Influence of Tax Rates on Tax Compliance in The Informal sector in Kenya: Survey of Nyeri Town

Abstract

Tax non-compliance reduces tax collection and the tax performance within a country. The Kenyan government has implemented various strategies to bring businesses in the informal sector into the tax bracket. However, available data shows that tax collections from the informal sector are above average but on a declining trend. The purpose of this paper is to determine influence of tax rates on tax compliance in the informal sector in Nyeri town. The study adopted a cross-sectional survey design and targeted 715 informal businesses in Nyeri Town. Stratified random sampling technique was used to select 143 informal businesses to participate. Researcher-administered questionnaires were used to collect data from the respondents. Descriptive methods such as frequency distribution, percentages, mean, were used to summarize and organize data. Chi-square tests and correlation analysis were employed to establish relationships between study variables. Findings were presented using tables of frequencies and percentages. Majority (74%) of the respondents indicated that they tried their best to comply with all tax procedures. Results revealed that Majority (75%) of the respondents indicate that the taxes charged were too high. Tax rates (p=0.000) had a significant relationship with tax compliance at 95% confidence level. The study cited that tax rates were important predictors of tax compliance in the informal sector. It was recommended that tax rates should be reviewed for those in the informal sector to ensure that they commensurate with economic conditions.