EFFECT OF TAX POLICY REFORMS ON THE PERFOMANCE OF KENYA
REVENUE AUTHORITY IN MOMBASA NORTH TAX DISTRICT
KENNETH SANG
A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF
ECONOMIC, ACCOUNTING AND FINANCE, SCHOOL OF BUSINESS IN
PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF
POSTGRADUATE DIPLOMA IN TAX ADMINISTRATION AT
JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY
2019
DECLARATION
This research project is my original work and has not been presented for any award in any
other academic or non-academic institution.
………………………….
………………..
Signature
Date
Kenneth Sang
HDB336-C016-2533/2016
This research project has been submitted for examination with my approval as the Supervisor
……………………………
………………..
Signature
Date
Andrew Sululu
Lecturer
Kenya School of Revenue Administration
ii
DEDICATION
I dedicate this research project to my parents Mr. and Mrs.Wilson Kenduiywa, all my siblings
and PGD Tax administration class of May 2016.
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ACKNOWLEDGEMENT
I am most grateful to our Almighty God for it is through his amazing grace that I have come
this far. I acknowledge the continuous and most valued contributions and guidance of my
supervisor, thank you for your most valuable time.
I wish to extend my sincere appreciation to the trainers and coordinator of PGD Tax Administration at Kenya School of Revenue Administration (Mombasa campus) for their support
throughout this journey.
Special appreciations to Kesra Librarian Madam Winnie, you have been of great help during
my research period and my colleagues in the PGD Tax Administration class whose great inspiration and encouragement have kept me going strong; thank you so much. And to those
who took time to respond to many questionnaires and those who sat with me to share most
valuable information and experiences, I sincerely thank you.
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TABLE OF CONTENTS
DECLARATION........................................................................................................... ii
ACKNOWLEDGEMENT ...........................................................................................iii
LIST OF APPENDICES ...........................................................................................viii
LIST OF TABLES ....................................................................................................... ix
LIST OF FIGURES ...................................................................................................... x
LIST OF ABBREVIATIONS AND ACROYNMS .................................................. xii
DEFINITION OF TERMS.......................................................................................... xi
ABSTRACT ................................................................................................................. xii
CHAPTER ONE ........................................................................................................... 1
INTRODUCTION......................................................................................................... 1
1.1 Background of the Study ....................................................................................... 1
1.2 Statement of the Problem ...................................................................................... 6
1.3 Research Objectives …………………………………………………..................7
1.3.1 General Objective ........................................................................................... 7
1.3.2 Specific Objectives ......................................................................................... 7
1.4 Research Questions ............................................................................................... 7
1.5 Justification of the Study ....................................................................................... 7
1.6 Scope of the Study................................................................................................. 7
1.7 Limitations of the Study ........................................................................................ 8
CHAPTER TWO .......................................................................................................... 9
LITERATURE REVIEW ............................................................................................ 9
2.1 Introduction ........................................................................................................... 9
2.2 Theoretical Framework ......................................................................................... 9
2.2.1 Rational Choice Theory .................................................................................. 9
2.2.2 Wagner’s Law of Increasing State Activity ................................................. 10
2.2.3 Compliance Theory ...................................................................................... 10
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2.3 Conceptual Framework ....................................................................................... 12
2.4 Review of Variables ............................................................................................ 12
2.4.1 Tax Legislation Reforms .............................................................................. 12
2.4.2 Tax Rates Reforms ....................................................................................... 14
2.4.3 Tax Regulatory Reforms .............................................................................. 16
2.4.4 Kenya Revenue Authority Performance ....................................................... 16
2.5 Empirical Review ................................................................................................ 17
2.6 Critique of Existing Literature ........................................................................... 18
2.7 Research Gaps ..................................................................................................... 20
2.8 Summary ............................................................................................................. 19
CHAPTER THREE .................................................................................................... 21
RESEARCH METHODOLOGY .............................................................................. 21
3.1 Introduction ......................................................................................................... 21
3.2 Research Design .................................................................................................. 21
3.3 Populationof the Study ........................................................................................ 21
3.4 Sampling Frame .................................................................................................. 22
3.5 Sample Size and Sampling Techniques ............................................................. 22
3.6 Data Collection Instruments ................................................................................ 23
3.7 Data Collection Procedure .................................................................................. 23
3.8 Pilot Testing ........................................................................................................ 23
3.8.1 Reliability ..................................................................................................... 24
3.8.2 Validity ......................................................................................................... 24
3.9 Data Analysis and Presentation ........................................................................... 24
CHAPTER FOUR ....................................................................................................... 25
DATA PRESENTATION ANALYSIS AND INTERPRETATION AND DISCUSSSION
....................................................................................................................................... 26
4.1 Introduction ........................................................................................................... 26
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4.2 Response Rate........................................................................................................ 26
4.3 Reliability Testing ................................................................................................. 26
4.4 Demographic Analysis .......................................................................................... 27
4.4.1 Level of Education ........................................................................................... 27
4.4.2 Work Experience .............................................................................................. 28
4.4.3 Type of Business .............................................................................................. 29
4.5 Variables of the study ........................................................................................... 29
4.5.1 Tax Legislation Reforms .................................................................................. 29
4.5.2 Tax Rate Reforms............................................................................................. 30
4.5.3 Tax Regulatory Reforms .................................................................................. 31
4.5.4 KRA Performance in Mombasa North Tax District......................................... 32
4.6 Correlation Analysis ............................................................................................. 33
4.6.1 Coefficient of Correlation ................................................................................ 33
4.6.2 Regression Analysis ......................................................................................... 34
4.6.3 Regression Coefficient ..................................................................................... 36
CHAPTER FIVE ........................................................................................................ 36
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ............................ 37
5.1 Introduction ........................................................................................................... 37
5.2 Summary Findings ................................................................................................ 37
5.2.1 Tax Legislation Reforms .................................................................................. 37
5.2.2 Tax Rate Reforms............................................................................................. 38
5.2.3 Tax Regulatory Reforms .................................................................................. 38
5.3 Conclusions ............................................................................................................. 39
5.4 Recommendations ................................................................................................... 39
5.5. Areas for further Research ..................................................................................... 40
REFERENCES ............................................................................................................ 41
APPENDICES ............................................................................................................. 48
vii
LIST OF APPENDICES
APPENDIX I. LETTER OF INTRODUCTION ......................................................... 48
APPENDIX II. QUESTIONNAIRE............................................................................ 49
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LIST OF TABLES
Table 3. 1 Target Population ....................................................................................... 21
Table 3. 2 Sampling Size............................................................................................. 23
Table 4.1 Response Rate……………………………………………………….. …27
Table 4.2 Reliability Results………………………………………………………..28
Table 4.3 Education & Professional ..........................................................................28
Table 4.4 Work Experience………………………………………………………....28
Table 4.5 Type of Business…………………………………………………………29
Table 4.6 Tax Legislation Reforms……………………………………………........30
Table 4.7 Tax Rate Reforms………………………………………………………..32
Table 4.8 Tax Regulatory Reforms…………………………………………………33
Table 4.9 KRA Performance in Mombasa North Tax District………………..........34
Table 4.10 Correlations……………………………………………………………..35
Table 4.11 Model Summary ………………………………………………………36
Table 4.12 ANOVA………………………………………………………………..36
Table 4.13 Coefficients……………………………………………………………..36
ix
LIST OF FIGURES
Figure 2.1 Conceptual Framework.............................................................................. 12
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DEFINITION OF TERMS
PAYE
Is a tax charged on Employment income and the employer
is required by law to compute, deduct, account and remit
on a monthly basis (Income Tax Act Cap.470)
Revenue Collection
Is the act or process of getting money received from
taxation, fees fines, intergovernmental grants or transfers as well as any sales made for the government
(KRA, 2017).
VAT
Value added tax is a type of tax that is assessed incrementally, based on the increase in value of a product or
service at each stage of production or distribution
(KRA, 2017).
Tax Rate Reforms
Is the process of changing the way taxes are collected or
managed by the government and is usually undertaken
to improve tax administration (Janet, 2016).
Tax Legislation Reforms
These are practical changes in tax law aimed at making
it responsive to the changing needs of the economy
(Janet, 2016).
Tax Regulatory Reforms
Is a form of regulation or supervision, which subjects
individual or financial institution to certain requirements, restrictions (Prabhakar, 2013)
xi
LIST OF ABBREVIATIONS AND ACROYNMS
AIA
Appropriation-in-Aid
ARD
Afghanistan Revenue Department
GDP
Gross Domestic Product
GIRoA
The Government of the Islamic Republic of Afghanistan
IMF
International Monitoring Fund
KRA
Kenya revenue Authority
SPSS
Social Packaging for Social Sciences
TMP
Tax Modernization Programme
KIPPRA
Kenya Institute of Public Policy Administration
KNBS
Kenya National Bureau Statistics
TNT
The National Treasury
TOT
Turnover Tax
TPM
Tax Modernization Programme
GTC
Georgia Tax Centre
URA
Uganda Revenue Authority
RRA
Rwanda Revenue Authority
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ABSTRACT
The recent global crisis has put considerable strain on inflows of international resources. This
has forced many countries to focus on domestic resource mobilization through tax reforms
with a view to increase revenues to finance public expenditure on social goods and services.
Therefore, KRA has come up with tax reform policies and modernization to improve on the
Authority’s performance and meet the increasing government demands. The objective of the
study was to examine the effect of tax policy reforms on the performance of Kenya Revenue
Authority in Mombasa North. The specific objectives of the study were: to establish the effect of tax legislation reforms on the performance of KRA in Mombasa North, to determine
the effect of tax rate reforms on the performance of KRA in Mombasa North, and to identify
the effect of tax regulatory reforms on the performance of KRA in Mombasa North. The
study is based on the following theories; rational theory, Wagner’s law of increasing state
activity and compliance theory. The metrics for measuring KRA performance was revenue
collected and the Customer satisfaction. A descriptive research design was adopted for the
study. The target population was drawn from KRA staff in Mombasa North Region. A structured questionnaire was used to collect data and was self-administered. Data collected were
then coded and systematically arranged so as to facilitate data processing using Statistical
Package for Social Sciences. Thereafter, the analyzed data was summarized and presented in
form of tables. The data was analyzed using Correlation regression where the study
used Pearson’s correlation to relate the variables. Data was analyzed using multiple regression analysis where dependent variable was regressed on independent variables. This
was to establish if there was a correlation between dependent variable KRA performance in Mombasa North against independent variables: tax legislation reforms, tax rate
reforms and tax regulatory reforms. The study revealed that a tax legislation reform, tax rate
reforms and tax regulatory reforms plays a vital role in determining KRA performance in
Mombasa North. P- value of 0.000 implies that the model is significant at the 95% confidence level. The researcher in its conclusion noted that changes in tax legislation, tax rate
reforms and tax regulatory reforms would lead to significant improvement in revenue performance hence recommended that; KRA adopt an effective tax legislation reforms, adopt tax
system that encourages tax payers to remit their taxes in more effective way and adopt and
continue to review ADR strategy to enhance tax collection.
