude of the taxpayers towards the tax system, the less the tax compliance behaviour.
Figure 1 illustrates the interaction between the independent variable and dependent variable
Independent VariableDependent Variable
-1905026035Taxpayers’ attitude and behaviour
Fairness and Trust
Relationship between taxpayers and tax authority
Understanding of taxation/Tax systems
00Taxpayers’ attitude and behaviour
Fairness and Trust
Relationship between taxpayers and tax authority
Understanding of taxation/Tax systems
2.4.1 Tax payers’ Attitude and Behaviour
Taxpayers’ willingness to pay taxes differs widely across the world. It cannot be viewed as simply depending on the tax burden. Rather, empirical research indicates that taxpayers throughout the world pay more taxes than can be explained by even the highest feasible levels of auditing, penalties and risk aversion CITATION Alm07 l 1033 (Alm & Martinez-Vasques, 2007). These high levels of tax compliance result from the tax morale of society that fosters self-enforcement of tax compliance. Tax morale, attitude and behaviour is, however, not easy to establish. Countries especially without a deep-rooted ‘culture’ and habit of paying taxes find it difficult to establish tax morale. In general, citizens expect some kind of service or benefit in return for the taxes paid. If the government fails to provide basic public goods and services o provides them insufficiently, citizens may not be willing to pay taxes and tax evasion and avoidance will be the consequence CITATION Bra08 l 2057 (Brautigam, Fjeldstad, & Moore, 2008)Some studies suggest that high tax rates foster evasion. The intuition is that high tax rates increase the tax burden and, hence, lower the disposable income of the taxpayer (Chipeta, 2002). However, the level of the tax rate may not be the only factor influencing people’s decision about paying taxes. In fact, the structure of the overall tax system has an impact as well. If, for example, the tax rate on corporate profits is relatively low, but individuals are facing a high tax rate on their personal income, they may perceive their personal tax burden as unfair and choose to declare only a part of their income. Similarly, large companies can often more easily take advantage of tax loopholes, thereby contributing to the perceived unfairness of the system. Tax rates and the overall structure of the tax system, therefore, have a significant effect on the disposition to evade and avoid taxes.
2.4.2 Taxpayers’ Education
This means the ability of taxpayers to understand tax laws. This criterion calls for a tax system that is simple enough to enable the payer to compute his own liability, to avoid administrative difficulties associated with determining the taxable income and the tax liability. A simple tax per head for all organizations would for example comply with this criterion.
Prior to a tax return being accepted for filing, a tax inspector pre-reviews the tax return for “accuracy” and may provide “advice” to the taxpayer. The same tax inspector may then “assess” the tax liability, subsequently be responsible for collection of any unpaid amount, and even determine if a control visit is necessary. The close relationship where the tax inspector is responsible for a specific group of taxpayers can easily lead to corruption CITATION Bau05 l 2057 (Baurer, 2005). Since the introduction of i-Tax system, an automated tax system, a taxpayer is able to self-assess their tax liability i.e. the tax return is accepted, making them accountable and expected to make timely payments based on the assessments.
Finally, tax laws and changes in the workforce in many countries, especially in developing countries, changes rapidly, thus producing instability and low transparency of the tax code. As a result, complicated tax legislation and ongoing changes of the tax code confuse tax administrators and taxpayers alike. This produces many opportunities for tax avoidance and non-compliance. Furthermore, it results in tax evasion, which is not intentional, but occurs due to lack of knowledge ignorance. In extreme cases, tax evasion and avoidance even become inevitable when the tax system becomes too complex and/or contradictory to follow (Mo, 2003).
2.4.3 Fairness and trustFairness and trust are perceived by many researchers to be an important driver for compliance. Valerie Braithwaite points out the importance of mutual trust and cooperation between the taxpayers and their tax authority in order to achieve voluntary compliance (Braithwaite, 2008). Kirchler and Hoelzl (2006) argue that fair treatment of taxpayers and trustworthiness of tax authorities will enhance voluntary compliance.
