dc.description.abstract | Kenya introduced Value Added Tax in the year 1990 to replace the Sales Tax which
had been in operation since 1973. VAT has been the choice instrument for unexpected
expenditure by increasing VAT rates. This study evaluates VAT revenue productivity
for the period 1995/96 to 2009/10. The objective of this study was to evaluate the
determinants of VAT revenue and come up with a model for predicting VAT revenue
in future. The study utilized secondary data obtained from the KRA database for the
financial years 1995/6 to 2009/10. The analysis showed that the determinants of VAT
revenue have a significant effect on the responsiveness of VAT revenue. This implies
that the growth in VAT revenue during the period of study was accounted for by
changes in its determinants. In the VAT revenue equation, the positive intercept effect
is counteracted by negative effects that are greater the higher are standard tax rate,
inflation rate and foreign exchange rate. This study also finds that multiple rates,
higher range between highest and lowest non-zero VAT rates, and the longer the VAT
has been in operation (age of the VAT) are associated with higher revenues.
This study provides decision makers with an analytical framework which can be used
to estimate the associated revenues for a VAT in Kenya and guidance to policymakers
in countries planning to introduce a VAT. It identifies the determinants of VAT
revenues which when properly understood, documented, and captured in relevant tax
revenue models, would make it possible to estimate accurately VAT revenues within
a specified period of time. Although past studies advocated for raising rates within the
existing system as the most obvious approach for increasing revenues, policy makers
should note that this study finds that the tax rate cannot be pushed too high without
markedly reducing VAT revenue. The study also contributes to the existing literature
on the VAT structure in Kenya and stimulates further research in the area of VAT.
Researchers should study the impact of Electronic Tax Register (ETR) and
Withholding VAT on VAT revenue.
The study concludes that Kenya’s VAT revenue is very responsive to changes in its
determinants and supports other researchers’ findings that the determinants of VAT
revenue have a significant effect on VAT revenue. | en |