Tax Incentives and 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 past 15 years. Therefore, 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 relationship between tax incentives and financial performance of manufacturing firms in Kenya. The specific objectives of the study were; to establish the effect of value added tax incentives, corporation tax incentives, custom duty incentives and double taxation treaty incentives on financial performance of manufacturing firms in Kenya. The study also determined the moderating effect of tax administration procedures on the relationship between tax incentives and financial performance of manufacturing companies in Kenya. The study will be of great value to the government of Kenya in setting up policies on tax incentives. The study was anchored on tax discrimination theory, laffer curve theory and agglomeration economies theory. Descriptive survey research design was adopted where a sample of 211 firms was selected by use of Yamane formula, from a target population of 447 manufacturing firms using stratified random sampling technique. The study relied on both primary and secondary data. Primary data was collected using questionnaires while secondary data was collected over a period of 10 years covering 2009 to 2018. The targeted respondents were the accountants, auditors and finance officers in the organizations. The response rate was 73.5%. Both descriptive and inferential data analysis was carried out such as ordinal regression model. Data was tested for multi- collinearity which was proved not to exist. The data was also tested for auto-correlation by use of Durbin Watson test and the data had no auto-correlation. Test of heteroscedasticity was carried out and the data confirmed not to suffer from heteroscedasticity. The study also tested the data for normality, the data violated the assumptions of normality. Data on dependent variable was transformed to ordinal scale by use SPSS.. Due to violation of the assumption of normality the study adopted the ordinal regression analysis which is a non-parametric method of analysis. The findings of the study revealed that tax incentives had statistically significant influence on financial performance of manufacturing companies in Kenya. The findings also revealed that tax administration procedures which was the moderating variable had antagonistic effect on the relationship between tax incentives and financial performance of manufacturing companies. The study concluded that influences of VAT incentives, income tax incentives, custom duty incentives and double taxation treaty incentives leads to improvement in financial performance of manufacturing firms in Kenya. The study therefore recommended that the management of manufacturing companies should utilize VAT incentives, income tax incentives, custom duty incentives and double taxation treaty incentives that are offered by the government. The study recommends that the government should review tax incentive policy so as to be able to widen the scope of tax incentives.