College Papers

Tax of the GDP in Kenya and represented

compliance refers to fulfilling all tax obligations as required by the tax laws,
including but not limited to declaring income, filing a return, and paying the
tax due in a timely manner. High compliance costs, inadequate understanding,
high tax rates and tax penalties are some of the variables that can lead to tax
evasion and tax fraud. Their size, nature and operation make the issue of tax
compliance critical among the SMEs. They are not well established in terms of
resources and expertise. (Williams and Round, 2009).


developing countries, taxation in an important element in the management of the
national economy (Lyme and Oats, 2009). The purpose of taxation in Kenya is to
finance government planned activities. Article 209 of the constitution of Kenya
2010 grants powers to impose taxes as revenue source by both the national and
the county governments. However mobilizing sufficient tax revenue is a major
challenge due to narrow tax base and cases of non-compliance among taxpayers.
Tax noncompliance is a major challenge confronting tax administrations (Chau
& Leung, 2009; Terkper, 2003). In 2011, it cost governments worldwide about
5.1 % of their Gross domestic Product (GDP). Even in the most advanced
economies in the world, tax evasion undermines revenue collection substantially
(Rile, 2011).

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now


the three East African countries of Kenya, Uganda, and Tanzania, tax evasion as
a function of GDP is high. Uganda loses the least amount in tax evasion: In
2011, it lost 856 million USD, followed by Tanzania at 1.9 billion USD, and
Kenya loses slightly over 2 billion USD. In 2011, the informal economy
constituted 33% of the GDP in Kenya and represented 7% of total government
expenditure. The tax burden in Kenya would thus be high, standing at about
20.9%. If the Kenya government is to increase its social expenditure, then it
needs to reduce tax evasion in the informal economy (Griffiths, 2005).


Value Added Tax
is a tax on the value added to the supply by the last seller, (Radhakrishanan,
2008). VAT was introduced in Kenya in 1990 as a means of increasing the
government tax collections by widening the tax base. VAT is imposed by Kenya
revenue Authority (KRA) as per the laws of the Value Added Tax Act 2013. The
Value Added Tax is an indirect tax on consumption applicable on the sale of
supplies at all levels of production and distribution. VAT registered taxpayers
acts as agents in collecting and remitting collected VAT to the government. The
VAT paid on inputs in turn is claimed as credit when registered taxpayers
declare output VAT on their sales (VAT Act 2013 Sec 17). Suppliers of exempt
goods & services (VAT Act 2013, first schedule) do not charge VAT on their
supplies and cannot claim credit for VAT paid on their purchases. The VAT
system also contains zero rated goods and services (VAT Act 2013, 2nd
schedule). Businesses charge VAT at a rate of 0% on their supplies and are
allowed to deduct the input tax paid on the purchase of those zero rated goods
and services (VAT Act 2013 Sec 17). The government formulates policy and VAT
laws, KRA oversees implementation of the laws, professionals offer services to
ensure tax compliance, businesses act as agents in collecting VAT &
remitting it to the government and the general public is concerned about the
VAT rate which influences their spending and how the government is utilizing
the VAT revenue collected. VAT contributes about 23% of the total tax revenue
collection by the government (KNBS 2014).


There are a number of tax compliance theories
that have been developed by various scholars. The economic deterrence theory is
a theory under criminology that views a taxpayer as a perfectly moral,
risk-neutral or risk-averse individual who seek to derive maximum satisfaction whenever
the expected gain exceed the cost (Becker, 1968). The fiscal and social
psychology theory proposes that taxpayers are more willing to pay taxes if they
have a positive attitude towards the payment of taxes (Schmolders, 1960). The
theory has been built on by various scholars overtime. The taxpayers’
willingness to comply with tax authorities relates to the individuals’
attitudes and perception of the tax system (Strumpel, 1966).Psychology theories
examines taxpayers’ attitudes and beliefs so as to understand and predict their
behavior and factors affecting their tax compliance. Social psychology theories
inductively examine the attitudes and beliefs of taxpayers in order to
understand & predict human behavior and factors that affect taxpayers’
compliance attitudes. The ability to pay theory proposes that citizens to contribute
to the support of the government as nearly as possible, in proportion to their
respective abilities in terms of revenue (Mill, 1848).