Effect of Tax Audit on Turnover Tax Compliance among Small and Medium Enterprises in Langata Sub-County, Nairobi, Kenya

Purpose: The implementation of turnover tax compliance (TOT) in Kenya was aimed at enhancing revenue collection and improvements in the tax system, the effectiveness of tax administration, and lowering the collection costs in the SME sector. However, over the past decade, the KRA has visibly struggled to implement the tax regime as well as collecting the returns. One of the major shortfalls of the TOT has been its collection due to its dependence on the goodwill among the affected taxpayers. Therefore, the main aim of the study was to establish the effect of tax audit on turnover tax compliance among small and medium enterprises in Langata sub-county, Nairobi, Kenya. The study was anchored on the Economic Deterrence theory. Methods: The study adopted an explanatory research design. The sample size for this study was 353 derived from 3,061 registered SMEs of the population using Yamane (2012) formulae and the responses by owners/managers of the firms. The study targeted 353 questionnaires with each target firm, 268 respondents managed to fill and return the questionnaires showing a 76% response rate. Results: The analysis of the hierarchical model found that tax audit has a significant positive effect on TOT compliance (B = 0.373, p = 0.006). In a nutshell, the study found that there is a significant relationship between tax audit and TOT compliance among small and medium enterprises in Langata Sub County, Nairobi, Kenya. Conclusion: The study recommends conducting frequent tax audits to enhance Turnover tax compliance.