Asian Basic and Applied Research Journal

This study analysed the impact of taxes on the financial performance of registered small and medium-sized enterprises (SMEs) in Starehe Sub-County, Nairobi City County, Kenya. SMEs contribute to employment creation, income generation, and innovation, yet many registered SMEs experience financial pressure associated with tax obligations. Financial performance was examined as the dependent variable, while sales turnover tax, excise duty, value added tax (VAT), and stamp duty were assessed as independent variables. The study was guided by Optimal Taxation Theory, Agency Theory, and Resource Mobilisation Theory. A descriptive research design was adopted. The target population comprised 350 registered SMEs, from which 186 SMEs were selected using stratified random sampling. Primary data were collected using structured questionnaires, and a pilot study was conducted among 5% of SMEs in Embakasi East Sub-County. Validity was established through expert review, while reliability was assessed using alpha coefficients. Data were analysed using SPSS version 20, with diagnostic tests conducted for normality, heterogeneity, serial correlation, unit roots, and overdispersion. The findings showed that sales turnover tax, excise duty, and stamp duty were not significantly related to SME financial performance. However, VAT had a significant negative relationship with financial performance. The study concludes that VAT is the most important tax-related factor affecting SME profitability in the study context and recommends reforms aimed at easing VAT compliance and improving SME performance.