IMF: VAT refund delays could be raising the cost of doing business in Kenya
Kenya’s VAT debate may be overlooking a hidden cost to businesses: tax paid on inputs that cannot be recovered efficiently. A new IMF analysis says unrecovered value-added tax (VAT) on business inputs can become an economic distortion in emerging-market and developing economies, potentially pushing up production costs and weakening the efficiency of the tax system. […]
A new International Monetary Fund (IMF) analysis sheds light on a potential hidden cost for businesses in Kenya: unrecovered value-added tax (VAT) on business inputs. The IMF suggests that unrecovered VAT can become an economic distortion in emerging-market and developing economies like Kenya, potentially increasing production costs and hindering tax system efficiency.
While the IMF does not specifically assess Kenya's VAT refund system, its findings provide a framework for examining how VAT administration, including refunds, impacts businesses in the country. The IMF argues that a well-designed VAT should tax final consumption, not production, and that when businesses can recover VAT paid on inputs, production costs decrease and resources can be allocated to more productive uses.
However, when input VAT remains unrecovered, it can increase production costs and weaken the effectiveness of the tax system. This analysis suggests that governments should prioritize improving VAT refunds and core tax administration processes to limit exemptions, enhance compliance management, and maintain revenue while minimizing compliance burdens.
For Kenya, this means examining the efficiency of VAT refunds and the overall administration of the tax system rather than solely focusing on the VAT rate. The IMF emphasizes that the economic impact of taxation depends not only on the amount collected but also on how it is collected, advocating for revenue-neutral reforms that lower production costs and encourage investment.
Written by urgent.news from People Daily Kenya's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
