Analysis of the Value Added Tax and Household Final Consumption Expenditure in Kenya for the Period 1990 - 2014
Kathure, Imaana Finnian
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Household final consumption expenditure (HFCE) is the largest constituent of Kenya’s Gross domestic product, representing overall around 60 per centof Gross domestic product.Moreover, consumption is a major impelling cause of Kenya’s economic growth. HFCE growth has been increasing with increasing growth of value added tax (VAT) revenue for most years.Moreover, growth of value added tax revenue hasbeen increasing more rapidly between financial years 2012/2013 and 2014/2015 due to the introduction of the new VAT Act 2013 which saw the list of exempt and zero rated goods and services reduce. With the rising growth of VAT revenue, growth of private consumption expenditure is likely to reduce in the future leading to reduced economic growth. The motive of this study was to investigate the impact of VAT on household final consumption expenditure in Kenya from 1990 to 2014. The study employed Vector Error Correction (VEC) technique to investigate the dynamic response of household final consumption expenditure growth in Kenya due to shocks in growth of VAT revenue, growth of disposable income and growth of inflation rate.Granger causality test was done to enlighten on the relationship between value added tax revenue and household final consumption expenditure in Kenya. The study used quarterly time series data from 1990 to 2014. The analysis revealed that value added tax revenue growthmoderately affects HFCE growthin Kenya. The study also found that increasing VAT revenuegrowth curtailed household final consumption expenditure growthin the shortrun but stimulated household final consumption expenditure growth before stabilizing itin thelong-run. These effects was statistically significant. Additionally, growth in household final consumption expenditure and growth in value added tax revenue do not granger cause each other. The study concluded that the government should look for other ways of raising VAT revenue instead of increasing the tax base. For instance, KRA should fully institutionalize ETR machines into its system and that the government should focus on ensuring that all traders have the machines and are well trained on how to use them to help seal loopholes of remitting VAT revenue by the traders.