Value Added Tax Reforms and the Financial Performance of Manufacturing Companies in Nairobi City County, Kenya
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Date
2025-05
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Kenyatta University
Abstract
Kenya is known for its vibrant manufacturing sector, which has the potential to drive economic growth and create jobs. However, recent statistical data reveals a troubling trend indicating that a significant number of manufacturing companies are struggling financially. The manufacturing sector saw a contraction of approximately 2.2% in 2022. This follows a trend where growth has been stagnant over the past few years, raising alarming questions about the sustainability of this sector. Data shows that exports from the manufacturing sector fell by about 3% in the last fiscal year and over 40% of manufacturers reported reduced sales volume compared to pre-pandemic levels. Therefore, this study sought to assess the effect of value-added tax reforms on the performance of manufacturing companies in Nairobi City County Kenya. Specifically, this study seeks to; determine the effect of standard rate adjustment, assess the influence of exemptions and zero-rating changes, examine the impact of VAT reverse charge mechanism, and examine the impact of VAT automation and technology upgrades on the financial performance of manufacturing companies in Nairobi City County. The study is anchored on the following theories: consumer demand theory, theory of excess burden of tax, and optimal tax theory. This study employed a cross-sectional approach using a descriptive survey design. The study targeted 40 manufacturing firms in Nairobi, aiming to survey 600 finance department employees including finance managers, auditors, and accounts assistants. A stratified sampling technique was used, followed by simple random sampling, resulting in a final sample of 240 respondents. Primary data was collected using questionnaires, while secondary data came from the firms' audited financial statements. A pre-test was conducted at two unrelated fast-food establishments. The questionnaires aligned with the research objectives, and reliability of the questionnaire was assessed using Cronbach's Alpha and an aggregate alpha value of 0.784 was achieved showing that the questionnaire items were reliable. The analysis of quantitative data was done using descriptive statistics and inferential statistics used such as correlation and multiple regression analyses. The study revealed that standard rate adjustment reforms, exemptions and zero-rating reforms, VAT reverse charge mechanism reforms and VAT automation and technology upgrades reforms had a positive significant influence on the financial performance of manufacturing companies in Nairobi City County. The study concludes that changes in corporate tax rates, value-added tax, and other levies can directly impact the profitability of manufacturing firms. Exemptions and zero-rating lead to lower operational costs for manufacturing firms and by reducing the tax burden, firms retain a larger portion of their revenues, thereby increasing profit margins. The reverse charge mechanism may improve cash flow for firms that previously faced delays in VAT refunds. Automation reduces the time and effort required for tax-related tasks, allowing firms to allocate resources more effectively. The study recommends that the companies should organize regular workshops to educate stakeholders, including business owners, employees, and policymakers, about the implications of rate adjustments. The companies should assess existing tax exemptions and zero-rating policies to identify gaps and inefficiencies. The companies should conduct workshops and seminars for manufacturing firms to educate them about the reverse charge mechanism, its benefits, and compliance requirements. The companies should implement comprehensive accounting software that integrates VAT management can streamline the invoicing process, automate tax calculations, and ensure accurate reporting.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Business Administration (Finance) of Kenyatta University, May 2025.
Supervisor
1. Mathenge Theuri