The Effect of Tax Reforms on Performance of Kenya Revenue Authority

Abstract

Taxation reforms have been in existence since 1986. Dwindling tax collections was the main reason that Kenya instituted major tax reforms hoping to spur tremendous growth in tax collections. This has not been the case in the past. The government's failure to meet its annual income targets through the Kenya Revenue Authority (KRA) has compelled the need to explore ways to improve revenue earned through taxation. The objective of the study was to establish the effect of tax reforms on performance of Kenya Revenue Authority. The research was guided by the the optimal tax theory, theory of public expenditure and the Allingham and Sandmo portfolio theory. The research design was descriptive. This study collected secondary data. The data was collected for a period of fourty quaters begining in the first quater of the 2010/2011 financial period upto the fourth quater of the 2019/2020 financial year. The data collected was time series data. The research utilized inferential statistics entailing correlation and multiple linear regression analyses. The results of the research showed that only tax reforms and interest rates were significantly correlated to KRA performance. Tax reforms and KRA performance had a significant positive correlation while interest rate and KRA performance had a significant negative correlation. However, the study findings also revealed that economic growth, inflation, and FDI did not have a significant correlation to KRA performance. Further study findings showed that the model entailing; tax reforms, economic growth, inflation, interest rates, and FDI explains to a great extent tax revenue collection by having a co-efficient of determination of 80.8%. Further findings were that the model entailing; tax reforms, economic growth, inflation, interest rates, and FDI significantly predicts KRA performance. The final findings were that only tax reforms had a significant relationship with the KRA performance; they had a positive significant relationship. However, the current study findings revealed that economic growth, inflation, interest rates, and FDI did not individually have a significant relationship with KRA performance. Policy recommendations are made to the government officials and policy formulators in the Treasury and the board of the Kenya Revenue to craft tax reforms so as to boost tax revenue collection. Additional policy recommendations are made to the treasury to regulate the interest rates through the Monetary Policy Committee (MPC) in order to enhance tax collection. Recommendations to the KRA management, consultants, and economists are made for them to estimate and base their projected tax revenue estimates and targets based on the tax reforms and prevailing interest rates. They should particularly be bullish about tax revenue collection when tax reforms have been instituted and when the lending interest rates are low. In addition, the KRA management should gauge tax reforms and lending interest rate levels to determine the level of tax revenue collection enforcement. Thus, during times of instituted tax reforms and low interest rates, they should increase the intensity of enforcement because more tax revenue can be obtained.