Treasury's headache in plugging Sh640 billion hole in Budget

NAIROBI, KENYA: Kenyans are staring at heavy taxation in this financial year as the National Treasury moves to increase budgetary allocation to fight insecurity, finance a widening deficit and revive the sluggish agriculture and manufacturing sectors.

It is only in this year's budget proposals that Cabinet Secretary for National Treasury Henry Rotich can afford to be radical in his measures. The year 2017 is an election year and Mr Rotich would have to be less drastic in order to avoid political ramifications that could hurt the Jubilee Administration.

Figures contained in the Budget Summary for the fiscal year 2015/16 indicate a deficit of Sh640.5 billion against an estimated overall balance of Sh509.3 billion in the current financial year. The 2015/16 budget targets revenue collection including appropriation-in-aid-ministries' own revenue- of Sh1.358 trillion compared to Sh1.1646 trillion in the current financial year. This is against an overall expenditure in 2015/16 financial year, including net lending of Sh1.998 trillion compared to an estimated 1.806 trillion in the 2014/15 financial year.

Treasury plans to support the fiscal deficit  by net external financing of Sh340.5 billion, domestic loan repayments of Sh2 billion, National Bank of Kenya rights issue of Sh5 billion and Sh219.2 billion in net domestic borrowing. As matters stand, the taxman fell below target in the first quarter and will have an uphill task in collecting revenue from a declining, under-performing agricultural sector and a slumped tourism sector.

All indications are that there will be an attempt to introduce new tax measures to an overburdened public. The National Treasury has already said that it will submit to the National Assembly for debate and enactment, the simpler and modern Excise Management Bill and a Tax Procedure Bill. The government will also continue to rationalise existing distortionary tax incentives, expand the income tax base and remove tax exemptions as envisaged in the Constitution.

Some tax measures already undertaken include enactment of income tax regime for the extractive industry, introduction of VAT withholding of 6 per cent out of the 16 per cent and rolling of iTax.

We hold the view that it will be unfair to tax small businesses or go after landlords and rental income as well as investors at the Nairobi Securities Exchange (NSE), who have hitherto resisted the capital gains tax net.

The Government is likely to borrow heavily into 2016, a development that could crowd out the private sector from the credit market. An alternative could be to float a Sukuk (Arabic version of a bond) or use other concessional financing methods such as Public Private Partnership agreements (PPP) arrangements and the annuity financing for roads.

The key risk in foreign borrowing remains exchange rate risk, when repayments kick-in. It is still unclear whether the Shilling will gain stability so that Kenya does not have to suffer huge foreign loan repayments. 
Revenue is going to be a challenge and the Government needs to fine tune more and be cognisant of how un-thought out tax plans can be unraveled in minutes. Big pillars of our economy remain very soft and caution should be taken to ensure the goose that lays the golden eggs is not hurt more than is necessary.

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