Kenya hits VAT ceiling, leaving little to no room for further tax hikes, KIPPRA study shows

KIPPRA warns Kenya should improve tax compliance and broaden the tax base instead of raising VAT above the current 16 per cent rate. (Photo: File)

By Alfred Onyango
Tuesday, July 28, 2026

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This means Kenya's current 16 per cent VAT rate is considered appropriate, leaving little scope for further increases.

The study identifies GDP, the prevailing VAT rate and the use of technology in tax administration as the main drivers of VAT revenue. However, it also highlights a disconnect between economic growth and VAT collections, attributing the gap to a large informal economy and persistent tax leakages that continue to undermine revenue performance.

To boost collections without increasing tax rates, KIPPRA recommends reducing VAT exemptions, formalising informal businesses, expanding the use of technology, strengthening tax audits and improving taxpayer education to enhance compliance.

The report also stresses the need to align the VAT rate with the revenue-maximising level identified by the Laffer curve.

In addition, it urges the government to review tax incentives and exemptions to ensure they support productive sectors without unnecessarily eroding the VAT base.

KIPPRA recommends prioritising incentives for sectors such as technology, renewable energy and manufacturing while limiting exemptions for luxury goods and parts of the real estate sector.

Regionally, Kenya's 16 per cent VAT rate is broadly consistent with most Sub-Saharan African countries, where standard rates typically range from 14 to 16 per cent.

However, Kenya trails some of its East African neighbours in VAT's contribution to total tax revenue. VAT accounts for 23.6 per cent of total tax revenue in Kenya, compared with 29.2 per cent in Uganda and 30.8 per cent in Rwanda.

Overall, KIPPRA argues that narrowing compliance gaps and modernising VAT administration would provide a more sustainable way to increase revenue than raising tax rates, while protecting economic growth and strengthening the country's fiscal position.