The Kenya Institute for Public Policy Research and Analysis (KIPPRA) has advised the government not to increase the Value Added Tax (VAT) rate beyond the current 16%, cautioning that higher rates may lead to reduced revenue instead of gains.
In a recent discussion paper titled Prospects and Optimal Level for VAT in Kenya, KIPPRA highlights that the existing VAT rate is near the revenue-maximising threshold under the country's economic conditions. The report uses historical data from 1990 to 2023 and economic modelling to demonstrate the existence of the Laffer curve, where tax revenue rises with rates up to a point before declining.
Key Findings
- The optimal VAT rate considering Kenya's economy and technological tax administration improvements is approximately 16.3%.
- Increasing VAT beyond this level can discourage consumption, reduce compliance, and shrink the taxable base, ultimately lowering revenue.
- Structural issues such as a large informal sector, numerous VAT exemptions, invoice fraud, and compliance gaps present bigger challenges than the VAT rate itself.
- Technology platforms like Electronic Tax Registers (ETR), iTax, and the Tax Invoice Management System (TIMS) have significantly improved VAT collections.
Policy Recommendations
KIPPRA urges shifting focus from raising VAT rates to enhancing tax compliance and broadening the tax base. The institute recommends:
- Reducing unnecessary VAT exemptions.
- Strengthening enforcement mechanisms.
- Encouraging formalisation of businesses.
- Leveraging technology to improve tax collection efficiency.
The report stresses that future Finance Bills should prioritise efficient tax administration rather than higher VAT rates, offering a sustainable path to boosting government revenue without increasing the tax burden on consumers.
