Effect of Withholding Value Added Tax on the Value Added Tax Revenue In Kenya.

Abstract

Value-added tax (VAT) withholding tax is a significant instrument used in various tax administrations to control revenue leakages that originate from taxpayers that charge VAT on their services and supplies and then fail to remit it to revenue authorities. The Kenya Revenue Authority (KRA) implemented VAT withholding in 2014 with the expectation that it would positively impact VAT revenue collection and compliance. The motivation of this study therefore arises from the knowledge that a number of developing countries are considering implementing a withholding tax mechanism on VAT revenue. The main objective of the study was to establish the impact of withholding VAT on VAT revenue in Kenya. The specific objectives included: to determine the effect of VAT withholding administration on VAT revenue collection in Kenya, to establish the effect of VAT withholding reform on VAT revenue collection in Kenya, to assess the effect of VAT withholding rates on VAT revenue collection in Kenya. The study was anchored on the ability to pay theory, the sacrifice theory and economic deterrence theory. The target population of the study was employees at KRA in Nairobi County. The study targeted 60 KRA employees involved in administration, collection and refund of VAT revenue. All the employees participated in the study; hence it was a census. Primary data was collected using a structured questionnaire. The study applied quantitative methods to analyse data. These included descriptive statistics such as percentages, means and standard deviation. Further, inferential statistics including correlation and regression analyses were conducted to determine the relationship between the independent variables and the dependent variable. The findings indicated that withholding VAT administration (β=0.347, p=.012), withholding VAT reforms (β=0.284, p=.034), and withholding VAT rates (β=0.34, p=0.017) had a positive and significant effect on VAT revenue. The study concluded that withholding VAT had a significant influence on VAT revenue in Kenya. The study recommended that the government through the necessary agencies such as KRA and Treasury ministry should strengthen VAT policies relating to withholding VAT administration, reforms and rates. The focus should be; Itax system, monitoring & evaluation, and compliance audit, VAT exemptions, number of tax collectors, penalties, audit skills, zero rated supplies, goods and services exemptions. Out of the limitations of the study, areas of further research have been pointed out. For instance, a study on the effect Withholding VAT system on the VAT refund/credit