Impact of tax awareness on business financial performance of small and medium enterprises in Vihiga county, Kenya

Abstract

Small and medium-sized enterprises (SMEs) play an important role in many countries' economic development, contributing significantly to job creation, revenue production, and innovation. According to Algan (2019), SMEs account for approximately 90% of businesses globally and provide more than 50% of employment opportunities worldwide. Tax is a compulsory financial charge imposed by the government on individuals or entities to yield public income. Taxation is a key function of the government, where it collects revenues from taxpayers, which are used to finance public services and benefits for society (Murphy, 2002). Tax awareness plays an important role in determining the financial well-being and capacity of growth for businesses and shouldn't be underestimated, particularly for small and medium enterprises. Kenya's SMEs have been of great importance to economic growth, employment generation, and innovation, with estimates of share contribution of about 80% of total employment opportunities and 30% of GDP Kenya National Bureau of Statistics (2022). The general objective of the study was to establish the impact of tax awareness on the business financial performance of small and medium enterprises (SMEs) in Vihiga County, Kenya. Specific Objectives were: To assess the effect of tax incentives and credits on financial performance of SMEs in Vihiga County, Kenya, to assess the effect of tax incentives and credits on financial performance of SMEs in in Vihiga County, Kenya, to evaluate the effect of income tax awareness on financial performance of SMEs in Vihiga County, Kenya. The analysis of study variables shows varying effects of different tax components on the financial performance of SMEs in Vihiga County, Kenya. Tax deductions recorded a moderate influence, with the highest mean of 3.74 (SD = 0.970) indicating agreement that they help reduce taxable income, though gaps in government information were noted (Mean = 3.33, SD = 1.200). Tax exemptions had the strongest positive perception, with unanimous agreement on their benefits (Mean = 5.00, SD = 0.000), highlighting their effectiveness in reducing costs and supporting business growth. Tax incentives were moderately rated, with business growth linked to incentives (Mean = 3.91, SD = 0.870) but challenges in accessibility and understanding reflected in lower means of 3.24–3.25. Income tax rates were seen as burdensome, with high rates negatively affecting performance (Mean = 4.47, SD = 0.678) and changes significantly impacting operations (Mean = 4.08, SD = 0.793). Tax filing practices revealed high compliance (Mean = 4.97, SD = 0.828), though simplicity, efficiency, and support were rated moderately (Means 3.40–3.55). Timeliness of tax payments showed that flexibility would improve compliance (Mean = 4.23, SD = 0.715), while penalties for late payment were a major concern (Mean = 4.14, SD = 0.768). Finally, investment-related tax benefits were perceived as supportive but underutilized, with incentives making assets more affordable (Mean = 3.47, SD = 1.017) yet limited government information (Mean = 3.10, SD = 1.066) pointing to awareness gaps. Overall, the findings suggest that while SMEs recognize the value of tax-related measures in improving performance, issues of accessibility, awareness, and fairness limit their full effectiveness. The study recommends that the government and tax authorities, particularly the Kenya Revenue Authority (KRA), should strengthen tax awareness and education programs targeting SMEs in Vihiga County, Kenya by simplifying access to information, providing digital resources, organizing training sessions, and collaborating with local business associations. Tailor-made policies, sensitization forums, and easy-to-understand materials on income tax obligations, rates, and investment tax incentives should be introduced to enhance compliance, reduce penalties, and improve informed financial decision-making.