EFFECT OF TAX POLICY REFORMS ON TAX REVENUE IN KENYA

ABSTRACT 
Taxation provides principal lenses in measuring state capacity, state formation and power relations in a whole society. In the evaluation of tax reforms in the developing countries, it is important to first determine the unique role of the tax system in each particular country. The main reason for undertaking tax policy reforms in Kenya was to address issues of inequality and to create a sustainable tax system that could generate adequate revenue to finance public expenditures. In this respect, the government of Kenya introduced in the country the tax modernization programmes for achievement of a tax system that was sustainable in the face of changing conditions locally and internationally. This study examined the reform efforts of the country with respect to revenue generated, and reviewed the strengths and weakness of the tax system as it has evolved over the years from 2003/2004 to 2012/2013. The methodology used was a descriptive research design. The general objective was to evaluate the effect of tax policy reforms on tax revenue in Kenya. The specific objectives of the research study were: to establish the relationship between domestic taxes policy reforms and tax revenue in Kenya, to determine the effect of customs policy reforms on tax revenue in Kenya, to evaluate the relationship between road transport policy reforms and tax revenue in Kenya and to assess the relationship between tax evasion and tax revenue in Kenya. The study used both descriptive and regression statistics. Correlation analysis was made to measure the strength of the relationship between the variables. With the aid of SPSS, a multivariate analysis was employed with the OLS regression being used. From the findings on the relationship between domestic taxes policy reforms and tax revenue in Kenya, the study established that there was a significant relationship between taxes policy reforms and tax revenue in Kenya.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
Tax reform is the process of changing the way taxes are collected or managed by the government which may involve the adoption of a Value Added Tax (VAT), the expansion of the VAT, the elimination of stamp and other minor duties, the simplification and broadening of corporate income or personal or asset taxes, or the revision of the tax code to enact comprehensive administration and criminal penalties for evasion (Mahon, 1997). 

In Kenya, taxation is the single largest source of government budgetary resources. Between 1995 and 2004, tax revenue constituted 80.4% of total government revenue (including grants). Relatively, the importance of non-tax revenue is also significant in sustaining the public budget, although its importance is much less than the role of taxation given that it’s share over the same period was 15.1%. Foreign grants play a minimal role as they have averaged only 4.5%. Given its central role, taxation has been applied to meet two objectives. First, taxation is used to raise sufficient revenue to fund public spending without recourse to excessive public sector borrowing (Glenday, 2002). 

Second, it is used to mobilize revenue in ways that are equitable and that minimize its disincentive effects on economic activities. Over time, Kenya has moved from being a low tax burden country to a high tax burden country yet the country faces the obvious need for more tax revenues to maintain public services. Given the high tax burden, prospects to raise additional revenue seem bleak. In addition, Kenyans are yet to accept a tax paying “culture”. On one hand, those with political power and economic ability are few and do not want to pay tax while on the other hand, those without political power are many, but have almost nothing to tax, and so resist paying taxes. As no one enjoys paying taxes, there is always mistrust between those collecting taxes and taxpayers. This mistrust generates a hostile coexistence between tax agents and tax payers, with agents perceiving taxpayers as criminals unwilling to pay their taxes, and tax payers being wary of government agencies’ high-handedness in collection of taxes (KRA, 2004). 

Even though the tax system continuously changes, in pursuit of the objectives of the Tax Modernization Programme that came into force in 1986, the challenges that confront the tax authorities today are not much different from the pre-reform challenges. With Kenyan firms reporting that about 68.2% of profit is taken away in taxes, tax competitiveness is low and the country remains among the most tax unfriendly countries in the world. Tax evasion remains high, with a tax gap of about 35% and 33.1% in 2000/1 and 2001/2 respectively (KIPPRA, 2004a). The tax code is still complex and cumbersome, characterized by uneven and unfair taxes, a narrow tax base with very high tax rates and rates dispersions with respect to trade, and low compliance (KIPPRA, 2004b). 

Additional challenges include tax systems with rates and structures that are difficult to administer and comply with, are unresponsive to growth and discretionary policy hence low productivity, raise little revenue but introduce serious economic distortions, treat labor and capital in similar circumstances differently and are selective and skewed in favor of those with the ability to defeat the tax administration and enforcement system (KIPPRA. 2004b). 

The composition of taxes could also change as a result of increased difficulty in taxing mobile tax bases with the total tax burden from income taxes on mobile tax bases like capital and skilled labour likely to decline across governments, while taxes on immobile tax bases will likely increase. In the face of tax competition, national governments may attempt to harmonize their tax systems in an attempt to reduce the negative externalities that one government’s decisions impose on other governments. Such harmonization implies that there should be some convergence in tax rates across governments, and in the definitions of tax bases. Some also argue that neither a “race to the bottom” nor international tax convergence are universal outcomes of increased globalization. Analysts differ on whether these developments are positive (e.g., tax competition that reduces the size of government and government waste) or negative (e.g., tax competition that reduces the ability of governments to provide public goods, eliminating the welfare state). However, few question that globalization has led, and will still to lead to a significant reduction in the autonomy of governments (Musgrave, 1987). 

In evaluating tax reform in developing countries, one first needs to determine the unique role of the tax system in each individual country. Among the key reasons for undertaking tax reforms in Kenya was to address issues of inequality and to create a sustainable tax system that could generate adequate revenue to finance public expenditure hence, the tax modernization programme introduced in the country was to achieve a tax system that was sustainable in the face of changing conditions domestically and internationally. Policy was shifted towards greater reliance on indirect taxes as opposed to direct taxes as consumption taxes were seen to be more favourable to investments and thus growth while trade taxes, instead of being used for protection or revenue-maximization purposes, were viewed more as instruments to foster export-led industrialization. Trade taxes were hence used to create a competitive exports sector rather than protect the import-competing manufacturing sector, as had been done in the past (Karingi and Wanjala, 2005). 

Given the destabilizing effects of the deficits and the fact that they were becoming unsustainable, the Kenya Government through Sessional Paper No 1 of 1986 (GOK, 1986) came up with measures to address this problem. The most notable fiscal policy proposals adopted were the Tax Modernization Programme (TMP) that was adopted in 1986 and the Budget Rationalization Programme that followed in 1987 (Muriithi and Moyi, 2003) .

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Item Type: Kenyan Postgraduate Material  |  Attribute: 76 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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