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Globally tax reforms have been undertaken with a view to increase revenues sufficient to
finance public expenditure on social goods and services. The need for tax reform arises from
the deficiency of the existing tax system in line with achieving the various canons of taxation.
With the rise of fiscal crises in many developing and developed economies, tax reforms have
coming to a lime light (Bird, 2013). The views of tax reform to mobilize tax revenues have
been increasing in the field of public finance among the academia and international institutions because countries are faced with declining external assistance in general. Tax reform is
more complex, as it involves tax rate cuts as well as base-broadening changes. There is a theoretical presumption that such changes should raise the overall size of the economy in the
long-term, though the effect and magnitude of the impact are subject to considerable uncertainty. The recent global crisis has put considerable strain on inflows of international resources, which have effectively forced these countries to focus on domestic resource mobilization. It is viewed that in most emerging economies fiscal governance is reflected only in
how deep a country can cut into its fiscal deficit, rather promoting a better tax system to mobilize more revenue to prevent it (Djankov, 2010).
The insatiable quest for economic growth and development drives many economies around
the globe to improve revenue generation. Government revenue is essential in accelerating
economic growth and development. Governments collect taxes to fund public services, assist
in the equitable redistribution of wealth and income and for regulation of some activities
within the economy such as cigarette smoking (Mutua, 2012). Ng'ang'a & Muturi (2015)
states that, taxation is the only known practical manner for collecting resources in order to
finance public expenditure for goods and services consumed by any citizenry. Some of the
services provided by governments to their citizens include education, health care, water, security, roads, and social security. In order to finance the provision of these goods and services, governments, collectively, use taxes and other sources of non-tax revenue as stated
earlier. Taxes are compulsory payments that may or may not benefit the taxpayer in terms of
government goods and services received (Hyman, 2013).
The USA introduced major tax Act in 1986 and perhaps interestingly these tax reforms reduced the top tax rate (Ngaruiya, 2012). The Government of the Islamic Republic of Afghanistan (GIRoA) launched measures to build the domestic tax system in 2004. These included
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introducing a number of simplified taxes, including a turnover tax (TOT) and withholding on
wages. The TOT was considered more feasible than a modern corporate income tax, given
the under developed state of the economy and low capacity of the Afghanistan Revenue Department (ARD). In 2009, Afghanistan enacted a comprehensive income tax law, covering
individuals and companies, which is much more consistent with international tax practice, yet
establishes rates similar to those already being applied. Bangladesh has been reforming its
revenue system since independence in 1971. Yet while incremental reform has been taking
place over these decades, domestic forces have slowed it at every turn.
Deep reform of the tax system had only been approximated when in 1991 the government
introduced the VAT. However, even this reform came about painfully, with implementation
put off long enough for all the country’s organized special interests to conspire within the
political system to ensure that the VAT would be riddled with protections, exemptions, and
weak sanctions. The authorities placed considerable discretionary power with tax officials
with whom large business could negotiate their tax settlement (Hassan and Prichard, 2013).
In Georgia between 2004 and 2009, tax reforms focused on simplifying the tax code and lowering tax rates. The number of national taxes to which Georgians were subjected was reduced
from 21 to six.
In Georgia, the VAT rate was brought down from 20% to 18% and personal income tax rates
were combined with the social contribution (payroll tax) into a single tax of 20% on income
(GTC, 2009). According to Georgia’s Tax Centre, Taxes on corporate dividends and interest
earnings were reduced from 10% to 5% in 2009. The new tax code applied the same rate to
all business activities, doing away with special rates and privileges. The strengthened tax
collection by streamlining and automating most processes, introducing risk-based audit management and vastly expanding e-services. This simplified taxpayer requirements and greatly
reduced face-to-face time between tax officers and taxpayers. Georgia’s tax revenues have
increased more than fourfold thanks to the combined effect of the changes in the tax regulation and administration. Total tax receipts soared from only 12% of GDP to 25%, despite
declining tax receipts on international trade due to the slashing of import duty rates (GTC,
2009).
Ghana for instance, has undertaken extensive tax reforms, which comprised of the key policy
instrument paramount to accelerate economic growth while reducing poverty (Omondi,
Wawire, Manyasa,& Thuku, 2014). Ghana’s major changes in tax administration fiscal poli2
cies played a key role in improving the country's revenue mobilization and overall fiscal
health. The prime factors cited for the increase in revenue are the expansion of tax base, the
structure of taxation; and reorganization of the tax administer. The administrative reforms in
Ghana centered on removing the revenue institutions from the Civil Service and granting
them operational autonomy, with a view to improve efficiency through enhanced work and
employment conditions. In Uganda, a key element of the administrative reform was to move
the existing revenue department out of the Ministry of Finance into a semi-autonomous revenue authority overseen by an independent Board of Directors.
The philosophy behind this move was mainly to provide incentives for the staff to improve
their performance and thereby increase revenues. The reform appeared to be a success in
URA’s (Uganda Revenue Authority) as reported revenue increased sharply - from 7% of
gross domestic product (GDP) in 2007 to around 12% of the GDP in 2013 (Fjeldstad, 2013).
These circumstances necessitated policy makers to pursue a rapid increase in domestic revenue and a corresponding increase in public services; and rebuilding of government’s revenues
base has been of the key features of Uganda’s economy recovery. In Rwanda, the VAT was
instituted in 2002. In 2003, the RRA re-organized from a tax-based organization to a function-based organization. At the same time, introduced an e-Tax Information System, which
partially integrated RRA core processes (Kloeden, 2011).After 2010, reforms mainly concentrated on adherence to regional integration and broader trade agreements, focusing on customs reform and lowering dependence on import duties.
Tax reforms in Kenya have been going on since independence albeit at different scales and
pace. The oil shock in the early 1970s led to the country’s first significant fiscal crisis, in response to which some relatively minor tax reforms were undertaken. Sales taxes were introduced as a means of generating extra revenue, and trade taxes were used in an attempt to reduce the ballooning balance of payments deficit. In 1986 the Kenyan government approved
the Tax Modernization Programme (TMP) aimed at broadening the tax base, and in 1987 it
adopted the Budget Rationalization Programme intended to place controls on public spending. The primary aim of the TMP was to raise the revenue-to-GDP ratio from 22% in 1986 to
24% by the mid-1990s, although this target was increased to 28% in 1992 (Muriithi and
Moyi, 2003). The main organizational change aimed at strengthening administrative capacity
was the incorporation of the Kenya Revenue Authority in 1995. In 1989, the government
passed legislation to introduce a credit-invoice value-added tax, which became effective on
January 1, 1990. At this time the concept of tax policy simplicity had not firmly taken root in
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Kenya: the VAT was introduced with a standard rate of 17 percent, but with 14 other rates
(the highest being 210 percent) that made the VAT appear more like a differentiated commodity tax regime.
In Kenya, the country’s tax system has undergone more or less continual reform over the last
twenty years. On the policy side, rate schedules have been rationalized and simplified, a new
value-added tax introduced, and external tariffs brought in line with those of neighboring
countries in East Africa. At the same time, administrative and institutional reforms have taken place. Most notable among these was the creation of the semi-autonomous Kenya Revenue
Authority (KRA) in 1995, which centralized the administration of tax collection. Kenya’s
taxation is the largest source of government budgetary resources. Between 1995 and 2004 for
instance, tax revenue formed 80.4% of total government revenue (Rukungu,2015).
Furthermore, many significant changes have been experienced in the economy over the last
four decades. One of the striking characteristics of Kenya at present is that unlike many other
Sub-Saharan countries today, it is a high tax-yield country with a tax-to-GDP ratio of over 20
per cent. As a result, Kenya is able to finance a large share of its budget, while external donor
finances are used to cover a much smaller share than in other countries of the region. Presently, external donors’ aid forms a paltry 3.9% while the bulk of government expenditure is financed through taxation, which the government aims to keep at or above 22% of GDP (GoK,
2014). This however does not mean that Kenya has a high tax collection ration since its base
is still extremely narrow.
When studying reforming tax policies and revenue mobilization in East and West African
countries, Kefela (2009) observed that simplicity and enforceable laws are part of any successful administrative reforms. It is argued that it is important to simplify procedures for taxpayers, for instance, by get rid of unnecessary information on tax returns and payment invoices. The author further says that, once the tax procedures are simplified, the customs officials can manage to focus on the core tasks which include facilitating compliance, monitoring
compliance and dealing with non-compliance. It is asserted that customs enforcement is difficult particularly in developing countries due to the presence of large informal sector. Low
literacy levels, low public morality, poor salary structure for civil servants, poor communication infrastructure, malfunctioning judicial systems and vested interests against radical reforms (Auriol & Warlters, 2002).
4
Revenue collection is the act or process of getting money received from taxation, fees fines,
intergovernmental grants or transfers as well as any sales made for the government. Tax collection has grown by 13.2% in the last financial year exceeding the target set by treasury.
KRA has collected 800 billion in the 2012/2013 financial year against 707.4 billion collected
in 2011/2012.The major aim of revenue collection for most governments is to stimulate and
guide the economic and social development of the country, there are several determinants for
an effective realization of the exercise. The obvious challenges facing revenue collection can
be generalized for most countries (Mutua, 2012). Enhancing revenue mobilization has frequently been the focus of revenue administrations. Diagnostic work has mainly focused on
measuring revenue leakages. Both the World Bank and the IMF frequently use this approach
(Marangu,2011). Government of Kenya raises most of its revenue through enhancing elasticity of the existing tax system that is, rationalizing and regulating expenditure through strict
fiscal controls (Rukungu, 2015).