Murphy (2004) shows in a study of accused tax avoiders that there is a correlation between fair and correct treatment of the taxpayer and trust in the revenue body. Trust, is in turn correlated to the willingness to comply. If regulators are seen to be acting fairly, people will trust the motives of that authority, and will defer to their decisions voluntarily. Fairness and trust are thus interlinked and the one cannot exist without the other.
Fairness and trust therefore also provide an explanation about why most people comply with tax laws and why some are motivated to evade taxes. Generally, a positive effect of perceived fairness in tax related affairs is found, meaning that perceived fairness will strengthen tax compliance.
2.5 Critique of the existing literatureMusya, (2014) undertook a study to examine the part played by internal control system in the collection of revenue by county governments in Kenya. The study hence failed to show the major challenges facing revenue collection at KRA. A study conducted by Okoth (2009) sought to find out, the extent to which revenue is collected and utilized at Kakamega Municipal council. The study however was carried out in Municipal Council and hence it was limited in scope. Further study is required to determine the challenges affecting revenue collection in large organization like KRA.
A study by Kuria & Omboi (2016), noted that Kenya’s tax system was not favourable to small businesses and also not fair compared to the tax systems of other countries, but he failed to show address taxpayers’ concerns about fairness and how it links with attitudes and behavioural intentions about tax compliance.
A study by Ndunda (2015) established how competence of revenue clerks and tax compliance influence optimal revenue collection. However, the study was only narrowed to employee’s competency and therefore did not explore all the major challenges that affect revenue collection at KRA. A more comprehensive study is hence required to analyze other challenges that affect revenue collection at KRA.
A country’s tax administration is one of the few public-sector organizations which touches the lives of a country’s citizens and businesses on a daily basis and, arguably has the greatest impact on their livelihood. Tax administration employees are amongst the most frequently contacted government officials and often represent to the public what is right or wrong about their government. The responsiveness, integrity, and quality of tax administration staff must therefore meet a very high standard. Revenue collected from taxes along with customs collections represents the major funding source for governmental expenditures. An effective and efficient tax administration system is integral to any country’s well-being. The proper amount of tax must be collected in a timely manner and the enforcement powers of the tax administration must be applied judiciously and in an even-handed fashion. The tax administration must provide an even playing field for business by ensuring that all taxpayers meet their tax filing and paying requirements. This requires significant efforts to deal with the underground economy and to, therefore, increase the tax base. Failure to bring business activity from the shadow economy into the tax system puts compliant taxpayers at a competitive disadvantage, and ultimately leads to an erosion of the tax base. The tax administration must balance its educational and assistance role with its enforcement role. The overriding goal is to foster on the revenue collection by the authority. This represents a significant challenge in a developing economy.
2.7 Research GapResearches have made great contributions from other corporate plans on other sectors of the economy, but on how they affect the compliance from the small and medium enterprises still needs to be adequately dealt with. Consequently, this raises another question of; “what are the effects of Kenya Revenue Authority’s sixth corporate plan on compliance from the small and medium enterprises?”
CHAPTER 3: RESEARCH METHODOLOGY3.1 Introduction
In this chapter, there is an outline of the research methods used, site of the study, target population, sample size, sampling technique, data collection and analysis. The objective consists of examining the way in which the level of compliance is affected by SMEs understanding of KRA’s Sixth Corporate Plan of Trust and Facilitation. The research attempts to investigate the concept of Trust and Facilitation, provide a picture of the characteristics of the SMEs, the factors affecting compliance, and the different levels of understanding of KRAs systems being used.
3.2 Research DesignThe study adopts a descriptive survey research design approach. The descriptive survey describes and explains the events as they are in the real life context in which they occurred. It would involve investigating the existing phenomenon by asking individuals about their perception, attitudes and level of understanding of taxation and the tax system to gauge SMEs levels of compliance.
