Tax Policies and Financial Performance of Selected Registered Manufacturing Firms in Kenya

Dicks Kevin Onyango and Fredrick Warui
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Dicks Kevin Onyango: Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya.
Fredrick Warui: Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya.

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Abstract: Globally, tax regulations continue to shape the fiscal and operational outcomes of manufacturing enterprises. In the United States, corporate tax reforms implemented in 2017 reduced rates from 35% to 21%, contributing to a 12% rise in manufacturing firms' net earnings within two years. The financial performance of manufacturing firms in Kenya has been constrained by a complex tax policy environment characterised by high corporate tax rates, cumbersome VAT compliance, inconsistent tax incentives, and heavy customs duties. This study examined the effects of tax policies on the financial performance of registered manufacturing firms, focusing on corporate income tax rates, VAT policies, tax incentives, and customs and excise duties. Anchored on the Modigliani and Miller Theory of Corporate Taxation, the Laffer Curve Theory, and Harberger's Excess Burden of Taxation Theory, the study adopted a descriptive research design targeting 100 firms across Nairobi, Mombasa, Kisumu, and Nakuru. Stratified random sampling and Yamane's (1967) formula ensured representative and statistically sound data collection. Secondary data were obtained from audited financial statements, KRA, and KAM reports covering the period 2020–2024. Data were analysed using descriptive and inferential statistics, including multiple regression analysis, with diagnostic tests ensuring model robustness. Findings revealed that VAT, tax incentives, and customs and excise duties positively and significantly influenced financial performance, while corporate income tax rates had a positive but insignificant effect. The Corporate Income Tax Rate (CITR) averaged 2.7%, significantly below the statutory 30%, suggesting the impact of tax incentives, deductions, or compliance challenges. Value Added Tax (VAT) averaged 15.14 with limited variability, implying a relatively uniform and high VAT burden across firms. The Heteroscedasticity Test yielded a significance value of p = 0.000 (p < 0.05), revealing the presence of heteroscedasticity. Results of correlation analysis showed that the corporate income tax rate (CITR) had a strong positive correlation with return on assets (ROA) (ρ = 0.928, p < 0.01). The study concluded that firms should strategically manage tax burdens, strengthen VAT compliance to improve liquidity, and maximise tax incentives for growth. Policymakers are urged to maintain predictable tax regimes, streamline VAT systems, enhance transparency in incentives, and formulate excise duty policies that promote industrial competitiveness.

Date: 2025-11-29
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Published in Asian Journal of Economics, Finance and Management , 2025, 7 (1), pp.1235-1250

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