According to Murithi & Moyi (2013), like most developing countries, Kenya has had to contend and still contends with the common problems that plague tax systems of developing
countries. These, they identify to include, the existence of tax systems, with rates and structures that are difficult to administer and comply with and that are unresponsiveness both to
growth and discretionary tax measures hence offering low tax productivity. In addition, the
tax collection strategy raise little revenue but introduce serious economic distortions as well
as provide opportunities for differential treatment of individuals and businesses in similar
circumstances, and that are selective with regard to tax administration and enforcement, and
skewed in favor of those with the ability to defeat the system. This means that for the country
to increase its revenue collection, it needs to modernize its collection policy and carry out the
necessary tax reforms that will yield an increased tax base (Ondiek, 2013). The main objective of tax reforms is liberalization of the market thereby attracting foreign direct investment.
As a result, there has been a reduction in the rates that customs authority charge on different
types of transactions. Since the formation of KRA, the collection of tax revenue has grown
continuously. In addition, administration of taxes has been strengthened. However, the tax
revenue has continued to fall below target. This has resulted to an increase in government
borrowing thereby impacting negatively on economic growth. The Kenyan budget has continued to increase and hence there is need to establish whether tax reforms have been important in increasing tax revenues.
5
1.2 Statement of the Problem
Marina (2013) was of the opinion that taxation was the only known practical manner for collecting resources in order to finance public expenditure for goods and services consumed by
any community. The views of tax reform to mobilize tax revenues have been increasing in the
field of public finance among the academic circles and international institutions because
countries are faced with declining external assistance in general. Tax reform is more complex, as it involves tax rate cuts as well as base-broadening changes (Djankov, 2010).
In Kenya, the tax system has undergone more or less continual reform over the last twenty
years, with the main attention being on trade liberalization and transitioning from sales tax to
value added tax (Mutua, 2012). Moreover attention has shifted to ensuring KRA have the
capacity to administer. Kenya has experienced fiscal deficit which has largely been attributed
to increasing and uncontrolled government expenditure against the collected revenues. However, despite there being various ways to finance deficit each of these methods has its own
shortcomings, in addition, heavy borrowing is also not viable in the long run since it can lead
to unsustainable debt level. There are also concerns that the challenges that confront The National Treasury and Kenya Revenue Authority with regard to revenue generation today are
not much different from the challenges that faced these revenue authorities before the reforms.
Past reviewed literature observes that tax policies are continually subjected to pressure and
changes which most time does not guarantee outcome that are in line with the overall goal
(James & Asiweh, 2012). Various other studies that have focused on response of tax revenues
to GDP growth have established a positive and significant causal relationship between GDP
and revenues from tax (Wawire, 2008, Ondiek, 2013; Muriithi and Moyi, 2007). Further
Mokua (2012) carried out a study to investigate the impact of tax reforms that have been undertaken in Income tax, Excise duty, Import duty and sales/Value Added tax on revenue
productivity. However, these studies have not addressed the response of specific tax revenues
(specifically customs taxes) to tax reforms and economic growth. There is need to disaggregate tax in order to identify the effectiveness of tax reforms on individual taxes. Furthermore,
some of the reviewed studies have been phased out by time. For instance, Nada and Jack
(2009) examined tax reforms in Kenya particularly in regard to policy and administrative
issues. The study acknowledges that tax system in Kenya has undergone perpetual reform
over the past two decades. Rizal & Palil, (2011) based their studies on the tax reforms period
from 1970-1994. These studies cannot be used to evaluate the present day effect of the tax
6
policy reforms since other reforms have been undertaken over the years and productivity in
the countries has also changed and thus there is need for a study to be conducted on recent
years. The current study bridged the literature gap by examining the effect of tax policy reforms on Kenya Revenue Authority performance, with a focus on the Mombasa north tax
district.
1.3 Research Objectives
1.3.1 General Objective
The general objective of the study was to establish the effect of tax policy reforms on the
performance of Kenya Revenue Authority in Mombasa North Tax District.
1.3.2 Specific Objectives
The study aimed to achieve the following objectives;
I.
To establish the effect of tax legislation reforms on the performance of KRA in Mombasa
North.
II.
To determine the effect of tax rate reforms on the performance of KRA in Mombasa North.
III.
To identify the effect of tax regulatory reforms on the performance of KRA in Mombasa
North.
1.4 Research Questions
The study seeks to answer the following research questions.
I.
What is the effect of tax legislation reforms on the performance of KRA in Mombasa North?
II.
How do tax rate reforms affect the performance of KRA in Mombasa North?
III.
To what extent do tax regulatory reforms affect the performance of KRA in Mombasa North?
1.5 Justification of the Study
The management of National treasury found this study useful as a point of reference for decision making regarding the tax policy reforms and the perceived effect on revenue collection.
The students, researchers, scholars and the academicians found this study a useful guide in as
far as further discussions or studies on the same are concerned. It will therefore form a basis
of further research from interested individuals on the subject of tax policy reforms
1.6 Scope of the Study
This study was confined on examining the effect of tax policy reforms on the performance of
Kenya Revenue Authority in Mombasa North Tax District. Specifically, the study was to
7
establish the effect of tax legislation reforms, tax rate reforms, tax regulatory reforms on
KRA performance. The study was conducted in Mombasa North Tax District.
1.7 Limitations of the Study
The limitations of this study included limited resources and constriction of time. The researcher counteracted this by coming up with a budget in line with the funds at hand. The
constraint of time for conducting the research was counteracted by working within the stipulated time.
8
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter reviews the existing literature, information and publication on the topic related
to the research problem by accredited scholars and researchers. In particular the chapter covered the theoretical review of literature, conceptualization of the research problem, empirical
review of the literature and critical review and research gaps.
2.2 Theoretical Framework
Theoretical review is presentation of abstract thinking without experimental proof. This study
will explore the effect of tax policy reforms on revenue collection in Kenya. The study will
be anchored on rational choice theory and compliance theory.
2.2.1 Rational Choice Theory
Based on the economic model, rational choice see social interaction as a process of social
exchange and according to this view, people are motivated by wants or goals that express
their preferences (Ng'ang'a & Muturi, 2015).The explanation that economic action is based
on rewards and punishment in which action is motivated by pursuit of profitable balance of
rewards over costs. For instance in USA, if one does not file tax returns by the due date, the
net effect is a 5 percent month’s penalty up to 25 per cent on the amount shown on the returns
(Portfolio & Block, 2012). Consequently, tax evasion has negative effect on the society and
can harm the economy in many ways. In Republic of Slovenia, writes TijanaSelinsek in an
article The penalization of Tax violation law and criminal tax offences in Slovenian law giving false information to tax authorities and failure to declare taxes are punishable by imprisonment of up to a maximum of 3 years ( Selin, 2009).
As in the case of most of the countries punishment of tax evasion is thought to act as deterrence yet still many countries face the challenges of tax revenue collection. For many, tax
evasion has to be dealt with robustly all the time. But in a recession, when ordinary lawabiding tax payers are suffering real hardship, the need to deter, detect and prosecute those
who evade tax is greater than ever. In many countries the level of deterrence is too low to
explain the high degree of tax compliance. Moreover, there is a big gap between the amount
of risk aversion that is required to guarantee such compliance and the effectively reported
degree of risk aversion. For example in Switzerland the relative risk aversion varies between
9
1 and 2, but a value of 30.75 would be necessary to reach the observed level of tax compliance of 76.52 percent (Frey &Feld, 2002).
2.2.2 Wagner’s Law of Increasing State Activity
The Law of increasing State activity was introduced by Adolf Wagner a nineteen century
German economist to explain the growth of the share of public expenditure in Gross National
Product (GNP). He divided government expenditures into three categories namely; administration and defense, cultural and welfare, and provision of direct services by government in
case of market failure. It is well known that rather than allow for monopoly to emerge, government usually creates Statutory Corporations such as NITEL, Post Office, and Water
Boards etc., to cater for the welfare of the people. Wagner’s Law states that as per- capita
income increase, the relative size of the public sector will grow.
According to Wagner as the economy becomes industrialized, population tends to concentrate
in the urban areas. This in turn leads to externalities (market failure) and congestion, which
require government intervention and regulations. Legal authorities and the police emerge to
address problems of law and order, peace and security. Banking services by the State arise to
link surplus funds with those who have the investment opportunities. The increase of public
expenditures on recreation, education, health, and welfare services is explained in terms of
the high population in the urban centers. Wagner argued that as real income increases, public
expenditure on education, recreation, health etc would increase more than the increase in real
income. This explains the increasing ratio of government expenditure to gross national product.
Wagner’s theory of increasing State activity has many defects. First, it is not a wellarticulated theory of public wants; rather it is an organic theory of the State where the State
behaves as if it were an individual and takes decisions independent of members of the society. Secondly, the predictive power of the theory is very much doubtful. It is not always true
that as par-capita income grows, the share of public expenditure in GNP increases. The share
of public expenditure may actually decrease as the economy grows particularly when the private sector is strong and dynamic.
2.2.3 Compliance Theory
At the broadest level, questions of compliance are questions about behavioral motivations.
What leads a state, firm, or individual to act in compliance with laws? March and Olsen
(1998) divided the basic logic of human action into the logic of consequences and the logic of
10
appropriateness. The logic of consequences views actors as choosing rationally among alternatives based on their calculations of expected consequences, whereas the logic of appropriateness sees actions as based on identities obligations, and conceptions of appropriate action.
As it will be shown in the following sections, tax reforms is undertaken after tax authorities
feels there is a shortfall from tax revenues.
Tax policy should be guided by the general principles of neutrality, equity, and simplicity.
Recent attempts at tax reform have given due consideration to tax preferences such as incentives, credits, tax reliefs, tax holidays, exemptions, deductions and special treatments. On the
other hand, some tax reformists argue that such tax preferences and subsidies may push small
businesses into the informal sector due to the exceptional treatment given to large or wellconnected businesses. Instead, tax credits and investment allowances (with suitable safeguards to minimize dangers), and accelerated depreciation are preferred instruments of advanced tax policies. There is an increasing trend towards the abolition of tax exemptions/privileges from tax laws and their replacement with reduced tax rates or the application
of flat tax rates. Taxpayers have limited ability to keep accounts. As a result, governments
often take the path of least resistance, developing tax systems that allow them to exploit
whatever options are available rather than establishing rational, modern and efficient tax systems.
11
2.3 Conceptual Framework
Conceptual framework is a concise description of the phenomenon under study accompanied
by a graphical or visual depiction of the major variables of the study (Mugenda & Mugenda,
2008). Independent variables are variables that can be manipulated in order to establish its
effective influence on another variable.
