Tax Incentives And Performance Of Selected Manufacturing Firms In Kenya

ABSTRACT

Manufacturing in Kenya has been on the decline for a considerable period of time with its contribution to Gross Domestic Product stagnating at 10 % from 1960’s. According to the Government of Kenya, the manufacturing sector has high, yet untapped potential to contribute to employment and Gross Domestic Product growth. Generally, the manufacturing sectors’ average growth percentage has continued to stagnate at three to four percent over the years. The performance of manufacturing sector is affected by several factors key of them being high costs of doing business. Excessive taxation in the form of high tax rate, double and multiple taxation are some of the challenges facing manufacturing industries. To mitigate this challenge, the government had advanced various tax incentives to the manufacturing sector. However, despite the various tax incentives being made towards these firms, their effect on their performance had not been investigated. Hence, this study sought to fill this gap. Therefore, the main aim of the study was to assess tax incentives and their effect on the performance of selected manufacturing firms in Kenya. Specifically, the study sought to; examine the effect of corporate income tax incentives capital allowance incentives, custom duty incentives and excise tax incentives on performance of selected manufacturing firms in Kenya. The study adopted a descriptive research design. The study population was all the 725 manufacturing firms in all the categories under the Kenya Association of Manufacturers directory as at 2016. The study used a sample of 90 companies which was obtained using simple random sampling. The study used panel data that was gathered using a secondary data collection template. A pooled panel regression model was used to test the significance of the effect of the independent variables on the dependent variable. STATA was used in conducting the analysis. The statistics that were generated included descriptive statistics and inferential statistics. The study period was 2017 and data was collected from 2011 to 2016. The study findings revealed that corporate income tax incentives received by the firms had the highest positive and significant effect on the performance of these firms. The findings also showed that the effect of capital allowance incentives on the performance of these manufacturing firms was positive and significant. It was found that custom duty incentives had a positive and significant effect on the performance of the firms even though their effect on performance was the least. The effect of excise tax incentives on the performance of the firms was also found to be positive and significant. The study findings recommended that the government needed to expand some of the tax incentives particularly capital allowances, excise tax incentives and custom duty incentives whose effect was yet to be fully felt within these firms compared to corporate income tax incentives. The study noted the need for greater diversification in the incentives granted and also greater sustainability. The study recommended the need for tax incentives among the firms so as to ensure the survival of a greater number of firms. The study also recommended the need for the government to conduct cost benefit analyses in order to ensure that the goals of granting such incentives are achieved. The study further recommends that policy makers should adopt strategic incentive plans or targeted incentive scheme that targets specific industry or a strategic tax incentive that add value or contribute positively to the economy through expansion of various sectors by cutting down on imports and in that way promoting the growth of demand for domestic products in the country. Through this, the government will be able curb smuggling, entry of contraband goods and also to promote the growth of the tourism industry as Kenya will become an industrial hub in the region.