3.3 Target PopulationThe study will be conducted within Mombasa City County, around Kongowea area. The study involves informal interaction with the local vendors and business owners from various establishments. Kongowea has about 262 SMEs’. This research will target 126 SMEs’ who have actively been in their areas of business for the last 5 years.
3.4 Sampling FrameSampling frame is the source material or device from which a sample is drawn. The main source of the population used is the 2016 Distribution of licensed Micro Small and Medium Establishments by County from the Kenya National Bureau of Statistics(KNBS) and the Mombasa City County website.
3.5 Sampling Design and Sample Size
The research will involve a stratified random sampling method to select participants purposefully to gain the answers to research questions. This will be done using population classification provided in the Mombasa City County website. This study therefore targets wholesale and retail traders’, restaurants/hotels and local parlours (e.g. salons). Sample size for this study is determined using Yamane formulae as follows;
n = N/ 1+ N (e2)
Where, n = the sample size, N = the population size, e= the error of 5 percentage points
*95% confidence level and p=0.5 are assumed
3.6 Data Collection InstrumentsIn this study, primary data is going to be used. Primary data will be collected by use of self-administered questionnaires and conducting interviews.
3.7 Data Collection Procedures
The questionnaire will be structured, open ended and closed ended which will be distributed and then picked later within three days. The interview will be done upon agreed scheduled time with the respondents.
3.8 Pilot Testing
Various authors have described pilot study as an exercise that ensures that errors are restricted at a very little cost. Kothari (2004) describes a pilot survey as a replica and a rehearsal of the main survey. To test the instruments reliability, the test-retest method will be used. The pre-testing will be conducted to assist in determining the accuracy, clarity and suitability of the research instruments. To ensure validity the researcher will engage the project supervisor and other experts who are familiar with the topic.
3.9 Data Analysis
The collected data will be sorted and summarized in tables and charts. Data analysis will involve editing for completeness and consistency; analysing the responses from the questionnaires to respond to the research objective.
The data will then be analysed, interpreted, conclusions drawn and recommendations made. The summaries of the analysed data will be done using descriptive statistics, correlations, and linear regression analysis. This was achieved through the use of statistical packages for social scientist (SPSS) and MS Excel to generate frequency distributions and percentages to assist in answering the research questions. The analysis sought to answer research questions and explain the nature and strength of associations between the dependent and independent variables.
The multiple regression model to be applied forms;
Y= Compliance (Dependent Variable)
X1 = Taxpayers’ attitudes and behaviour (Independent Variable)
X2 = Taxpayers’ education (Independent Variable)
X3 = Trust and fairness (Independent Variable)
?0 = constant of regression (Independent Variable)
? -the stochastic error term
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APPENDICESAPPENDIX 1: GlossaryTable 1: Definition of SMEs
Category Micro-enterprise Small enterprise Medium Enterprise
General Annual turnover does not exceed KES 500,000;
Employs less than 10 people;
Annual turnover ranges between KES 500,000 and KES 5 Million;
Employs more than 10 but less than 50 people;
Annual turnover ranges between KES 50 Million and 800 Million;
Employs between 50 and 99 people;
Manufacturing where the investment in plant and machinery or the registered capital of the enterprise does
not exceed KES 10 Million;
Investment in plant and machinery as well as the registered capital of the enterprise is between KES 10 Million and 50 Million Shillings *Not specified
Services, primary agriculture/Farming and Information and Communication Technology (ICT) Investment in equipment or registered capital of the enterprise does not exceed KES 5 Million Equipment
investment as well as registered capital of the enterprise is
between KES 5 Million and 20 Million *Not specified
Source: Micro and Small Enterprise Act of 2012
APPENDIX 2: QUESTIONNAIREInstructions:
This questionnaire is designed to find out a few things about you and your job. Please answer the questions truthfully. There is No Right or Wrong answers. Tick where appropriate.
234315016383000Date of receiving the questionnaire:
SECTION A: BACKGROUND INFORMATION
Please tick in the boxes provided
Gender of the respondents
Respondents level of education
16338553429000None of the above
Age bracket of the respondents.