Tax Legislation Reforms


VAT Law
Tax Procedures Act
KRA Performance
Tax Rates Reforms

PAYE Rate Changes

VAT Rate Changes


Revenue collected
Customer Satisfaction
Tax Regulatory Reforms

Alternative
Dispute
Resolution

Tax Base Expansion
Independent Variables
Dependent Variable
Figure 2.1 Conceptual Framework.
2.4 Review of Variables
2.4.1 Tax Legislation Reforms
These are practical changes in tax law aimed at making tax system responsive to the changing
needs of the economy. It is usually legislated in parliament to make it operational. The main
factors contributing to an improved revenue performance are changes in tax legislation, tax
administration and minimal tax evasion (Mirrlees,2010). Kenya operated tax system inherited
from the colonial government since independence until early 1970s when policy and administrative changes were initiated. According to KIPPRA (2006), there was little problem with
revenue mobilization until 1970s energy crisis necessitated tax reforms to mobilize more revenue. Kenya adopted the income tax act in 1973 (African Development Bank Group, 2010).
12
According to a study by African Development Bank Group (2010), the initial measures were
aimed at widening the tax base by way of introducing the sales tax in 1973 and the capital
gains tax in 1975. This was a reactive strategy aimed at militating against the decline in duty
revenues brought about by the imports substitution industrialization policies. The capital
gains tax was later abolished in 1984. The major tax reforms began in 1985 following a study
by World Bank (1985) which undertook a review of International Journal of Economics and
Finance Vol. 6, No. 10; 2014 98 Kenya’s economic policy that led to a Sessional Paper No. 1
of 1986.
The second phase of tax reforms was Tax Modernization Programme (TMP) which took
place between 1986 and 2002. TMP had the following policy objectives; raise revenue from
22 to 28 percent of GDP, improve economic efficiency of the tax system through lowering
and rationalization of tax rates, enhance greater reliance on self-assessment system supported
by selective tax audits, improve administrative efficiency through computerization, address
constraints in existing tax structures as well as overreliance on direct taxes (KIPPRA, 2006).
For revenue administration reform to be successful, critical requirements have to be met, including: a strong political commitment to reform, with clear decisions and the provision of
necessary resources, professional and stable leadership, a willingness to abandon old, ineffective practices, and the establishment of a formal reform project with a clear achievable mandate, agreed objectives, and realistic timeframes. Reforming revenue administration is neither
quick nor simple. There are a great many challenges to be faced, and these tend to mirror the
preconditions for success. In a study conducted by Crandall and Bodin (2005) on revenue
administration reforms in Middle Eastern countries between 1994-2004, they found that
Egypt and Lebanon had made significant improvements with the system acquired for the
VAT, although it is not yet being used for income tax. Jordan was planning improvements
and, some improvements had taken place in Morocco, Pakistan, Saudi Arabia, and Sudan.
In Kenya, the VAT Act was repealed in September 2013 and in its place the VAT Act, 2013
was enacted. This brought with it drastic changes including the removal of long lists of exempt and zero rated supplies. The exempt supplies are not subject to VAT and are listed in
the First Schedule to the VAT Act. Zero-rated supplies are listed in the Second Schedule to
the VAT Act and are taxed at 0 %. Withholding VAT has been reintroduced where selected
corporate entities, government departments, ministries and parastatals are mandated to with-
13
hold VAT at 6% from their suppliers during payment and remit the same to KRA (Oxford
Business Group, 2016).
In 2016, Tax Procedures Act came into play by harmonizing the penalties and fines of all tax
laws. The TPA also harmonizes and consolidates tax procedural rules; it provides that the
taxpayer should keep records for five years. Previously, the different tax laws, such as VAT
Act, 2013, Income Tax Act, and Exercise Act prescribed different timeframes that records
should be kept by taxpayer (PWC, 2019). According to KRA 6th corporate plan of
2015/2016-2017/ 2018, changes in the tax law and government expenditure in the annual
national budget have a major impact on how KRA conducts its business. Many of these
changes have a significant impact on KRA in terms of the scope and effectiveness of service,
cost of service delivery and taxpayers’ perception. The Authority must therefore find ways to
effectively administer these changes in a way that minimizes complexity, tax burden and cost
of collection. With the advent of EAC, the changes may be more pronounced depending on
the political consensus.
The Government will also be expected to complete the review of the Income Tax law so as to
modernize it and align it to international best practice. Considering rationalization of public
expenditures to enhance efficiency and productivity in service delivery may be onerous more
so if there is no collaboration between the National Government, County governments and
related government agencies. Additionally, there was the introduction of the Tax Procedures
Act which basically harmonizes the three tax laws of Kenya.
2.4.2 Tax Rates Reforms
Tax Rate reforms can be viewed as a process of changing the way taxes are collected or managed by the Government and is usually undertaken to improve tax administration which can
include; reducing or increasing tax rates, zero rating and exemption.
Over time, Kenya has moved from being a low tax burden country to a high tax burden country yet the country faces the obvious need for more tax revenues to maintain public services
(KRA, 2004). Tax rates are structured into two; individual rates and corporate rates. Tax rates
can encourage compliance or tax evasion. Governments use different kinds of taxes and vary
the tax rates. This is done to distribute the tax burden among individuals or classes of the
population involved in taxable activities, such as business, or to redistribute resources between individuals or classes in the population. According to World Bank (2018), Kenya’s
revenue is not growing as fast as the economy, the World Bank has said. In the 2016/17 fi14
nancial year, tax-to-GDP (gross domestic product) ratio fell to 16.9 per cent, the lowest in a
decade. Tax revenue, said the Bretton Woods institution, and is not keeping pace with the
expansion in expenditure and the buoyancy of economic growth, bringing into question
KRA’s aggressive efforts to ensure tax compliance.
Therefore, by increasing tax rates, there is no given certainty that there will be more revenue
generation. Where taxes are not evadable, some businesses for instance the foreign investors
opt to pull out and this has a direct effect on revenue collection. Some studies recommend
broadening of tax network instead of raising tax rates to the expense of affecting economic
activities (Hungerford, 2010; Janet, 2016). A study by Hunay and Skudar (2006) attributed a
partial contribution of economic growth to foreign direct investment because foreign affiliates increased the general level of productivity, export propensity and profitability in all sectors of the economy. In this study, 43% and 37% felt that FDI increases the general level of
productivity and therefore taxation of foreign subsidiaries raises government revenues. The
government should lower the tax rates to increase voluntary compliance by tax payers since
they do not feel over-burdened by taxes. This will, in return, encourage foreign direct investment.
In 2014, the Value Added Tax Amendment took effect. The aim of this amendment was to
protect the low income earners from the increasing prices of basic commodities; and the
changes included an expanded list of services and goods that are exempt from value added
tax. This amendment rectified by getting rid of the ambiguity in some items in the list of exempt supplies (EY, 2014).VAT is levied under the VAT Act, 2013 and the VAT regulations,
2017.There are various types of supplies that attract VAT at different rates: 16% for taxable
local supplies, 0% for zero rated supplies, exports for exempt supplies and the reduction on
local supply of fuel from initial proposed 16% to 8 % (effective September 2018) (PWC,
2019). According to KRA, (2017/2018) VAT recorded growth of 7.5 % mainly driven by the
reintroduction of withholding VAT framework which now comprises almost 7,000 agents.
VAT has consistently performed strongly since 2013 with annual growth averaging 21.5%.
The implementation of the Finance Act 2017 followed new PAYE tax rates coming into place
effective 1st January 2018, meaning all submissions for payrolls from January 2018 reflected
the new rates. These changes in PAYE bands and personal relief will yield monthly tax savings ranging from shs 184 to shs 667.5 depending on an individual’s salary (KRA, 2017).The
changes will raise the effective tax –free income threshold highly benefitting those at the bot15
tom of the income pyramid. While low –income earners have gained less from the changes in
the PAYE taxes; they are exclusive beneficiaries of tax exemption on their bonuses, retirement and overtime pay as effected earlier (KRA, 2017).According to KRA, (2017/2018)
PAYE recorded growth of 9.2% mainly driven by improved compliance within the Public
Sector following the establishment of a dedicated compliance programme within KRA for
this critical sector. The new compliance programme focuses on education and compliance
support interventions geared towards helping public enterprises better understand on new
PAYE band rates requirements, with a resultant 29.5% increase remittances from the sector.
2.4.3 Tax Regulatory Reforms
In 2015, there was the operationalization of the Alternative Dispute Resolution (ADR) strategy, a more effective way of resolving taxpayer disputes than prosecution. This was done with
an aim of addressing the challenges relating to the increasing tax challenges by reducing legal
actions and processes. This was to consequently enhance revenue collection by making available the revenues that were being held up by other tax dispute courts and tribunals (KRA,
2016). Since then, over 191 cases have been resolved (KRA, 2019).
In line with the Tax Base Expansion programme, Kenya Revenue Authority states in its 7th
corporate plan (2018-2021) that it intends to increase the number of active taxpayers from
3.94 million to 7 million. This is to be achieved by having an additional 418,000 individual
taxpayers driven by normal growth of the economy based on the 3.2 million taxpayers who
compliant in 2017/18, an additional 10,500 corporate bodies based on normal economic
growth based on the 78,000 corporate who were filed their tax returns in 2017/18.
Further to that, the target will be achieved by focusing on the 1.56 million taxpayers with
Single Business Permits (SBPs) who were not in the previous Turnover Tax Regime, the
25,000 professionals who are not in the tax net, and 40,000 individuals trading online. Additionally, there will be the recruitment of 66,000 landlords, 430,000 registered companies that
are not seen to be active in the system, and 511,000 informal sector players (KRA, 2019).
2.4.4 Kenya Revenue Authority Performance
The government targeted revenue collection including Appropriation-in-Aid (AIA) of Ksh
1.7 trillion (20.6 percent of GDP) for the FY 2017/18 from Ksh 1.5 trillion (20.4 percent of
GDP) in the FY 2016/17. Ordinary revenues mainly taxes are projected at Ksh 1.5 trillion
(18.7 percent of GDP) in the FY 2017/18 up from the projected Ksh 1.37 trillion (18.4 percent of GDP) in the FY 2016/17. The Kenyan government has indicated that this performance
16
will be underpinned by on-going reforms in tax policy and revenue administration, through
automation and inter agency collaboration and connectivity.
