The Kenya Institute for Public Policy Research and Analysis (KIPPRA) has cautioned the National Treasury against increasing Value Added Tax (VAT) beyond the current 16%, warning that doing so could ultimately reduce, rather than increase, government revenue.
In a new study, the state think tank argues that Kenya is already operating close to the VAT rate that maximises revenue collection. It warns that any further increase could discourage consumer spending, encourage tax evasion and weaken compliance, undermining the government’s efforts to raise additional revenue.
The findings come as the government faces mounting pressure to narrow fiscal deficits, boost domestic revenue mobilisation and reduce its reliance on borrowing.
Drawing on data from 1990 to 2023, KIPPRA estimates that while the theoretical optimal VAT rate in an ideal economy would be 10.25%, Kenya’s economic conditions, including GDP growth, tax administration and technological advances, raise the revenue-maximising rate to approximately 16.3%.
According to the report, the current VAT rate of 16% is already close to that threshold, suggesting that any further increase risks becoming counterproductive. The study argues that higher tax rates do not necessarily translate into higher government revenue, challenging the long-held assumption that raising taxes automatically boosts collections.
Instead, the report explains that VAT follows the principles of the Laffer Curve, where revenue rises only up to a certain point before beginning to decline as excessive taxation suppresses consumption, encourages businesses to underreport sales and drives more economic activity into the informal sector.
KIPPRA’s analysis found that once VAT exceeds 16.3%, revenue elasticity turns negative, meaning higher rates begin to discourage economic activity, reduce compliance and create stronger incentives for tax avoidance.
The report notes that Kenya has implemented numerous VAT reforms over the past three decades, including adjustments to tax rates, expansion of the tax base and the introduction of digital tax administration systems such as Electronic Tax Registers (ETRs), iTax and the Electronic Tax Invoice Management System (eTIMS).
Also Read: Kenya Bets on Business Tourism to Reach Five Million International Visitors by 2027
Despite these reforms, VAT’s contribution to overall tax revenue has declined. According to the study, VAT accounted for an average of 45% of total tax revenue during the 1990s, but its share has gradually fallen to about 26% in recent years as exemptions and zero-rated products narrowed the tax base.
Rather than increasing VAT rates, KIPPRA recommends that the Treasury focus on improving the efficiency of tax collection. The think tank urges policymakers to broaden the tax base by reducing exemptions, formalising more businesses operating in the informal economy and strengthening tax compliance through improved enforcement and greater use of technology.
The researchers also call for a review of tax incentives to ensure they encourage investment without unnecessarily shrinking the VAT base.
The report identifies digital tax administration as one of the most effective drivers of stronger VAT performance. It found that technology-based reforms, including ETR, iTax and eTIMS, have significantly improved revenue collection by enhancing transaction reporting, reducing fraud and strengthening taxpayer compliance.
KIPPRA argues that continued investment in tax technology is likely to deliver greater revenue gains than increasing statutory tax rates.
The study also highlights the large informal economy and extensive VAT exemptions as major sources of revenue leakage. While Kenya’s economy has continued to grow, the report notes that VAT collections have not kept pace, indicating persistent weaknesses in the tax system.
According to KIPPRA, reducing exemptions and bringing more businesses into the formal economy would expand the tax base without placing additional tax burdens on compliant taxpayers.
The report further notes that while Kenya’s 16% VAT rate is broadly comparable with those of its regional peers, the country’s VAT efficiency still lags behind neighbours such as Rwanda and Uganda. VAT currently accounts for about 23.6% of Kenya’s total tax revenue, suggesting there is greater scope to improve tax administration and compliance than to raise tax rates further.
