Imposition of Tax Penalties and Interest and Its Influence on Tax Compliance of Small and Medium-Sized Enterprises in Nairobi County, Kenya

Abstract

The purpose of this study was to determine the effect of the imposition of tax penalties and interest on tax compliance of small and medium-sized Enterprises (SMEs) in Nairobi County, Kenya. The economic deterrence theory was used as the theoretical anchor of the study. The population of the study was 195,000 SMEs in Nairobi County, Kenya. The descriptive cross-sectional design was used in the study which focussed on a sample of 399 constituting the managers and owners of SMEs in Nairobi County. Data was gathered using a structured questionnaire that contained closed-ended questions. The collected data was analyzed using descriptive statistics and ordinary least squares regression with the aid of SPSS. The study findings indicated that the imposition of penalties and interest has a positive and significant influence on tax compliance of small and medium enterprises in Nairobi County, Kenya (β = 0.642, t = 10.633, p < 0.05). This, therefore, depicts that the imposition of interest and fines makes SMEs to be more tax compliant. The study findings have implications for tax authorities to improve the effectiveness of the tax penalties system that should complement the self-assessment system. The tax authorities should also ensure that the penalty system is equitable, proportionate, clearly defined, and even-handedly administered to encourage voluntary tax compliance and deter tax offenders. The tax authority should also increase the penalty amount to collect more revenue and make it significant for SMEs that do not comply with tax regulations.