Tax Administration Practices and Financial Performance of Small and Medium Enterprises in Nairobi Central Business District, Kenya

Abstract

Small and Medium Enterprises in Nairobi’s Central Business District remain critical to Kenya’s economy but continue to experience fluctuating financial performance amid evolving tax administration practices. Intensified enforcement procedures, frequent audits, and complex filing requirements have increased administrative burdens, reducing profitability and threatening sustainability. This study sought to examine the effect of tax administration practices, specifically tax enforcement procedures, tax audit practices, and tax filing procedures, on the financial performance of SMEs in Nairobi CBD. The study was anchored on Compliance Cost Theory and supported by Tax Neutrality Theory and the Resource-Based View Theory, providing a comprehensive framework for understanding how administrative processes and internal capabilities influence financial outcomes. A descriptive and explanatory research design was adopted. The target population comprised 11,280 SMEs across sectors, including general business, transport and communication, agriculture, hospitality, and manufacturing, and Yamane’s formula was used to determine a sample size of 384 respondents selected through stratified random sampling. Primary data were collected using structured questionnaires and analyzed using descriptive and inferential statistics, including correlation and multiple regression techniques, in SPSS Version 27. A total of 361 questionnaires were returned, representing a response rate of 94%, which was deemed adequate for statistical analysis. The regression results revealed a strong explanatory power with an R² of 0.764, indicating that tax enforcement procedures, tax audit practices, and tax filing procedures collectively explained 76.4% of the variation in financial performance. The model was statistically significant (F = 385.686, p < 0.001), confirming its overall fit. Individually, all predictors had positive and significant effects on financial performance: tax enforcement procedures (B = 0.287, p < 0.001), tax audit practices (B = 0.336, p < 0.001), and tax filing procedures (B = 0.387, p < 0.001). The study concluded that effective tax enforcement, fair audit practices, and simplified filing procedures enhance SME financial performance by improving compliance and operational efficiency. The study recommends that the Kenya Revenue Authority adopt transparent, risk-based enforcement and audit frameworks, simplify and digitize filing systems, and implement targeted taxpayer education programs to reduce compliance burdens.