In relation to the above, the Kenya Revenue Authority had targeted to collect of Ksh 4,185.6
billion from all sources including, but not limited to, customs and domestic taxes between the
period of 2015/16 - 2017/18. The actual performance, however, was Ksh 4,000.8 billion
which implies a performance of 95.6% with an average growth of 10.4 per cent and a deficit
of Ksh 184.8 billion. The actual cumulative estimated impact of macroeconomic variance
was Ksh 69.8 billion, accounting for 37.8 per cent of the shortfall, and variances in the inflation rates and Real GDP growth rates led to foregone revenue of Ksh 49,329 million and Ksh
13,860 million, respectively (KRA, 2019). This performance is an improvement from the
previous plan period - 2012/13-2014/15- where the actual revenue collected was Ksh2, 833.9
billion. This translates to a 41.2% increase in the revenue collected by the authority between
the two plan periods.
Customer satisfaction is another key performance indicator in gauging the performance of the
authority. The 2013/14 customer satisfaction survey found customer satisfaction rates of
65%, KRA’s systems having the highest percentage of 73%, and the compliant handing process at 63%. There was an improvement of performance to 71.9 % in 2016/17 against a target
of 80%. These was as a result of staff adherence to core values, proficient resolution of taxpayers’ complaints, increased presence of the staff in the Huduma Centres and implementation of service centres. (KRA, 2019)
2.5 Empirical Review
Mokua (2012) carried out a study to investigate the impact of tax reforms that have been undertaken in Income tax, Excise duty, Import duty and sales/Value Added tax on revenue
productivity. The study sought to specifically estimate the effect of tax reforms on buoyancy
of Income tax and Value Added tax, as well as estimating the effect of the reforms on elasticity of the tax system. Published secondary data was used to analyze the relationship between tax reforms and revenue productivity and before, after piecemeal/policy and during the
comprehensive reform buoyancy and elasticity were estimated using regression analysis. The
regression result showed that total tax in Kenya was inelastic during the three periods, but it
was buoyant during the pre-reform and piecemeal reform periods.
Gachanja (2012), in his research on the effect of tax reforms and economic factors on tax
revenues in Kenya observed that Kenya introduced the tax modernization programme in 1986
17
with the hope that this would, among other things, enhance revenue collection. The objective
of this study was to establish the effect of tax reforms and economic factors on tax revenues
in Kenya. A co relational study design was selected. Secondary data was collected for a ten
year period (2000-2009) from various sources included the Central Bank of Kenya website,
the Kenya National Bureau of Statistics, Transparency International website and the World
Bank website. The trend analyses revealed that there corruption index in Kenya had been
improving since 2000 while tax revenues had been rising over the period. The OLS regression revealed that the independent variables accounted for 91.6% of the variance in tax revenues. Reforms were negatively and significantly correlated with tax revenues, which had a
positive and significant influence on tax revenues, while corruption had a positive but insignificant impact on tax revenues. The study concluded that tax reforms have negatively contributed to tax revenues in Kenya while economic conditions (GOP) have positively impacted
on revenues.
Muriithi andMoyi (2003) carried out a study to analyze the productivity of Kenya’s tax structure in the context of the tax reforms. The findings suggest that tax reforms had a positive
impact on the overall tax structure and on the individual tax handles, even though the impact
of the reforms was not always uniform. The reforms had a bigger impact on direct taxes than
on indirect taxes, suggesting that revenue leakage is still a major problem for indirect taxes.
Ondieki (2013) carried out a study on responses by Kenya Revenue Authority to the challenges encountered in the implementation of the customs’ reforms and modernization. In particular the study sought to establish how KRA implemented the CRM program, the challenges in the process of implementing the same, and how the Authority responded to those challenges. The study revealed that the greatest challenges encountered by KRA were resistance
to change, lack of requisite skills, lack of resources, and also lack of a supportive telecommunication infrastructure.
2.6 Critique of Existing Literature
Past reviewed literature observes that tax policies are continually subjected to pressure and
changes which most time does not guarantee outcome that are in line with the overall goal
(James & Asiweh, 2012). Various other studies that have focused on response of tax revenues
to GDP growth have established a positive and significant causal relationship between GDP
and revenues from tax (Wawire, 2008, Ondiek, 2013; Muriithi and Moyi, 2007). Further
Mokua (2012) carried out a study to investigate the impact of tax reforms that have been un18
dertaken in Income tax, Excise duty, Import duty and sales/Value Added tax on revenue
productivity. However, these studies have not addressed the response of specific tax revenues
(specifically customs taxes) to tax reforms and economic growth. There is need to disaggregate tax in order to identify the effectiveness of tax reforms on individual taxes. Furthermore,
some of the reviewed studies have been phased out by time. For instance, Nada and Jack
(2009) examined tax reforms in Kenya particularly in regard to policy and administrative
issues. The study acknowledges that tax system in Kenya has undergone perpetual reform
over the past two decades. Rizal & Palil, (2011) based their studies on the tax reforms period
from 1970-1994. These studies cannot be used to evaluate the present day effect of the tax
policy reforms since other reforms have been undertaken over the years and productivity in
the countries has also changed and thus there is need for a study to be conducted on recent
years.
2.7 Research Gaps
Ondieki (2013) carried out a study on responses by Kenya Revenue Authority to the challenges encountered in the implementation of the customs’ reforms and modernization. The
study revealed that the greatest challenges encountered by KRA were resistance to change,
lack of requisite skills, lack of resources, and lack of a supportive telecommunication infrastructure. However the study was more concerned on how KRA implemented the CRM program, the challenges in the process of implementing the same, and how the Authority responded to those challenges. The study did not interrogate how tax policy reforms affect revenue collection. The current study will bridge the literature gap by looking at tax policy reforms and KRA performance.
Mokua (2012) carried out a study to investigate the impact of tax reforms that have been undertaken in Income tax, Excise duty, Import duty and sales/Value Added tax on revenue
productivity. The study sought to specifically estimate the effect of tax reforms on buoyancy
of Income tax and Value Added tax, as well as estimating the effect of the reforms on elasticity of the tax system. The regression result showed that total tax in Kenya was inelastic
during the three periods, but it was buoyant during the pre-reform and piecemeal reform periods. However, the study used published secondary data to analyze the relationship between
tax reforms and revenue productivity and failed to adopt primary data using questionnaires,
which limited the study evidence. This research study will adopt primary data methods by use
of questionnaire in addition to secondary data to examine the relationship between tax policy
reforms and KRA performance.
19
2.8 Summary
The chapter reviewed the theories related to the study which included the rational choice theory, Wagner’s law of increasing state activity and compliance theory. It also covered the empirical facets of tax policy reforms and revenue collection. The conceptualized tax reforms
are; tax legislation reforms, tax rates reforms and tax regulatory reforms. The linkages among
the variables were determined and a conceptual framework was hypothesized and relevant
gaps explained.
20
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter explains research methodology of the study also provides a general outlook for
this research; the research design, target population, the sample, research instruments, pilot
testing which validity and reliability and finally Data analysis describing how the data
collected was analyzed in an attempt to answer the research questions.
3.2 Research Design
The study adopted a descriptive research design, Saunders et al. (2012), explain this as a
study designed to depict the participants in an accurate way. This research design allowed a
detailed description and analysis of the variables under study; descriptive allows describing
and presenting their accurate profiles as it exists without influencing it in any way and explaining their relationship without manipulation as supported by Saunders et al. (2009).
3.3 Population of the Study
The study thus focused on selected sections within the Larger Domestic Tax Department
(DTD); Audit section, Compliance section, Tax Recruitement and Registration section
(TRR), Taxpayer services section (TPS), Debt Section and Customer Service section from
KRA Mombasa North office .The KRA staffs in these DTD sections were preffered because
the researcher believes that they have the right and accurate information regarding the topic
under study since they participate mainly in the collection of Revenues.
Table 3.1 Target Population
Category
Audit section
Target Population
14
Compliance Section
25
Debt Section
10
Tax Recruitment/Registration & Taxpayer Service Section
35
Customer Service Section
30
Total
114
Source: Mombasa North tax district (KRA, 2018)
21
3.4 Sampling Frame
The Study was carried out in Mombasa North Tax District in Kenya. The researcher mainly
concentrated on Domestic Tax Department (DTD. The target population in this study was
114 KRA officers spread in the Audit section, Compliance section, Tax Recruitement and
Registration section (TRR), Taxpayer services section (TPS), Debt Section and Customer
Service section in Mombasa North as at 2018.
3.5 Sample Size and Sampling Techniques
Sampling is concerned with the selection of a subset of individuals from within a statistical
population to estimate the characteristics of the whole population (Berinsky, 2008). Orodho
(2010) defined sampling as a technique where investigators seek knowledge or information
about a whole population, subject or event by observing a sample and extending to the entire
population representation. The general goal of sampling method was to obtain a sample that
is represented of the target population. A simple Random Sampling method was applied and
the Slovin’s formula was used to determine sample size as shown below.
n=
N
1 + N(e)2
Where,
N=
Target Population size
n=
Sample size
e=
Margin error to be decided by the researcher
Therefore,
n=
114/1+114(0.05)2
n=
89
22
Table 3.2 Sampling Size
Category
Sample Size
Audit Section
9
Compliance Section Persons
20
Debt Section
5
Tax Recruitment/Registration & Taxpayer Service Section
30
Customer Service Section
25
Total
89
3.6 Data Collection Instruments
Data collection methods are defined as ways of gathering facts that include behaviours,
attitudes and perceptions from the respondents (Cooper & Schindler, 2008). A structured
Likert scale questionnaire was used to collect primary data in order to minimize response
variation as well as taking less time to code and transcribe. Secondary data from other
researches, revenue Authority Reports and Corporate plans, books, journals among others
were used to assist the researcher in making informed assumptions in order to achieve the
required results. The secondary sources are intended to provide background information of
the study.
3.7 Data Collection Procedure
The structured questionnaires to be adopted were administered by the use of drop and pick
method. The researcher provided for sufficient time for respondents to fill in the
questionnaires, follow up interviews assisted in making sure the collection instruments are
duly filled. Questionnaires are relatively easy and inexpensive to administer for the simplest
of designs (Ader, 2008).
3.8 Pilot Testing
In order to ascertain the reliability and validity of the instrument the pilot study were conducted on a portion of the population. These results were therefore analyzed using SPSS to
determine validity using Cronbach’s alpha and content validity.
23
3.8.1 Reliability
According to Abbott and McKinney (2013), Reliability is the degree to which an examination
measure gives a steady assessment of an idea. In order to ascertain the reliability of the questionnaires, the researcher conducted a pilot study on the questionnaires by administering it to
12 KRA staffs – 10% of the sample size – from whom data will not be collected during the
actual time of undertaking the research (Connelly, 2008).
