• VAT in Tanzania and Uganda is set at 18 percent.
• VAT is 'regressive' because poor people pay proportionately more thabn rich people
Treasury CS Njuguna Ndungu has said that the government will cut spending after President Ruto rejected the Finance Bill that caused riots across Kenya.
There is a simple way to raise taxes and minimise cuts in government spending.
VAT in Tanzania and Uganda is set at 18 percent. They complain that Kenyan manufacturers are undercutting them because their VAT is 16 percent.
If Kenya increased its rate of VAT to 18 percent, it would cut the budget deficit, keep the IMF happy, and reduce friction over exports with Tanzania and Uganda.
Increasing VAT from 16 to 18 percent would generate at least Sh65 billion in extra revenue for the KRA and be paid by all Kenyans according to how much they consume.
VAT is not a 'progressive' tax where rich people pay more than poor people. It is 'regressive' in that rich and poor are taxed equally on consumption. The other downside of VAT is that it is inflationary.
Nevertheless, VAT plays a useful role in a country where the majority of the population inhabits the informal economy.
Kenya should set its VAT rate at 18 percent like Uganda and Tanzania.
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