Analysis of the Value Added Tax and Household Final Consumption Expenditure in Kenya for the Period 1990 - 2014
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Date
2017-07
Authors
Kathure, Imaana Finnian
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
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.
Description
A Research Project Submitted to the Department of Econometrics and Statistics in the School of Economics in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Economics (Econometrics) of Kenyatta University, July 2017
Keywords
Value Added Tax, Household Final Consumption Expenditure, Kenya, 1990 - 2014