Interest Rate and Performance of Value-Added Tax in Kenya
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Date
2023-11
Authors
Nyambu, James Kitogho
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
To provide necessities for its citizens, the government must rely on revenue from many streams, including Value-Added Tax. In Kenya, the skewness of the tax structure lies strongly favouring Value Added Tax and Income Taxes as the two main tax revenue sources and the Government is constantly undertaking tax reforms to ensure adequate revenue collection. Despite these tax reforms, however, Kenya has had recurring national budget deficits similar to the majority of Sub-Saharan African countries. For almost two decades now, Kenya has from year to year recorded a one-figure budget deficit, a situation that is likely to continue shortly. In the year 2005, the budget deficit was at 0.90% and the trend has been upward to a deficit of 8.06% in the year 2020. Several variables determine how much VAT is collected. Generally, these can be divided into two groups: those that are localized to individual tax authorities (micro factors) or those that influence the economy as a whole (macro factors). The cost of borrowing money which is the interest rate is determined by various factors including the level of government borrowing (demand) to finance its budget deficit. In Kenya, the bank lending rates have been unpredictable and the Government in September 2016 capped the interest rates in aiming at protecting borrowers from excessive credit rates. The capping was however done away with in November 2019 which allowed the commercial bank to be in control of their loan pricing based on the borrower’s risk profile. This research purpose was to establish how well Value-Added Tax is doing in Kenya and to determine how interest rates affect VAT's performance in Kenya. The value-added tax receipts collected by the Kenya revenue authority from 1990 to 2020 are the primary topic of this descriptive research. All of the Kenya revenue authority's value-added-tax receipts for the study's period were taken into account. Conceptually, secondary time series data from the Kenyan national bureau of statistics, the Kenya revenue authority, and the central bank of Kenya were all provided through institutional archives. Utilizing data collecting sheets, secondary data was gathered during the trial. According to the study, interest rates hurt Kenya's ability to collect value-added tax. The introduction of the VAT Act 2013 was found to have a positive effect on value-added tax collected in Kenya. The study thus urges the government through Treasury to implement effective anti-inflationary policies to contain the country's tendency toward inflationary value-added tax and control the rise in interest rates so as not to cause price instability, while also preserving the current level of improvement in revenue generation. To prevent price instability in the nation, the government should control the growth in interest rates. The focus must be placed on additional restructurings that would boost the effectiveness of collecting VAT, such as training the KRA workforce and properly staffing to collect any past-due VAT taxes, monitoring the way tax reforms are being carried out, and identifying evasion and tax avoidance.
Description
A Research Project Submitted to the Department of Economic Theory in the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Economics (Policy And Management) of Kenyatta University, November 2023.
Keywords
Interest Rate, Value-Added Tax, Kenya