3.8.2 Validity
Validity alludes to how much evidence and hypothesis bolster the translation of test scores
involved by the utilization of tests (Abbott & McKinney, 2013). Validity can be measured by
the extent the data obtained accurately reflects the theoretical or conceptual concepts; that is
if the measurements gotten are consistent with the expectations. Validity of the questionnaire
was addressed with the help of Lecturers at KESRA, their important corrections, proposals
and comments suggested by them assist in the validation of the instrument.
3.9 Data Analysis and Presentation
For this study, descriptive statistics was adopted, Follow ups and interviews were analyzed
by computing the percentages, mean, standard deviation and variance using Statistical
Package for Social Sciences computer software.After collecting the questionnaires, data were
sorted out to identify filled and unfilled items, identify relevance of the responce, spelling
mistakes and wrong respondents.
Descriptive and inferential statistics was used to analyse the data and presenting them in the
form of graphs, pie charts , bar charts and percentages to analyse the data. Descriptive
statistics contains discrete data (Mugenda &Mugenda,2008) the analysed data was used to
summarise finding and describe population sample involved. For inferential statistics the
linear regression model was adopted together with Karl Pearson Coefficient of correlation to
determine the effect of independent variables on dependent variable, multiple linear
regression model was
applied using Statistic Practice for Social Science (SPSS). The
independent variables include legislation review, PAYE and VAT review, Regulatory
reforms and the dependent variable tax collection.
For analytical analysis, the multiple linear regression models were specified as:
Y= β0 + β1X1 + β2X2 + β3X3+ ε
This is a multi linear regression model
24
where : Y = Dependent variable of KRA Performance
β0 is the Y-intercept,KRA performance when other factors are zero
β1 ,β2, β3-the regression coefficients
X1= Tax legislation Reforms,
X2=Tax Rate Reforms
X3=Tax Regulatory reforms
ε= the residual error of regression
25
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Introduction
The general objective of the study was to determine the effect of tax policy reforms on the
performance Kenya Revenue Authority in Mombasa North Tax District. Statistical Packages
for Social Sciences (SPSS) was used to analyze data. Data was analyzed using both descriptive and inferential statistics. Correlations and regression analysis were used to describe the
association and relationship between the dependent and independent variables.
4.2 Response Rate
A total of 89 questionnaires were administered to KRA staff in Mombasa North of which 85
were filled and returned. This represented a successful response rate of 96%. According to
Babbie (2014) return rates of 50% are acceptable and fit to analyze and publish, 60% is good
and 70% is very good.
Table 4.1: Response Rate
Responses
Frequency
85
Percentage
96%
Non-responses
4
4%
Total
89
100%
4.3 Pilot Testing
During piloting, the researcher sought to measure the data collection instrument’s reliability,
with the use of SPSS Cronbach alpha, the researcher was able to determine the instruments
internal consistency as shown in the reliability results table below.
4.3 Reliability Testing
The study conducted reliability test, to test instrument’s ability to produce coherent and stable
measurements. In this study, reliability was tested using Cronbach’s coefficient alpha (a).
Cronbach’s alpha measures internal consistency of the items in a questionnaire. Larry (2013)
adds that Cronbach Coefficient can be used to test internal consistencies of items/traits
of a construct when a research instrument has Likert scales with multiple responses
for data collection. Therefore, it is appropriate for this study to apply Likert scale with multi26
ple responses. To achieve this, SPSS was used to analyze data and results are as shown in
table 4.2 below.
Table 4.2: Reliability Results
Scale
Tax Legislation Reforms
Cronbach’s Alpha
0.715
N/of Items
4
Comments
Acceptable
Tax Rate Reforms
0.704
4
Acceptable
Tax Regulatory Reforms
0.724
4
Acceptable
KRA performance
0.717
4
Acceptable
4.3.2 Validity Testing
The validity refers to the extent at which observed results reflects a true reality. The questionnaire was simplified in a language that all participants were familiar with. To determine
internal validity of a questionnaire, researcher did a pilot test where 10% of participants from
the population were selected to fill the questionnaire. The results of the pilot test established
that the questionnaire was easy to answer and the questions were easily understood by the
respondents.
4.4 Demographic Analysis
In trying to assess demographic characteristics of the respondents. Study used level of education, work experience; department and type of business in Mombasa North to determine the
effect of tax policy reforms on the performance of KRA in Mombasa North. Results of the
findings were tabulated as follows;
4.4.1 Level of Education
The study wanted to establish the level of education of the respondents so as to determine if it
had any influence on KRA performance in Mombasa North tax district. The data findings for
level of Education are presented in table 4.3.
27
Table 4.3 Education & Professional
Level of Education & Professional
Level
Certificate & Diploma
Frequency
22
Percentage
25.9%
Degree
30
35.3%
Non-Academic
22
25.9%
Others if any
11
12.9%
Total
85
100%
Table 4.3 above, shows that majority 35.9% had attained degree, 25.9% had attained professional account, and 25.9% had certificate and diploma while 12.9% had other form of education qualification. This is represents a good distribution which is likely to give balanced opinions that cut across all levels of education.
4.4.2 Work Experience
The study sought to investigate relevance of work experiences on KRA performance in
Mombasa North. Results was obtained and presented as shown below
Table 4.4 Work Experience
Valid 0-3 years
Frequency
12
Percentage
14.1%
4-8 years
37
43.5%
9 -13 years
26
30.6%
Above 14 years
10
11.8%
Total
85
100%
Referring to above table, results findings showed that 14.1% of respondents had work experience less than 3 years, 43.5% had work experience between 4 and 8 years, and 30.6% had
work experience between 9 and 13 years. And, above 14 years had 11.8% work experience,
implying that majority of the respondents had experience on effect of tax policy reforms on
performance of Kenya Revenue Authority in Mombasa North Tax District.
28
4.4.3 Type of Business
The study sought to investigate the relevance of type of business assigned to the respondents
on effect of tax policy reforms on performance of Kenya Revenue Authority in Mombasa
North. Results were obtained and presented as shown below.
Table 4.5 Type of Business
Frequency
Percentage
Valid Service
25
23.5%
Trading
32
41.6%
Wholesale
28
34.9%
Total
85
100%
Referring to table 4.5 above, results findings showed that 23.5% of respondents are in service
industry, 41.6% in trading business and 34.9% are in wholesale business, implying that majority of the respondent’s majors runs various trading business in Mombasa north tax district.
4.5 Variables of the study
4.5.1 Tax Legislation Reforms
The researcher sought to establish the effect of tax legislation reforms on KRA performance
in Mombasa North tax district. Using a five point Likert scale of 1-5 where 1=Strongly Disagree, 2=Disagree, 3=Not Sure, 4=Agree, and 5=Strongly Agree. The results were as shown in
table 4.6. The table shows that the responses had a mean of >3.0 which imply that tax legislation reforms highly determined KRA performance in Mombasa North tax district. The results
also had a standard deviation of <1.5 which showed that the difference in response received
from the population was almost similar. Based, on the findings as indicated in table 4.6, on
whether the reforms or changes in tax legislation and tax administration has greatly improved
the revenue performance had a(mean = 4.46, SD = 1.259). This is in support of (Morrisset &
Izquierdo, 2013) who noted that changes in tax legislation and tax administration with minimal tax evasion improves revenue performance. On whether, the continuous review of the
VAT Act is important to keep revenue Authority abreast with new and changing circumstances had (mean = 3.86, SD = 1.344). The modernization of tax laws has improved the economic efficiency of the tax system through lowering and rationalization of tax rates had a
29
(mean=4.26, SD= 1.156). It was also found with (mean = 4.28, SD=1.333) that the introduction of the Tax Procedures Act and changes in government expenditure in the annual national
budget have a major impact on tax collected. The findings correlate with those (Morrisset &
Izquierdo, 2003; Crandall Bodin (2005) in regards to revenue administration in Middle Eastern countries.
Table 4.6 Tax Legislation Reforms
N
Mean Std. Deviation
85
4.46
1.259
The continuous review of the VAT Act is important 85
3.86
1.344
85
4.26
1.156
85
4.28
1.333
Reforms or changes in tax legislation and tax
administration has greatly improved the revenue
performance
to keep revenue Authority abreast with new and
changing circumstances
The modernization of tax laws has improved the
economic efficiency of the tax system through
lowering and rationalization of tax rates
The introduction of the Tax Procedures Act and
changes in government expenditure in the annual
national budget have a major impact on tax collected
Average means
4.22
4.5.2 Tax Rate Reforms
The researcher sought to determine the effect of tax rate reforms on KRA performance in
Mombasa North tax district, using a five point Likert scale of 1-5 where 1=Strongly Disagree,
2=Disagree, 3=Not Sure, 4=Agree, and 5=Strongly Agree. The results were as shown in table
4.8. The table shows that the responses had a mean of >3.0 implying that tax rate reforms
highly determined KRA performance in Mombasa North tax district. The results also had a
standard deviation of <1.5 which showed that the difference in response received from the
population was almost similar. Table 4.7 shows that, reforms on duty rates greatly influences
the amount of revenue collected by the Authority as indicated with (mean = 4.26, SD =
1.156). It was also agreed with a (mean = 4.06, SD = 1.360) that Value Added tax Zero rated
has a significant effect on revenue collection. Furthermore, it was also agreed with a
30
(mean=4.32, SD= 1.391) that increment on the VAT and PAYE rates negatively affects the
KRA performance. The findings correlate with those of (Wawire, 2008 & Ondiek 2013) in
regards to response of tax revenues to GDP growth. Further, it was found with a (mean=4.15,
SD=1.291) that PAYE and VAT exemption have led to decrease in revenue collected.
Table 4.7 Tax Rate Reforms
N
85
Reforms on duty rates greatly influences the
Mean Std. Deviation
4.26
1.156
amount of revenue collected by the Authority
Value Added tax Zero rated has a significant effect 85
4.06
1.360
4.32
1.391
4.15
1.291
on revenue collection
Increment on the VAT and PAYE rates negatively 85
affects the KRA performance
PAYE and VAT exemption have led to decrease in 85
revenue collected.
Average mean
4.20
4.5.3 Tax Regulatory Reforms
The researcher sought to identify the effect of tax regulatory reforms on KRA performance in
Mombasa North tax district using a five point Likert scale of 1-5 where 1=Strongly Disagree,
2=Disagree, 3=Not Sure, 4=Agree, and 5=Strongly Agree. The results were as shown in Table 4.8. The table shows that the responses had a mean of >3.0. This also implies that Tax
Regulatory Reforms highly determined performance of KRA in Mombasa North tax district.
