INTEREST RATE AND PERFORMANCE OF VALUE ADDED TAX IN KENYA
INTEREST RATE AND PERFORMANCE OF VALUE ADDED TAX IN KENYA
James Kitogho Nyambu - Kenyatta University, Kenya
Mwiathi Peter Silas (PhD) - Kenyatta University, Kenya
ABSTRACT
In order to provide basic necessities for its citizens, governments must rely on revenue from many streams, including taxes such, Personal income tax, value-added tax corporate taxes and other levies. In Kenya, the skewness of the tax structure lies strongly favouring value added tax and income Taxes as the two main tax revenue sources. Despite numerous tax reforms undertaken by the government, Kenya has had recurring national budget deficits similar to majority of Sub-Saharan African countries. 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, including interest rates, determine how much VAT is collected. In Kenya, interest rates have been unpredictable which forced the government to cap the interest rates in September 2016 at 14% aiming at protecting borrowers from excessive cost of credit. The capping was however repealed in November 2019 allowing commercial bank to be in control of their loan pricing based on the borrower’s risk profile. The purpose of this study was to determine how interest rates affect VAT's performance in Kenya. The Value Added Tax (VAT) receipts collected by the Kenya Revenue Authority from 1990 to 2020 are the primary topic of this descriptive research. Institutional archives provided secondary time series data, including those of the Central Bank of Kenya, the Kenya National Bureau of Statistics, and the Kenya Revenue Authority. Secondary data was collected in the course of the study by using data collection sheets. Descriptive and regression analysis, the study found that interest rate had negative effect on value-added tax collected in Kenya. The study thus recommends that the Government should regulate the rise in the level of interest rate in the country in order not provoke price instability in the country.
