Effect of Digital Payments on Value Added Tax Compliance among Manufacturing Firms in Athi River, Machakos County, Kenya

Abstract

Tax compliance is important as it has a direct impact on revenue for most governments around the world. Despite the reforms that the Kenya Revenue Authority has been undertaking to increase revenue collection, it has, of late, failed to meet its revenue targets, particularly VAT targets. This shows that there is a problem with VAT compliance in Kenya, and this challenge forms the main motivation for undertaking this study. In realization of this situation. This study aimed to determine the effect of digital payments on value-added tax compliance among manufacturing firms in Athi River, Machakos County, Kenya. The study was guided by the following theories: The study was guided by the Ability to Pay theory and the Innovation Diffusion theory. The study adopted an explanatory research design, and the target population was 263 manufacturing firms in Athi River, Machakos County, Kenya, and a Census survey was used for this study. After collection and analysis of the responses, 218 respondents correctly filled and submitted their questionnaires, indicating an 82.9% response rate. Questionnaires were used to collect primary data, and analysis included both descriptive and inferential statistics. The hypotheses were tested at a significance level of 0.05 using multiple regression analysis to analyze the data. The findings revealed that the digital payments exhibited a positive and significant effect on VAT compliance (β = 0.185, p = 0.011). The findings of this study provide policy recommendations for the government to improve value-added tax compliance. The study recommends that the government develop policies that incentivize cashless transactions while ensuring equitable access to digital financial services. Future studies should examine the effect of taxpayer sensitization on VAT compliance.