And, with a standard deviation of <1.5, it implies that the difference in response received
from the population was almost similar.
Based on the findings as indicated in able 4.8, the introduction of Alternative Dispute Resolution significantly helped in solving tax issues of taxpayers as shown with a (mean = 4.20,
SD=1.248). Furthermore, it was strongly agreed with a (mean = 4.24, SD = 1.233) that the
Alternative Dispute Resolution has helped in increasing the revenue collected. On whether
expansion of the tax base by recruiting more landlords will assist in enhancing KRA performance had a (mean= 4.29, SD = 1.215). Finally on whether tax base expansion through following up on the inactive taxpayers in the system will enhance KRA performance had a
31
(mean=4.04 SD=1.317).This implies that the management is usually engaged in tracking project progress. The findings correlate with those of Nada and Jack (2009) in regards to policy
and administrative issues
Table 4.8 Tax Regulatory Reforms
N
The introduction of Alternative Dispute Resolution 85
Mean Std. Deviation
4.20
1.248
has helped in solving tax issues of taxpayers.
The Alternative Dispute Resolution has helped in
85
4.24
1.233
85
4.29
1.215
85
4.04
1.317
increasing the revenue collected.
Expansion of the tax base by recruiting more
landlords will assist in enhancing KRA
performance.
Tax base expansion through following up on
the inactive taxpayers in the system will enhance
KRA performance.
Average mean
4.19
4.5.4 KRA Performance in Mombasa North Tax District.
Finally, the researcher sought to find out the performance of KRA in Mombasa North using a
five point Likert scale of 1-5 where 1=Strongly Disagree, 2=Disagree, 3=Not Sure, 4=Agree,
and 5=Strongly Agree. The results were as shown in table 4.11. And, a mean of >3.0, it implied that tax policy reforms is key in determining KRA performance in Mombasa North.
Based on results findings as shown in table 4.9, tax reforms have a positive impact on KRA
performance of the Mombasa North region as indicated with a (mean = 4.26, SD = 1.112).
It also found that improved customer service and relations increases the KRA performance on
the customer satisfaction level as indicated with a (mean= 3.98, SD=1.102). Further, it was
agreed as demonstrated by a (mean=4.24, SD=1.212) that the number of returns filed by the
taxpayers has a
significant impact on the revenue collected. Further respondents agreed
with a (mean = 4.46, SD = 1.259) efficient KRA systems have led to correct filing of returns
thereby improving performance.
32
Table 4.9 KRA Performances in Mombasa North.
N
Mean Std. Deviation
Tax reforms have a positive impact on KRA
performance of the Mombasa North region
85
4.26
1.112
85
3.98
1.102
85
4.24
1.212
returns thereby performance improving the KRA 85
4.46
1.259
Average mean
4.24
Improved customer service and relations increases
the KRA performance on the customer satisfaction
Level.
The number of returns filed by the taxpayers has a
significant impact on the revenue collected
Increased taxpayer resulting from
efficient KRA systems have led to correct filing of
4.6 Correlation Analysis
To establish the relationship between the independent variables and the dependent variable,
the study conducted correlation analysis which involved coefficient of correlation and coefficient of determination.
4.6.1 Coefficient of Correlation
Pearson Bivariate correlation coefficient was used to determine the correlation between the
dependent and independent variables. The independent variables were (Tax Legislation Reforms, Tax Rate Reforms, and Tax Regulatory Reforms. The dependent variable was KRA
Performance. As stated by Sekaran, (2015) the correlation is expected to take a linear trajectory with its coefficient ranging from
-1.0 (implying a perfect negative correlation) to +1.0 (implying a perfect positive relationship). Computation of correlation coefficient helps in establishing the strength of the relationship between independent variables and dependent variable (Kothari and Gang, 2014).
Table 4.10 shows Bivariate linear relationship between the study variables. The findings of
the correlation analysis indicated that there is a significant strong positive correlation between
tax legislation reform and KRA performance at Kenya Revenue Authority (r=0.526, pvalue=0.000). Therefore, an increase of tax legislation reform led to an increase in KRA performance. Regarding Tax Rate Reforms, the correlation coefficient was also positive (r =
33
0.852, p-value =0.000). This means that an increase in Tax Rate Reforms led to an increase in
KRA performance in Mombasa North tax district. Results of the study also showed that there
is a significant positive correlation between Tax Regulatory Reforms and KRA performance
(r=0.887, p-value =0.000) implying that Tax Regulatory Reforms negatively affects KRA
performance in Mombasa North tax district. This is in line with OLS regression findings that
revealed reforms are negatively and significantly correlated with tax revenues, which had a
positive and significant influence on tax revenues. Thus, the results suggest that tax policy
reforms leads to higher performance of KRA performance at Mombasa North. This further
implies that the variables could be selected for statistical analysis like regression analysis.
Table 4.10 Correlations
Performance Tax Legislation
Performance
1
Tax Rate
Tax Regulatory
Sig. (2-tailed)
Tax Legislation
.526**
1
Sig. (2-tailed)
.000
Tax Rate
-.852**
Sig. (2-tailed)
.000
.000
Tax Regulatory
.887**
.625**
.873**
Sig. (2-tailed)
.000
.000
.000
.528**
1
1
** Correlation is significant at the 0.01 level (2-tailed).
4.7 Regression Analysis
In order to answer the research questions, a standard multiple regression analysis was conducted using KRA performance as the dependent variable, and the three investigations factors, the effect of tax legislation reforms on KRA performance in Mombasa North, effect of
tax rate reforms on KRA performance in Mombasa North, effect of tax regulatory reforms on
KRA performance in Mombasa North. Table 4.11 presents the model regression results.
From the model summary it is clear that the adjusted R2 was 0.509 indicating that combinations of Tax Legislation Reforms, Tax Rate Reforms, and Tax Regulatory Reforms have a
significant effect on performance of Kenya Revenue Authority.
Table 4.7.1 Model Summary
Model R
R Square
Adjusted R Square Std. Error of the Estimate
34
1
.901a .813
.806
1.570
a Predictors: (Constant),tax Regulatory Reforms, Tax Rate Reform, Tax Legislation
4.7.2 Analysis of Variance
From the ANOVA table 4.12, it is clear that the overall standard multiple regressions model
(the model involving constant, Tax Legislation Reforms, Tax Rate Reforms, and Tax Regulatory Reforms). The regression model achieves a degree of fit as reflected by an R2 of 0.813
(F=117.123; P = 0.000 < 0.05).
Table 4.7.2 ANOVA
Model
Sum of Squares
1
Regression
866.448
df
3
Mean Square F
Sig.
288.816
117.123.000b
Residual
199.740
81
2.466
Total
1066.188
84
12.693
a Dependent Variable: Performance
b Predictors: (Constant), Tax Regulatory Reform, Tax Rate Reform, Tax Legislation
4.7.3 Regression Coefficient
The probability value of 0.000 indicates that the regression relationship was significant in
establishing how Tax Regulatory Reform, Tax Rate Reform, Tax Legislation affects KRA
performance. The F calculated at 5 percent level of significance was 21.800. Since F calculated is greater than the F critical (Value = 2.2899), the overall model was considered significant.
Table 4.7.4 Coefficients
Model
1
Unstandardized Coefficients
B
Std. Error
Standardized Coefficients
Beta t
Sig.
(Constant)
14.919
1.746
Tax Legislation
.178
.062
.117
2.870 .000
Tax Rate
.342
.104
.324
3.291 .000
Tax Regulation
.624
.107
.627
5.844 .000A
Variable: KRA Performance
35
8.546 .000
Dependent
4.7.5 Regression Coefficient
Table 4.7.4 presents the regression results on how Tax Regulatory Reform, Tax Rate Reform,
Tax Legislation Reforms affects KRA performance in Mombasa North. The multiple regression model equation:
Y= β0+β1X1+β2X2+ β3X3+ε, hence multiple regression equation becomes;
Y =14.919 + 0.178X1 +0.342X2 + 0.624X3.
Therefore, when all the study variables were held zero, KRA performance would be 14.919.
A unit increase in Tax Legislation with other factors constant would result into .178 changes
in KRA performance. A unit increase in Tax Rate Reforms would result into 0.342 changes
in KRA performance. A unit increase in Tax Regulation Reforms would lead to 0.624 increases in KRA performance. At 5% significance, Tax Legislation (p=0.000<0.05), Tax Rate
(p=0.003<0.05) and Tax Regulation (p=0.000) significantly contributed towards KRA performance. All studied variables were significant since their p-value were less than 0.05.
4.7.6 Variable Discussion
The findings of correlation analysis indicate that tax legislation had a positive and significant
relationship with KRA performance (r= .526, p=0.000<0.05). There is further a positive relationship between tax rate and KRA performance (r=0.852, p=0.000 <0.05). The study also
established a positive relationship between Tax Regulatory and KRA performance (r=.887,
p=0.000 < 0.005). In view of correlation of co-efficient results therefore, tax legislation
(p=0.000 < 0.005), tax rate (p=0.000 <0.05) and tax regulation (p=0.000 < 0.05) had significant but varied effect on the performance of KRA.
From regression analysis, at 5% significance, Tax Legislation (p=0.000<0.05), Tax Rate
(p=0.003<0.05) and Tax Regulation (p=0.000) significantly contributed towards KRA performance. The findings are in line with Gachanja (2012) who studied the relationship between revenues raised from Taxes by the Government and their effect on economic growth in
Kenya and established existence of a positive relationship between economic growth and tax
revenues. Masika (2014) also established a positive link between corporate and individual
taxes and economic growth.
36
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS.
5.1 Introduction
The chapter presents the summary of the findings as analyzed in previous chapter. Additionally, the conclusion is made based on the summary findings relating them with literature received. The recommendation is provided for as per the objectives researched on. Finally, the
study gives suggestions on areas for further research in relation with policy tax reform on
performance of Kenya Revenue Authority.
5.2 Summary Findings
Study based on an investigation on the effect of tax policy reforms on Kenya Revenue Authority performance in Mombasa North tax district. The study comprised of 85 respondents.
