Impact of Taxation on the Cost of Business Operations among Small and Medium Enterprises in Nairobi County, Kenya

Abstract

Small and Medium Enterprises (SME) make-up the largest proportion of businesses all over the world and play tremendous roles in employment generation, provision of goods and services, creating a better standard of living, as well as immensely contributing to the gross domestic products (GDPs). However, over the last few decades their growth has been stunted due to many factors, top of which is the challenge of multiple taxations that has crippled production capacity of the manufacturing sector. The current study examines the effect of multiple taxations on the growth of SMEs in Nairobi County, Kenya. This research followed both descriptive and exploration design with the target population being all the registered SMEs in Nairobi County. Both stratified and simple random sampling techniques were used to draw sample of 114 finance managers. Data collection was done by use of questionnaires and document analysis. Data was analysed by use of both descriptive and inferential statistics. The main test of importance here was to find out whether or not the dependent variable (response) is determined by any group of independent variables (predictors). ANOVA test was used with the assumption in mind that the four samples were randomly selected from the population and the populations being sampled have equal variances. Chi-square was used to test for significant associations between independent and dependent categorical variables. Multiple regressions were used to predict factors influencing the cost of operation and its effect on growth of SMES. Results suggest that the taxes charged for the small and medium enterprises differed proportionally except for corporate tax (2010) and advance tax (2009). The results showed significant variations concerning the effect of taxation on the growth of varying small and medium enterprises. It was concluded that growth of SMEs largely depends on the cost of operations (arising from high rates of taxation); nature of SMEs and how these SMEs respond to the adverse effects of such high taxes. The study concluded that when the taxes charged are high, cost of running those businesses are consequently high. The study recommends the use of enhanced tax planning measures (tax avoidance, tax compliance and seeking competent tax advices) to mitigate the harmful effects of taxation and reduce their heavy tax burden.