Report: Rich dodge taxes due to faulty system

By MACHARIA KAMAU and MOSES MICHIRA

NAIROBI, KENYA: Kenya’s rapid economic growth has been achieved at the expense of the majority who are now much poorer, thanks to a defective tax system.

A new report compiled by the Tax Justice Network in Africa (TJN-A) has revealed that the wealthy have amassed their riches by either evading taxes-that should otherwise re-distribute wealth.

The poor do not have a way to dodge their only taxes, VAT or Pay-as-you-earn. “There is evidence that in many cases, growth is taking place at the expense of the poor who are increasingly impoverished,” said Alvin Mosioma, the director of TJN-A- a pan-African organisation.

He was speaking at the launch of the report titled ‘Africa Rising? Inequalities and the Essential Role of Fair Taxation’ which has criticised the country’s tax system.

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The economy has sustained fast growth rate in the past decade peaking at 7.1 per cent in 2007 and is projected to hit 6 per cent this year, helped mainly by consumption taxes. Taxes on income and consumption are the two highest contributors to Government revenue–which is earned from the majority of the population that is largely poor and an emerging middle-income class.

Mega projects

Martin Napisa, the national co-ordinator of the National Taxpayers Association, said the tax system has made it easy for the rich to evade taxes on their several income streams.

Mosioma said the recently-introduced measure to levy 16 per cent VAT on commodities, that were previously tax-exempt or zero-rated, had disproportionately hit the poor.

That is in addition to the income tax which is deducted on their salaries at a graduated scale of up to 30 per cent on any income over Sh38, 893.

As result, the poor are paying through the nose to fund the vibrant economic expansion and the mega infrastructure projects.

High-income earners, on the other hand, spent a much smaller proportion of their income on taxes, or even end paying nothing as is the case with most businessmen.

“The growth model has seen a concentration of income, which along with the inability of governments to tax the proceeds of growth exacerbate income inequality,” said Mosioma, who cites tax dodging and illicit finance flows to have undermined taxation of the rich.

The findings now place National Treasury and Kenya Revenue Authority on the spot for implementing faulty tax measures, which are soft on mega investments in real estate, repatriated profits and capital gains.

These have, over time, worsened the plight of the poor while allowing wealthy individuals and multinational firms to avoid paying their fair share of taxes.

“It is notable that while the tax burden on the poor is rising in Kenya, the country’s elite successfully continue to resist paying taxes on the profits made from their real estate and stock market investments,” he said. Going heavy on the ‘easy targets’ in the form of income and consumption taxes while ignoring the wealth has the effect of widening the poor-rich divide, Mosioma said.

High net worth individuals

The report notes that the rich are able to use loopholes within the law to dodge paying taxes, while in other instances there are outright tax evasion cases but get away scot free.

“The scale of the tax evasion problem is very evident from recent revelations regarding high net worth individuals (HNWI) in Kenya and South Africa,” he said.

In Kenya only 100 HNWI are registered with the tax authority even though the country has 142 Kenyan shilling billionaires, whose net worth exceeds US$30 million each.

“Apart from the non-declaring billionaires, there are likely to be a further 40,000 HNWI in the country who are evading tax,” reads the report in part.

In Kenya, food security should be a prime concern, yet the abolition of VAT exemption on many basic goods was done without proper analysis of the consequences for the poor… this move is aggravated by the implementation of the new money transfer tax, an additional tax burden for the poor, according to the researchers.