Taxation practices and financial sustainability of supermarkets in Laikipia County.

Abstract

Financial sustainability allows retail businesses to remain profitable, invest in growth, and create jobs, which supports broader economic development. In Kenya, however, high taxes like VAT, Income Tax, and Excise Duty significantly strain retailers, limiting their ability to grow. Additionally, compliance costs, penalties, and interest further reduce profitability, especially for small and medium enterprises. This study investigates the impact of taxation practices on the financial sustainability of supermarkets in Laikipia County, Kenya. Taxation is critical for public funding, supporting infrastructure, and providing essential services, yet it can also impose financial burdens on businesses, affecting their ability to expand and sustain operations. The research explores how income tax, value-added tax (VAT), excise duty, and pay-as-you-earn (PAYE) influence supermarkets' cash flow, profit margins, and investment capacity. Through examining both global and regional tax perspectives, the study highlights the challenges posed by high tax rates and compliance costs, particularly for retail businesses operating on narrow profit margins. The study was anchored on several theories, including the Ability to Pay Theory, Theory of Optimal Taxation, Kelekian Theory of Taxation, and Economic-Based Theory. Theoretical insights show that progressive taxation and optimized tax rates can foster equity and resource allocation, helping maintain business growth and sustainability. A descriptive research approach was applied, with a sample size of 70 respondents selected using a Yamane sampling design. Primary data was collected through self-administered questionnaires, and secondary data through a systematic literature review of existing literature. Data was analyzed using descriptive statistics and multiple linear regression. Reliability and validity tests were conducted to ensure data collection instruments were accurate and consistent. Findings indicated a statistically significant positive relationship (p < 0.05) between all tax variables and the financial sustainability of supermarkets. This study highlights the significance of structuring tax policies that support business financial sustainability, stressing the need for balanced taxation systems to reduce operational pressures and enhance the economic sustainability of retail businesses. Consequently, the study recommends that Supermarkets should prioritize cash flow management and establish reserve funds to meet tax obligations, while enhancing tax planning to optimize deductions and credits, thereby supporting their financial sustainability. Additionally, the study suggests that the government and KRA should simplify tax compliance, consider adjusting tax rates, and introduce incentives to encourage business expansion and compliance.