Analysis of Value Added Tax Productivity in Kenya

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Date
2020-09-28Author
Muguchu, Jane
Wawire, Nelson H.
Wambugu, Anthony
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Show full item recordAbstract
One of the critical components of Sustainable Development Goals is to strengthen domestic resource
mobilization. The target is to have domestic resources contributing at least 75 percent to 90 percent of the
financing required to achieve Agenda 2063 (AU, 2015). In an effort to enhance domestic resource
mobilization in Kenya, great emphasis has been placed on Value Added Tax whereby the tax authority
endeavors to enhance the contribution of VAT collections to GDP from a mean of 6 per cent to 9 percent
of GDP. The study sought to estimate the productivity of VAT over the period 1973-2016 using data
collected from Kenya National Bureau of Statistics and Kenya Revenue Authority’s database. OLS
method was adopted to estimate buoyancy of VAT while divisia index approach was adopted to estimate
elasticity of VAT. The study found that, the VAT system was buoyant with a value greater than one while
the elasticity was 0.79 which was less than one implying VAT system was inelastic. The study concluded
that the tax reforms adopted during the study period had impacted positively on VAT performance hence
the buoyancy value greater than one. Therefore, to mobilize more revenue from VAT, reforms focusing on
enhancing VAT compliance and expanding tax base should be emphasised.