Kenya has a complex tax system that makes it expensive for taxpayers to comply with and increases cost of doing business, a new report from the country’s ministry of finance has indicated.

The complicated tax structure, the report on public finance and expenditure pointed out, is costly to implement occasioning huge losses to the country’s economy. 

“Kenya’s tax system is highly complex, much more than other African countries, due to the existence of multiple tax rates and incentives,” noted the report received on Thursday.

Some of the things that make the country’s tax structure complex are systems of waivers, exemptions, zero ratings, tax refunds and debt write-offs.

“This system that encompasses a variety of tax exemptions makes its administration costly and increases costs to the taxpayer of complying with it,” said the report prepared by GIZ, European Union and Kenya’s government.

The more complex a tax system is, according to the report, the more costly is its administration and the more expensive it is for people to comply with it. Taxes administered in Kenya include corporate income tax, personal income tax, Value Added Tax (VAT) and withholding tax.

Corporate income tax rate is 30 per cent, personal income tax rate ranges between 10 per cent and 30 per cent, VAT rate is 16 per cent, while withholding tax rates begin from five per cent and depend on income source, and whether one is a Kenyan or not.

The complex tax regime has also made it difficult to execute are tax refunds.

“VAT refunds are a challenge for Kenya Revenue Authority (KRA) since finance ministry provides a monthly and annual ceiling in the budget on refunds, which is inconsistent with the principle that VAT refunds should be classified as negative revenues and not as expenditures,” said the report titled Public Expenditure and Financial Accountability Assessment.

In countries that have best tax practices, the analysis noted, VAT refunds are automatic. However, in Kenya, the VAT Act does not contain a legal provision for a time limit for settlement of the refunds.

Refund system

“Delays in refunding VAT tax claims have been a contentious issue in Kenya. In its contribution to the 2011/12 budget preparation process, Kenya Private Sector Association proposed that VAT refund system should be simplified so that any amount of money owed to taxpayers should be refunded by KRA within 30 to 60 days after the submission of the claim,” said the report.

Most companies and individuals entitled to tax refunds, observed the report, experience long delays in payment of refunds claims, which discourages investment in the country.

“Stakeholders have noted that delays in refunds should result in penalties being imposed on KRA, just as the institution imposes penalties on late tax payment,” the report noted.

And while the analysis acknowledged that the Budget process improved with the passage of new Constitution, execution still faces several challenges.

“Budget execution and cash management face issues that impact on in-year predictability and efficiency. Kenya’s commitment control systems are based on approved budgets, not projected cash availability, leading to the risk of payment arrears (end-year pending bills), in the event of revenue shortfalls,” said the report.

Funding policy

The analysis also observed that Kenya does not have a comprehensive external funding policy, which could include rules and procedures with regard to administrative, budgeting and use of external money. This according to the report leads to unpredictability of direct budgetary support from donors.

“About two-thirds of aid is provided off-budget in the form of Appropriations in Aid. Donors providing aid in this form prefer to use direct payment to contractors, thus circumventing the country’s accounting systems, which creates confusion,” noted the report.

Kenya has initiated various reforms to improve revenue collection and accountability in expenditure. However, the analysis said the changes are uncoordinated.

Fragmented, unco-ordinated

“Reforms in the sector are being implemented in a fragmented and uncoordinated way. While officials appears genuinely interested and committed to developing a public finance management strategy, responsibilities in practice are often delegated to subordinate staff, resulting in reduced effectiveness of the process,” said the report.

The report warned that the pace of reforms in the public finance management sector may be affected by the upcoming elections, which are expected in March next year.

-Xinhua