A study of the productivity of Value Added Tax (VAT) in Kenya

Abstract

This study set out to establish Value Added Tax (VAT) productivity in Kenya as well as establish the factors that affect VAT productivity in Kenya. VAT productivity was measured using autoregressive models whereas the factors affecting VAT productivity were sourced from both taxpayers and the tax administration by use of questionnaires. Descriptive statistics by use of simple ratios and content analysis were used to analyze the questionnaires. It was found that VAT is responsive to changes in GDP, a contradiction with previous studies done in Kenya. Further analysis showed that VAT was rigid to changes in GDP up to the financial year 2004/05 and the years that brought about the shift in responsiveness were the last seven years running from 2005/06 to 20B/l2. However the positive trend was eroded in 2011112 due to the scrapping of the withholding VAT system. The VAT system did not possess most of the characteristics of a workable tax system of simplicity, convenient, certainty and productivity. The study also found that taxpayers faced challenging compliance costs and that there was neglect of the medium and small taxpayers who were found not to be compliant because of computational difficulties and lack of audit. The tax administration also faced difficulties in implementing VAT laws due inadequate resources. From the above Kenya Revenue Authority (KRA) needs to shift focus from revenue collection to coming up with systems that are more taxpayer oriented so as to enhance their compliance with VAT laws. A few reforms that are seen to have negatively impacted VAT collection need to be reviewed key.among them was the withholding VAT issue. This study contributes to the existing fe'S1ean::h on productivity of the Kenyan system by documenting the specific difficulties encountered in enforcing VAT laws as well as difficulties faced in complying with VAT laws. This study also brings to light the fact that VAT is responsive to GDP in contrast with previous studies.