The Moderating Effect of Regional Economic Policies on The Relationship Between Tax Compliance and Financial Sustainability of SMES in Trans Nzoia County

Abstract

Vision 2030 is Kenya's national long-term growth plan that identifies SMEs as key drivers of economic development. Financial sustainability indicates entrepreneurial activities that are healthy in the economy; it is an indicator of success of SMEs and prosperity of the society. However, the growth and sustainability of these SMEs have been poor leading to shut down within few years of operation as well as not achieving their goals; with statistics showing less than 50% of SMEs survive the 3-year mark.SMEs in different regions face varying challenges due to diverse regional contexts hampering their operations and expansion.Thestudy evaluates the effect of taxcomplianceon financial sustainability and also examine the moderating effect of regional economic policies on the relationship betweentax compliance and financial sustainabilityof SMES in Trans Nzoia County. The study was informed by dynamic capacity theory of economic growth. Anchoring on an explanatory research design, the study target population was 2246 registered SMEs in Trans Nzoia County, Kenya. The study sample size was294SMEs, computed using the Yamane formula. The SMEs were selected using stratified and simple random sampling techniques. Data was collected using structured questioners and items anchored on a five-point Likert scale. The study hypotheses were tested using a multiple regression model and Hayes process macro for moderation analysis.The results showed that tax compliance (β = .398, p = 0.000 < 0.05)had a significant effect on financial sustainability. In addition, regional economic policiesmoderated the relationship between tax compliance (β = -.139, p < 0.05)and financial sustainability.The study concluded that tax complianceis keyin enhancing financial sustainability. The study is beneficial to the government and policymakers since it may uncover some specific challenges or barriers faced by SMEsespecially when meeting tax obligation, or financial sustainability. Journal of Business, Economics and Management Research Studies2(3)Received:September21, 2024Accepted:November04, 2024Published:November07, 2024