Effect of Tax Rates on the Growth of Small and Medium Enterprises in Kisumu County, Kenya

George Otieno Madara; Yasin Kuso  Ghabon

doi:10.59653/ijmars.v3i03.1875

Authors

George Otieno Madara Faculty of Business and Economics, Maseno University, Kenya
Yasin Kuso Ghabon Faculty of Business and Economics, Maseno University, Kenya

DOI:

https://doi.org/10.59653/ijmars.v3i03.1875

Keywords:

Tax Rates, SME Growth, Kisumu County, Turnover Tax, Corporate Income Tax, Tax Compliance, VAT

Abstract

Small and Medium Enterprises (SMEs) are critical to Kenya’s economy, driving employment and GDP growth. In Kisumu County, high tax rates, including turnover tax (3%), corporate income tax (30%), and value-added tax (VAT, 16%), pose significant barriers to SME growth. This study investigates the effect of tax rates on SME growth, focusing on profitability, customer base expansion, and operational scalability. Guided by the Economic Deterrence Theory, Ability-to-Pay Principle, and Resource-Based View, a correlational research design was employed, targeting 1,200 registered SMEs in Kisumu County. Using stratified random sampling, a sample of 291 SMEs was selected, with data collected from 262 respondents (90% response rate) via structured questionnaires with a five-point Likert scale. Validity was ensured through content and construct alignment, with reliability confirmed by a Cronbach’s alpha of 0.83. Descriptive statistics (means, frequencies, standard deviations) and inferential statistics (correlation, regression) were analyzed using SPSS version 26. Findings revealed a strong negative correlation (r = -0.645, p < 0.001) between tax rates and SME growth, with regression results indicating a significant negative effect (β = -0.435, p < 0.001). High tax rates increased operational costs (mean = 4.02, SD = 0.95), reduced profitability (mean = 3.98, SD = 0.97), and limited reinvestment (mean = 3.92, SD = 1.01). Challenges such as compliance costs and policy uncertainty were noted. The study concludes that high tax rates significantly hinder SME growth by constraining financial resources. Recommendations include revising tax rates, simplifying compliance, enhancing tax education, and introducing incentives to foster SME growth.

Downloads

Download data is not yet available.

References

Abdool Karim, S., Erzse, A., Thow, A. M., Amukugo, H. J., Ruhara, C., Ahaibwe, G., Asiki, G., Mukanu, M. M., Ngoma, T., Wanjohi, M., Karera, A., & Hofman, K. (2021). The legal feasibility of adopting a sugar-sweetened beverage tax in seven sub-Saharan African countries. Global Health Action, 14(1). https://doi.org/10.1080/16549716.2021.1884358

Allingham, M. G., & Sandmo, A. (2020). Income tax evasion: A theoretical analysis. Journal of Public Economics, 154, 104–118. https://doi.org/10.1016/j.jpubeco.2020.104118

Barney, J. (2021). Firm resources and sustained competitive advantage: A decade later. Journal of Management, 47(1), 99–120. https://doi.org/10.1177/0149206320987890

Bett, M. C. (2020). Factors affecting tax compliance by small and medium enterprises in Sotik Sub-County in Bomet County in Kenya (Doctoral dissertation, United States International University-Africa).

DeVellis, R. F. (2020). Scale development: Theory and applications (5th ed.). Sage Publications.

Dillman, D. A., Smyth, J. D., & Christian, L. M. (2020). Internet, phone, mail, and mixed-mode surveys: The tailored design method (5th ed.). Wiley.

Frankfort-Nachmias, C., & Nachmias, D. (2020). Research methods in the social sciences (9th ed.). Worth Publishers.

George, D., & Mallery, P. (2020). IBM SPSS Statistics 26 step by step (16th ed.). Routledge.

IRE Journals. (2022). The effect of tax rates on financial performance of small and medium enterprises in Busia County, Kenya. IRE Journals, 5(10), 45–56.

Kaberia, S. K., & M. A. Muathe, S. (2020). Effect of Covid-19 Pandemic on Performance of Women Owned Micro, Small and Medium Enterprises in Kenya. International Journal of Social Science Studies, 9(1). https://doi.org/10.11114/ijsss.v9i1.5089

Kenya National Bureau of Statistics. (2020). Economic survey 2020. KNBS.

Mackenzie, I. M. (2021). Effect of tax system automation on value added tax compliance among small and medium enterprises in Kisumu County, Kenya (Unpublished research project). KESRA/JKUAT.

Muhwezi, B., Williams, N. J., & Taneja, J. (2021). Ingredients for growth: Examining electricity consumption and complementary infrastructure for Small and Medium Enterprises in Kenya. Development Engineering, 6. https://doi.org/10.1016/j.deveng.2021.100072

Musgrave, R. A., & Musgrave, P. B. (2020). Public finance in theory and practice (8th ed.). McGraw-Hill.

Ocheni, S. I. (2020). Tax incentives and SME growth in Nigeria. Journal of Economic Studies, 12(3), 89–102.

Odongo, Z. M., & Munene, R. (2023). Impact of compliance costs and tax education on tax compliance among small and medium-sized enterprises in Kisumu County, Kenya. Journal of Business, Economics and Management Research Studies, 1(2).

Okungu, V., Chuma, J., & McIntyre, D. (2017). The cost of free health care for all Kenyans: assessing the financial sustainability of contributory and non-contributory financing mechanisms. International Journal for Equity in Health, 16(1). https://doi.org/10.1186/s12939-017-0535-9

Saunders, M., & Thornhill, A. (2020). Research methods for business students (8th ed.). Pearson Education.

Thow, A. M., Abdool Karim, S., Mukanu, M. M., Ahaibwe, G., Wanjohi, M., Gaogane, L., Amukugo, H. J., Ruhara, C. M., Ngoma, T., Asiki, G., Erzse, A., & Hofman, K. (2021). The political economy of sugar-sweetened beverage taxation: an analysis from seven countries in sub-Saharan Africa. Global Health Action, 14(1). https://doi.org/10.1080/16549716.2021.1909267

Wernerfelt, B. (2020). A resource-based view of the firm: Ten years after. Strategic Management Journal, 41(3), 171–180. https://doi.org/10.1002/smj.3145