Nature of Employment
Specify (teacher, artisan etc.) ________
Are you a registered taxpayer by KRA? (if No/do not know skip to Qn.7)
4360545139700016338551778000YesDo not know
Which category of taxes do you normally pay?
21482052476500Income tax (e.g. P.A.Y.E)
Others (Please specify) _________________________
21907501778000None of the above
SECTION B: COMPLIANCE BEHAVIOUR
-6286501905004688840190500Do you keep up to date transaction records and books of accounts? Yes No
If yes, which of the following transaction records and books of accounts do you keep?
-21050254953000Sales receipts and invoices (Daily sales record books)
-29146501143000ETR records (in case you have an ETR)
-333375029210000-534352529210000Have you been provided with a stencil (TOT 4) where you record your daily sales or takings? Yes No
-22574252286000-10001251333500Do you encounter problems with record keeping? Yes No
If yes, what problems? ………………………………..
-2914650825500-3848100825500Do you file tax returns? Yes No
466725016319600If yes, when was the last time you filed the tax returns this year? Month
How often do you submit tax returns?
-11430003429000-50914301905000-2157730952500-3810000952500Monthly QuarterlySemi – annually Annual
Please indicate the mode of filing your tax returns?
-26600151714500-4743450762000Manual filingOnline filing
-1895475889000-952500698500Do you encounter problems with filing your tax returns? Yes No
If yes, what problems? ………………………………..
-14954252857500-7810501143000Do you know the Tax rate at which you have to pay your taxes? Yes No
-2905125889000-1962150889000Have you ever been penalized by KRA? Yes No
If yes, what were the reasons for penalization?
-38481001333500-10858501333500Failing to submit returns c) Later filing of returns
-3829050762000-1069340762000No keeping of records d) Falsifying records
Are you aware that KRA conducts taxpayer education to the taxpayers?
5245735260350042360851651000Have you ever attended a KRA taxpayer education ‘clinic’? Yes No
If YES, what had motivated you to attend the taxpayers’ education session?
If NO in Q.9 above, why have you never attended a taxpayer education session organized by KRA?
How do you obtain information on tax matters?
-1533525952500-3567430762000Personal visit to KRA offices Friends/Colleagues
-15240001270000-35718751460500-52197004127500Brochures Telephone Written inquiry
-8572501016000-3571875952500-52482751206500TV/RadioKRA website Print media (newspapers, etc.
The table below presents various aspects on taxpayer education by KRA. Kindly indicate the extent to which you agree – disagree with the issues
5 – Strongly agree 4 – Agree3 – No sure 2 – Disagree 1 – Strongly disagree
Please rate how satisfied you were with the following aspects
1 2 3 4 5
The taxpayer education has enhanced the public level of understanding of various tax regimes of KRA The taxpayer education will enhanced tax compliance among non-corporate taxpayers Tax education improves on tax compliance hence improving revenue collection. Tax evasion is still rampant even after taxpayer education Tax law is easy to understand i.e. calculation of tax, return filing and paying dates It is easier for tax payers to file returns than before I pay my taxes willingly because I know the benefits I always pay my dues at the right time and in the right amount I hate paying taxes because tax rates are too high Taxpayer education relevant to achievement of compliance and revenue goals of KRA Tax payer’s attitude towards KRA affects the level of tax compliance SECTION C: ADMINISTRATIVE CHALLENGES
Please indicate whether you are extremely dissatisfied (ED), dissatisfied (D), neither satisfied nor dissatisfied, that is undecided (U), satisfied (S), or extremely satisfied (ES) with the following aspects of administration of tax in Kenya.
ED D U S ES
Ease in filing up the tax forms Simplicity in procedures in submitting tax returns Clarity in procedures in submitting tax returns Ease in complying with tax processes Fairness in decisions of tax officials Ease in getting tax refund There is a good tax administration system
Do you have any comments on existing tax system in use by KRA? Specify your suggestions.
THANK YOU FOR YOUR PARTICIPATION