AN ASSESSMENT OF THE EFFECTIVENESS OF ELECTRONIC TAX REGISTERS IN PROCESSING OF VALUE ADDED TAX RETURNS: A CASE STUDY OF REGISTERED VAT TAXPAYERS IN KISII TOWN, KENYA

ABSTRACT 
The main purpose of this study was to assess the effectiveness of Electronic Tax Registers (ETRs) in the processing of Value Added Tax returns. The population under study comprised of 98 VAT registered taxpayers in Kisii town, which was stratified into; service providers, wholesalers & large scale retailers and supermarkets. The main instrument of collecting primary data was the questionnaires while secondary data was obtained from the KRA regional office. Analysis of data was mainly done using descriptive statistics.Data was collected from 78 registered VAT taxpayers in Kisii town. The respondents were senior, middle level and lower level managers. Out of the 78 registered VAT taxpayers to whom the questionnaires were administered, only 68 responded. This gives a response rate of 87% percent. Data analysis tools used in the research were Excel and SPSS and data was presented in form of tables and graphs. Based on the results from data analysis and findings of the research, one can safely conclude the following; First, Kenya has witnessed significant changes in many aspects of its economy over the last four decades, but like most developing countries, it has had to contend with the common problems that plague tax systems of developing countries. From the research data, most businesses (91%) have acquired ETR machines; an indication that most businesses in Kisii town have complied with the VAT requirements in Kenya. Secondly, the timely filing of the monthly VAT returns is attributed to many factors. ETR is one of the factors. Most businesses indicated that timely filing of VAT returns was attributed to the adoption of the ETR machine. The use of ETR machines has also led to improved sales audit for the business. Thirdly, it was found out that ETRs have enhanced revenue collection resulting from sound sales and stock audits. Lastly, to evaluate the effectiveness of ETRs in filing VAT Returns at regular intervals, it was found that the use of ETRs was not a waste of funds and has assisted the business in many ways. The findings of this research project will assist the Kenya Revenue Authority look for ways of improving the processing of VAT returns as well as come up with other cost effective methods which taxpayers can use in processing their VAT returns

CHAPTER ONE: 
INTRODUCTION 
1.1 Background of the Study 
A lot of debate has been going on in the country between business owners and the Kenya Revenue Authority (KRA) on the adoption of Electronic Tax Registers. Electronic Tax Registers were introduced by KRA to replace the manual paper system of remitting VAT returns that was considered inefficient and straining. 

To enhance the accountability systems for Value Added Tax, the Kenya Revenue Authority (KRA) has spearheaded the introduction of the Electronic Tax Registers and Electronic Signature Devices. These devices offer unique benefits to traders and the Revenue Authority alike by recording transaction data in such a manner that it cannot be deleted. The Government of Kenya on the other hand allowed businesses to offset the cost of the ETR installation against the input VAT as well as training of traders on the use and benefits of those devices. 

Kisii town is among the fast growing commercial towns in Western Kenya. It is located 300 miles away from the country’s capital city Nairobi along the Nairobi Isebania road. Major businesses that are carried out in the town range from large scale businesses, service provision industries, processing industries to small scale businesses. Majority of the traders are registered taxpayers and have adopted the Modern Electronic Tax Registers. Initially the tax payers used to file their VAT returns using prescribed forms that are provided by KRA. 

This study aimed at assessing in detail the effectiveness of ETRs in processing of VAT returns by taxpayers that were introduced to replace the earlier manual system of VAT processing. The study also tried to establish if there was any increase or reduction in costs incurred in the preparation and remittance of VAT to the Kenya Revenue Authority with the introduction of the electronic devices. The study was to find out if there was any time saved in the process and if both the taxpayer and KRA were enjoying these advantages. 

Variables explored in this study include; time of processing VAT returns, problems encountered in processing of VAT returns using ETRs, financial resources that go into the processing, remittance and management of the VAT returns and improve public revenue capture through more accurate data entry, operational expenses, tax agencies expenses, costs of processing refund claims, costs of inspection and audit by the KRA to establish evaders and defaulters, filing of tax returns systems, costs that are incurred in processing tax refunds, costs of auditing sales records, the cost of maintenance of the Electronic Tax Registers, the cost of training staff to handle or rather operate the machines, the cost of time value of money that was used in purchasing of the tax registers until such a cost is finally offset by the Kenya Revenue Authority as well as the cost of replacing such machines and the learning curve effect of using the devices. Time taken to process the VAT as well as the extra labour that was required to sort and analyse the sales books to come up with the VAT values by separating the VATable from the non VATable items as well as the Zero rated ones. 

The Kenya Revenue Authority focuses on effective methods of revenue collection so as to meet the country’s budget revenue targets. The tax base in Kenya, as in most sub- Saharan African countries, is extremely narrow. So far, attempts to increase tax revenue have focused on closing the ‘taxation gap’ and expanding the tax base. The main policies recommended by the IMF have led to trade liberalization, the transition from a sales tax to a system of VAT. (IMF, Nov.2005). Such policies have been adopted by most African countries with Kenya being no exception. 

Kenya has witnessed significant changes in many aspects of its economy over the last four decades. One of the striking characteristics of Kenya is that unlike many other Sub- Saharan countries today, it is a high tax-yield country with a tax-to-GDP ratio of over 20 per cent. Kenya is able to finance a large share of its budget, while external donor finances are used to cover a much smaller share than in other countries of the region. This is mainly because of the efforts made in overcoming problems affecting its tax system. Like most developing countries, it has had to contend with the common problems that plague tax systems of developing countries (Karingi, Wanjala, Dec, 2005). This was also confirmed by President Mwai Kibaki’s (2006) speech during Kenyatta day celebrations. Most scholars in finance have ignored focusing on the costs to traders of the tax systems that are now used in the processing and remittance of tax returns to revenue collection institutions. Not to mention the modern electronic systems like the Kenyan ETR which formed the basis of this study. 

It was in this regard therefore that the Kenyan revenue authority had tried to move from a system; with rates and structures that are difficult to administer and comply with; that are unresponsive both to growth and discretionary tax measures hence offering low tax productivity; that raise little revenue but introduce serious economic distortions; that provide opportunities for differential treatment of individuals and businesses in similar circumstances, and that are selective with regard to tax administration and enforcement to an electronic system (ETR) that should be categorized as; Efficient, fair and administratively feasible both for the specific tax instruments and for the entire tax regime. 

Looking at how far Kenya’s tax system had adopted the modern Electronic devices and how its benefits had differed from the previous system of effecting tax returns on costs that are incurred by the small scale traders was an area whose outcome (s) was quite desired. There was little literature available on the introduction and adoption of Electronic Tax Registers in Kenya as well as in other developing countries. Developed countries like the United States of America and Canada make use of electronic filing and electronic commerce to collect taxes from the taxpayers.

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Item Type: Kenyan Project Material  |  Attribute: 51 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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