The Kenya Institute for Public Policy Research and Analysis (KIPPRA) has released a study indicating that Kenya does not need to increase its Value Added Tax (VAT) rate to raise more government revenue. Instead, the focus should be on improving tax enforcement, broadening compliance, and leveraging digital tax administration.

In its paper titled Prospects and Optimal Level for VAT in Kenya, KIPPRA finds that the current VAT rate of 16% is near the optimal point for maximizing revenue under Kenya's economic conditions. Raising VAT beyond this level risks reducing collections by discouraging consumer spending, shrinking the taxable base, and encouraging tax evasion.

Optimal VAT Rate and Economic Impact

Using data from 1990 to 2023, the study estimates that in an ideal economy without inefficiencies, a VAT rate of 10.25% would maximize revenue. However, considering Kenya’s real economic context and improved tax administration via technology, the optimal rate increases to approximately 16.3%, closely aligning with the current rate.

The report highlights the Laffer curve effect, showing that beyond a certain VAT rate, further increases lead to lower overall tax revenue due to behavioral changes by consumers and businesses.

Recommendations for Tax Policy

  • Broaden the VAT base by reducing exemptions and zero-rated goods
  • Formalize informal businesses, which currently constitute about 84% of Kenya’s economy
  • Strengthen compliance and reduce invoice fraud
  • Expand use of digital platforms like Electronic Tax Registers (ETR), iTax, and the Tax Invoice Management System (TIMS) to enhance collections

KIPPRA emphasizes a comprehensive reform approach rather than piecemeal VAT increases, aiming to improve fiscal sustainability without placing additional burdens on consumers already facing high living costs.

Role of Technology and Structural Challenges

The report credits technology-driven tax systems with significantly improving VAT compliance and revenue collection over time. Despite VAT being a major revenue source, its contribution has declined from about 45% of total tax revenue in the 1990s to around 26% recently, largely due to exemptions and a shrinking taxable base.

Kenya’s large informal sector, widespread exemptions, and compliance challenges remain key obstacles to maximizing VAT revenue.

Overall, KIPPRA advises that Kenya’s long-term fiscal health depends on enhancing tax administration and expanding the tax base rather than increasing VAT rates.