Impact Of Tax Reforms On Revenue Productivity In Kenya

ABSTRACT

The implementation of the Kenya vision 2030, coupled with financing expenditures

under the devolved government in the new constitution requires enormous resources. The

vision requires the government to ensure that the bulk of its expenditures are met from

tax revenue and that overall expenditure should be controlled to ensure stable

macroeconomic environment. The Government of Kenya continued to carry out tax

reforms over the years with an aim of improving taxation efficiency and increasing the

amount of revenue raised to finance the ever raising government expenditure. Despite the

continuous tax reforms since 1986, the envisaged improvement on tax productivity to

Gross Domestic Product Ratio of 28 percent has not been achieved. This study sought to

investigate the impact of the reforms that have been undertaken in Income tax, Excise

duty, Import duty and sales/Value Added tax on revenue productivity. Income tax is

levied on individual and corporate incomes thus as the economy keep expanding the

contribution of this category of tax to revenue is bound to increase, assuming the reforms

are aimed at broadening the tax base. Similarly, Value Added tax is a consumption tax

charged on both local sales and importation, as opposed to import duty, which is levied

on the value of imports. Excise duty is levied selectively on particular goods and services.

Compared to Import and Excise duties, Value Added tax has more potential to increase

revenue through reforms aimed at increasing consumption spending in Kenya. The

specific objective of this study therefore was to estimate the effect of tax reforms on

buoyancy of Income tax and Value Added tax, as well as estimating the effect of the

reforms on elasticities of the tax system. The study was guided by the Tax Modernization

Programme of 1986 and the Kenya Vision 2030. Published secondary data was used to

analyze the relationship between tax reforms and revenue productivity and before, after

piecemeal/policy and during the comprehensive reform buoyancy and elasticities were

estimated using regression analysis. The regression result showed that total tax in Kenya

was inelastic during the three periods, but it was buoyant during the pre-reform and

piecemeal reform periods. The study also showed that the reforms had a positive impact

on productivity of income tax, but did not have a positive impact on productivity of

Value Added Tax. The positive of reform on the productivity of income tax was as a

result of the relative effectiveness of income tax reform that made the tax system simpler

and reduced avenues for evasion and corruption, whereas the low elasticity of value

added tax might have been caused by tax evasion and collusion between the tax collectors

and tax payers. In spite of the good performance of income tax as a result of reforms,

further reform needs to be done particularly on the inelastic value added tax. These

reforms include: reduction of rates and exemptions, increasing the number of tax

collectors, imposing tougher penalties for those found guilty of evasion, strengthening audit skills, taxation of absentee landlords and income from rental houses.