The impact of value added tax reforms on price stability in Sugar firms: a case study of western Kenya

Abstract

Price stability refers to a condition where money maintains its value over a considerable period of time, by allowing money to mitigate cost efficiency, control inflationary trends and maintain economic developments, and investments. It is the reigning general price level in an economy, essential for fostering sustainable economic growth, reducing uncertainties, enhancing investment, and supporting long-term planning for households and businesses. Over the period 2019 to 2023, significant price fluctuations have been observed in the sugar sector, presumably attributed to implementation and compliance with aspects of VAT reforms (2018); including standardization of VAT rates at 16% and the expansion of the VAT base, with apparent increased cost of production inputs, such as fertilizers and machinery. The introduction of digital tax invoicing systems further complicated compliance for sugar firms, especially smaller enterprises, leading to increased operational costs. These fluctuations in production costs passed to consumers, results in to inconsistencies in sugar prices. VAT reforms, while designed to enhance government revenue and broaden the tax base, have introduced increased challenges with production inputs. Despite VAT reforms being implemented to enhance revenue collection from the proportionate cost to product values on marketed goods and services, it is unknown how compliance to the VAT reforms affect price movement in the economy. Specifically, there has been continued instability in sugar prices, affecting both producers and consumers’ returns and investment in the sugar sector. The purpose of this study is to assess the effect of Value Added Tax (VAT) reforms on price stability within the sugar firms in western Kenya. Specifically, the study seeks to examine the effects of VAT reforms on price stability by focusing on three core objectives: to evaluate the influence of inflation-linked VAT reforms on price stability, to investigate the effect of VAT reforms on the production costs within sugar firms, and to assess how compliance with VAT reforms influences price stability in the sector. The study will adopt a descriptive and causalcomparative research design. western Kenya region that has a population of over 1.2 million people residing in the region, with close to 500,000 being sugarcane farmers. Census survey will be employed to collect secondary data for the study. Secondary data, consisting of relevant inflation to sugar sector; consumer price sensitivity, input cost inflation, compliance cost, operation expense, Input cost variation, administrative cost compliance, tax reporting efficiency, price volatility index, supply demand balance in the sugar industry. With data collected from key personnel from twelve sugar firms, each having 5 respondents, resulting in sixty respondence in total. Consisting of general managers, production managers, finance managers, and sales). The regression model showed a strong relationship, with an R Square of 0.624, indicating that 62.4% of the variance in performance is explained by the predictors. Significant predictors included inflation-based VAT reforms (B = 0.633, Beta = 0.297, p = .003), money supply-based VAT reforms (B = 0.452, Beta = 0.318, p = .004), and trade openness-based VA333ms (B = 0.748, Beta = 0.353, p = .002). The study concludes that VAT reforms significantly impact performance, recommending a continued focus on targeted VAT adjustments to enhance stability in the sugar industry. The significance of this study lies in its potential to provide policymakers and industry stakeholders with empirical data on the effectiveness of VAT reforms, offering recommendations for more targeted tax policies that promote price stability and economic resilience in the sugar industry. This research is crucial as it addresses a gap in sectorspecific studies on how macroeconomic policies like VAT reforms directly impact pricing mechanisms in Kenya's sugar industry.