5.2.1 Tax Legislation Reforms
The first objective of the study was to establish the effect of tax legislation reforms on the
performance of KRA in Mombasa North tax district. The study looked at Tax Legislation
Reforms where tax legislation reforms or changes in tax laws and tax administration ranked
higher with a mean of 4.46, followed by the introduction of the Tax Procedures Act and
changes in government expenditure in the annual national budget having a major impact on
tax collected with a mean of 4.28 and then modernization of tax laws for economic efficiency
through lowering and rationalization of tax rates with a mean of 4.26.
When Tax Legislation Reforms with KRA performance were correlated there was a significant positive correlation of r=0.526 and p=.000. These findings were also supported by the
regression model as indicated by table 4.14. According to the regression model Tax Legislation Reforms was found to have a positive regression of 0.178 a significant effect on KRA
performance, concluding that Tax Legislation Reforms has effect on KRA performance. Thus
adoption of Tax Legislation Reforms would significantly address KRA performance.
In a study conducted by Crandall and Bodin (2005) on revenue Legislation reforms in Middle
Eastern countries between 1994-2004, they found that Egypt and Lebanon had made significant improvements with the system acquired for the VAT and have had positive effect on the
general performance on revenue collected, although it is not yet being used for income tax.
Jordan was planning improvements and, some improvements had taken place in Morocco,
Pakistan, Saudi Arabia, and Sudan.
37
5.2.2 Tax Rate Reforms
The second objective was to examine the effect of Tax Rate Reforms on the performance of
KRA in Mombasa North Tax District. The study looked at Tax Rate Reforms where Vat exemption was ranked higher with a mean of 4.26 followed by; increment on the Vat and
PAYE rates with a mean of 4.32 and finally, reforms on duty rates mean of 4.15.When Tax
Rate Reforms and KRA performance were correlated it was found to be statistically significant with a Pearson’s r= 0.852 which was above average correlation with significance of
p=.000. These findings were also supported by the regression model as indicated by table
4.14. According to the regression model Tax Rate Reforms was found to have a positive significant regression of 0.342 on KRA performance. Therefore, adoption of Tax Rate Reforms
in tax reform policy would significantly address performance in Kenya Revenue Authority.
According to KRA, (2017/2018), VAT recorded growth of 7.5 % mainly driven by the reintroduction of withholding VAT framework which now comprises almost 7,000 agents. VAT
has consistently performed strongly since 2013 with annual growth averaging 21.5%. PAYE
recorded growth of 9.2% mainly driven by improved compliance within the Public Sector
following the establishment of a dedicated compliance programme within KRA for this critical sector. The new compliance programme focuses on education and compliance support
interventions geared towards helping public enterprises better understand on new PAYE band
rates requirements, with a resultant 29.5% increase remittances from the sector.
5.2.3 Tax Regulatory Reforms
The third objective was to identify the effect of tax regulatory reforms on the performance
KRA in Mombasa North tax district. The researcher did look at the effect of Tax Regulatory
Reforms on performance of Kenya Revenue Authority where expansion of the tax base by
recruiting more landlords to enhance KRA was rated highly with a mean of 4.29, followed by
followed by Alternative Dispute Resolution helping in increasing the revenue collected with a
mean of 4.24 and, then the introduction of Alternative Dispute Resolution in solving tax issues of taxpayers with a mean of 4.20. When correlated with KRA performance, the Pearson’s yielded r=0.887 and statistically significant at p= .000. The study found that Tax Regulatory Reforms greatly affects KRA performance. Implying that adoption of Tax Regulatory
Reforms would affect performance of Kenya Revenue Authority. This concurs with 2015,
operationalization of the Alternative Dispute Resolution (ADR) strategy as a more effective
way of resolving taxpayer disputes than prosecution by addressing the challenges relating to
the increasing tax challenges by reducing legal actions and processes. This was one way of
38
enhancing revenue collection by making available the revenues that were being held up by
other tax dispute courts and tribunals (KRA, 2016).
5.3 Conclusions
The first objective of the study was to establish the effect of tax legislation reforms on the
performance KRA in Mombasa North Tax District. The researcher is in support of (Morrisset
& Izquierdo, 2003; Crandall Bodin (2005) who noted that changes in tax legislation and tax
administration would lead to significant improvement in revenue performance as in case of
tax administration reforms in Middle Eastern, Egypt and Lebanon.
The study further concluded that Tax Rate Reforms affects performance of Kenya Revenue
Authority positively and significantly. In this case VAT exemption, increment on the VAT
and PAYE and Zero rated Value Added were found to significantly affect revenue collection.
It was found necessary in support of (Muriithi & Moyi (2003) whose findings suggested that
tax reforms have a positive impact on the overall tax structure and on the individual tax, although the impact of the reforms might not always be uniform.
The study also found that Tax Regulatory Reforms leads to increase in revenue collection as
a result of expansion of the tax base by recruiting more landlords. Further the study found
that Tax Regulatory Reforms is able to resolve inherent challenges that are hindrance to revenue collection by adopting Alternative Dispute Resolution (ADR) strategy.
5.4 Recommendations
1. The study recommends that Kenya Revenue Authority adopt an effective tax policy reforms.
The study recommends that the organization adopt an effective tax legislation reforms and tax
administrative changes to enhance tax collection.
2. It is recommended that Kenya Revenue Authority adopts tax system that encourages taxpayers both corporate and individuals to remit their taxes in a more effective way.
3. The organization to adopt and continue to review Alternative Dispute Resolution (ADR)
strategy in order to address challenges encountered in the implementation of the tax reforms
and modernization.
4. Challenges encountered by KRA were lack of enough personnel, resources and supportive
telecommunication infrastructure. It is the recommendation of the researcher that the organi39
zation be fully funded by the Government to facilitate training and improvement in infrastructure.
5.5. Areas for further Research
Tax policy reform is a complex phenomenon that has been applied worldwide to improve
revenue collections. Given its wide contents, other studies should focus on how the other elements of tax policy reforms that can be adopted to enhance maximum revenue collections.
The researcher suggests that more study to be conducted to explain on the remaining 18.7%
variation on how variables under study that is tax legislation reforms, tax rate reforms and tax
regulatory reforms in other jurisdictions are adopted to enhance revenue collections.
40
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World Bank Group, (2018). Kenya Economic Update 18th Edition.
http://documents.worldbank.org/curated/en/766271538749794576/pdf/Kenya.
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APPENDICES
APPENDIX I: LETTER OF INTRODUCTION
Dear Respondent,
RE: REQUEST FOR RESEARCH PARTICIPATION
I am a student at Kenya school of Revenue Administration undertaking a post graduate diploma degree in Tax administration. I am conducting a research entitled “EFFECT OF TAX
POLICY REFORMS ON THE PERFOMANCE OF KENYA REVENUE AUTHORITY IN MOMBASA NORTH TAX DISTRICT”. The proposal is part of requirements of
my postgraduate diploma course. This research is carried out specifically for academic reasons. I write this with the hope that you will kindly aid in the research project whereby your
participation is totally voluntary. The data and information collected from you is personal and
it will not be used or exposed in other place.
Once you provide the information it will only be used as a basis of an academic research,
together with many other sources used in the entire process. Your contribution to this project
does not expose you to any risks. Any questions or additional information that might arise
during or after the study may be asked and will be highly appreciated. Be assured that this
research proposal has been reviewed, approved and validated by the University Committee of
Postgraduates.
Your contribution in this study is highly appreciated.
Yours Faithfully
…………………………………………………………………
Kenneth Sang
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APPENDIX II: QUESTIONNAIRE
This questionnaire has been designed to collect data on EFFECT OF TAX POLICY REFORMS ON THE PERFORMANCE OF KENYA REVENUE AUTHORITY IN
MOMBASA NORTH TAX DISTRICT. Information provided herein will be used solely
for academic research purpose.
SECTION A: BACKGROUND INFORMATION
1) Level of Education & Professional
Certificate & Diploma [ ]
Degree [ ] Non-Academic [ ]
2) For how long have you been in operation?
0-3 years [ ]
4-8 years [ ]
9 -13 years [ ]
3) What kind of business are you in?
Service [ ]
Trading [ ]
others if any [ ]
Above 14 years [ ]
Wholesale [ ]
SECTION B: TAX LEGISLATION REFORMS
Indicate the level of your agreement or disagreement on the extent of the statement:
5=Strongly Agree, 4=Agree, 3=Not Sure, 2=Disagree, 1=Strongly Disagree.
5 4 3 2 1
Statements
B1
Reforms or changes in tax legislation and tax administration has greatly improved the revenue performance.
B2
The continuous review of the VAT Act is important to
keep revenue Authority abreast with new and changing
circumstances.
B3
The modernization of tax laws has improved the economic
efficiency of the tax system through lowering and rationalization of tax rates
B4
The introduction of the Tax Procedures Act and changes in
government expenditure in the annual national budget have
a major impact on tax collected
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SECTION C: TAX RATES REFORMS
Indicate the level of your agreement or disagreement on the extent of the statement:
5=Strongly Agree, 4=Agree, 3=Not Sure, 2=Disagree, 1=Strongly Disagree.
5 4 3 2 1
Statements
C1 Reforms on duty rates greatly influence the amount of revenue collected by the Authority.
C2 Value Added tax Zero rated has a significant effect on revenue collection.
C3 Increment on the VAT rates negatively affects the KRA performance
C4 Increment on the PAYE rates negatively affects the KRA performance.
SECTION D: TAX REGULATORY REFORMS
Indicate the level of your agreement or disagreement on the extent of the statement:
5=Strongly Agree, 4=Agree, 3=Not Sure, 2=Disagree, 1=Strongly Disagree.
5 4 3 2 1
Statements
D1 The introduction of Alternative Dispute Resolution has helped
in solving tax issues of taxpayers
D2 The Alternative Dispute Resolution has helped in increasing
the revenue collected
D3 Expansion of the tax base by recruiting more landlords will
assist in enhancing KRA performance
D4 Tax base expansion through following up on the inactive taxpayers in the system has enhanced KRA performance
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SECTION E: KRA PERFORMANCE
Indicate the level of your agreement or disagreement on the extent of the statement:
5=Strongly Agree, 4=Agree, 3=Not Sure, 2=Disagree, 1=Strongly Disagree.
Statements
5
E1 Tax reforms have a positive impact on the performance of KRA in
Mombasa North region
E2 Improved customer service and relations increases the performance
of KRA on the taxpayer Compliance
E3 The number of returns filed by the taxpayers has a significant impact on the revenue collected
E4 Increased taxpayer Compliance resulting from efficient KRA systems have led to correct filing of returns thereby improving the
KRA performance
Thank You Very Much for Your Participation
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4 3
2
1
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