Summary Policy Note on Tax Reforms in Kenya: Reforming Value Added Tax (VAT), Excise Taxes on Cigarettes and the Personal Income Tax (PIT)
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Date
2025
Authors
Ngugi, Rose
Tarp, Finn
Kedir, Abbi
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
Designing and implementing tax systems that are both efficient and effective are essential for revenue generation, economic growth, and equity as well as fairness across income groups in Kenya. The existing highly complex and outdated tax structures and the lack of effective digitization undermines compliance and limit revenue collection. This, in turn, severely constrains the amount and quality of public services the Government of Kenya (GOK) can finance in support of economic transformation and development, on the one hand, and the well-being of its citizens, on the other. It has also led to a public debt level that is at high risk of distress, and harsh liquidity constraints due to the reliance on short-term borrowing instruments.
The overarching goals of the tax reform process in Kenya are to maximize revenues without distorting markets, and to ensure that the design of tax policy and tax instruments do not raise incentives to avoid and/or evade taxes. Simplification and unification of tax structures aimed at reducing government expenditures and the burden placed on taxpayers is central to achieving these goals. Therefore, this summary note (and the underlying policy notes) explores whether and how a re-design of taxes can help support change towards a combination of lower tax rates and higher revenue, and points to the associated needed range of adjustment in each of the tax instruments.