Impact of Indirect Tax Policy Reforms on Revenue Performance in Kenya
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Date
2020
Authors
Kiara, Faith Gatwiri
Saina, Dr. Ernest
Nekesa, Dr. Marion
Journal Title
Journal ISSN
Volume Title
Publisher
KESRA/Moi University
Abstract
The largest source of government revenue in Kenya is taxation. Domestic revenue
mobilization is a key priority for providing governments with funds to deliver public
services, for sustainable development agendas and investing in development. Tax and
non-tax revenue are critical components of domestic resource mobilization. Over the
years, there have been major changes in tax systems of various countries including
Kenya. The motivation for these reforms has varied from country to country. For many
developing countries, the impending fiscal crisis has provided the need for immediate
tax reforms to enhance revenues. Kenya has undertaken massive tax reforms since the
late 1980s under the Tax Modernization Programme. The significance of Indirect taxes
over direct taxes as a means of raising government revenue, has gained momentum and
is viewed as more favorable for investment and growth. Little is known about the
performance of the reforms in terms of its revenue raising capacity for each tax
category. This study aims to examine the impact of tax reforms in respect to pre- and
post- reform periods and the factors underlying the observed trends of indirect taxes as
one of the revenue sources that is not fully utilized. The objectives of the study were to
establish the effects of introduction of Withholding VAT agents, Introduction of EGMS
and switching the tax system from hybrid to a uniform specific or ad valorem Excise
tax regime on revenue collection in Kenya. Annual secondary data spanning the period
2010-2019 was used in the analysis. The source of the data was mainly Kenya Revenue
Authority and Kenya National Bureau of Statistics. Impact evaluation techniques
(regression discontinuity and difference-in-difference) also known as quasi panel
analysis techniques were used in the analysis. Stata software was employed in the
analysis. From the difference-in-difference model, the analysis reveals that the
introduction of EGMS led to an increase in excise revenue by 81.2%. This was
significant at 1% level of significance. VAT increased by 13.4 per cent following the
introduction of VAT withholding agents. This was equally significant at 5% level of
significance. These findings are expected to shape policy direction that is aimed at
enhancing domestic revenue mobilization. Based on the findings, the study
recommends that the Commissioner of Domestic taxes should map all Medium
Taxpayers (MTO) based on risk assessment and enroll additional taxpayers who can
serve as potential VAT withholding agents. Further, the study recommends the
broadening of the scope of goods covered under the EGMS system, and amendment of
the Excise duty act to revert to the hybrid system (Higher of specific or ad valorem
rates).
Description
Keywords
Indirect Tax, VAT, Excise duty, EGMS, VAT Tax withholding agents, xcisable Goods Management System, Tax Reforms