Revenue productivity of value added tax in Kenya

Abstract

Given the negative impact of persistent unsustainable fiscal deficits on the Kenyan economy, there is now a consensus among scholars on the need to address the problem, revenue projection is necessary condition for devising an appropriate framework for fiscal deficit management.

This study therefore evaluates the productivity of value added tax (VAT) to devise a reasonable accurate estimation of revenue profile since VAT is predominant in the tax structure. The study applies the concept of elasticities and buoyancy to determine the productivity of VAT. The finding of the study revealed an elasticity of VAT of 0.824 which is less than unity, indicating that VAT is inelastic. A buoyancy estimate of VAT on the other hand was 1.304 which showed that VAT is fairly buoyant.

On the basis of the change in the buoyancy and elasticity indexes, it is concluded that the shift from sales tax to VAT improved the response of the tax revenue to both automatic changesin private consumption and discretionary tax measures adopted by government

- Finally the study underscores the urgent need for the tax authorities to pay attention to tax payers' education, compliance and tax audits, this will improve the productivity of VAT which will mitigate the perpetual fiscal imbalances.