Effects of Corporate Income Tax Incentives on Financial Performance of Manufacturing Firms in Kenya

Abstract

Tax incentives have been an issue of great concern world over as many governments have applied the incentives to attract multinational companies as well as to promote the domestic manufacturing industries. Manufacturing sector in Kenya has continued to show significant drop in its contribution to the Gross Domestic Product for the last 15 years and hence the government introduced tax incentives as one of the measures to address the challenges of the growth of the sector. The purpose of the study was to determine the effect of corporate income tax incentives on financial performance of manufacturing firms in Kenya registered by Kenya association of manufacturers. The study was based on tax discriminatory theory. Descriptive research design was adopted where a sample of 211 respondents was selected from a target population of 447 manufacturing firms using stratified random sampling technique. The response rate on the questionnaires issued was 73.5%. The collected data was edited and analysed with the help of SPSS version 25. Results showed that corporate income tax incentives had statistically significant influence on financial performance of manufacturing companies, and that tax administration procedures had a high moderating effect on the relationship between corporate income tax incentives and financial performance of manufacturing companies in Kenya. It is recommended that the government of Kenya should consider offering more tax incentives to the manufacturing companies in Kenya. In particular, it can consider reviewing the tax policy with intent to offer tax holidays to more manufacturing companies. Further research should target effects of tax incentives on financial performance of specific sectors like building and construction to test the hypothesis on specific sectors in the post COVID-19.