Effects of Tax Incentives on Financial Performance of Manufacturing Firms in Nyeri County

Abstract

Purpose: The main objective of this study was to ascertain how tax incentives affected the financial performance of manufacturing firms in Nyeri County. The study's goal was to look into the impact of tax incentives, corporate income tax incentives, capital allowance incentives, and custom duty incentives on the financial performance of manufacturing firms in Nyeri County. Methodology: The study adopted a descriptive research design. The population for the study comprised of all the 15 manufacturing firms in Nyeri County that were registered by Nyeri County finance department; licensing office 2023. The target population's information was gathered using census methodologies. The data was gathered using questionnaires with likert scales to capture the primary data. The questionnaires were split into two sections that captured the demographic information in the first part, and the second part capturing data on the study variables. The study collected secondary data from the audited annual financial reports for the targeted manufacturers and the internal sources for a six-year period, focusing on the specific variables under investigation. Drop and pick method was used to distribute the questionnaire to the participants. Descriptive statistics including the mean, standard deviation, and frequency were used to analyse the data. Findings: The study findings established that there exists a significant relationship between capital allowance and the financial performance of manufacturing firms in Nyeri County. Capital Allowance emerged as the most crucial predictor of Financial Performance (Beta = 0.766), followed by Custom Duty Incentive (Beta = 0.498) and Tax Holiday (Beta = 0.359). On the other hand, Corporate Income Tax Incentive had the least effect (Beta = 0.323) on the financial performance of these firms. Participants expressed a positive perception regarding the influence of capital allowances on their respective firms' financial performance, with strong agreement on investment deductions, wear and tear allowance, capital allowance incentives, and overall satisfaction with the current level of capital allowances. The study concluded that customs duty incentives positively affect the financial performance of manufacturers in Nyeri County. Unique Contribution to Theory, Practice and Policy: It recommends revisiting customs duty tax policies to gain industry support. Strategic custom duty incentives aligned with economic goals can boost industrial enterprises and stimulate growth. Tax holiday incentives have the potential to increase employment and profitability, encouraging investment and job creation. Corporate income tax incentives were found to enhance manufacturing firms' financial performance, suggesting their prioritization and offering additional incentives, like reduced tax rates, to foster growth. The study suggested further research to explore factors beyond tax incentives that influence the financial performance of manufacturing firms. Additionally, the research recommended conducting similar studies in sectors other than manufacturing to assess the effects of these tax incentives across different businesses. This comparison could help identify the most suitable incentives for each organization.