Relooking Kenya’s fiscal health: Time for tough action?

The government’s recent fiscal arithmetic in introducing numerous taxes has been questioned. To begin with, tax is and has always been intended to be a social contribution for the common good. Never has it been and it should not be a burden. There are arguments for expanding the scope in certain hard times, but this ought to be the exception rather than the norm.

It is therefore necessary for the government to relook its policies and find an acceptable threshold since the current trajectory is not in tandem with canons of good taxation. For instance, it raises fundamental issues in raising taxes on critical commodities such as fuel, which is estimated to raise a maximum of 100B based on the estimated consumption while costing the economy more than a trillion directly and indirectly.

Foremost, the practice of changing tax legislation annually to influence investment is an old fashioned practice and most businesses now prefer certainty on what their taxes will be in the next five to ten years. As such, the most preferable route for investors currently is in form of investment codes which guarantee high cost investments of certain tax rates for at least the next 15 to 20 years. In the region, Rwanda has embraced use of investment codes.

Generally, the world has cracked down on the use of tax incentives significantly over the last two decades by classifying some aggressive practices as ‘harmful tax competition’. This then implies that the room for using this tools is now limited, unlike during the time when the Asian Tigers and other tax havens utilised all manner of tax incentives to attract foreign investment.

Even then, most studies done by IMF and other global institutions have confirmed that most multinational businesses do not give much premium to grants and incentives as they do to other factors such as economic stability and corruption. Of the twelve indicators surveyed, tax incentives ranked eleventh thus underscoring its irrelevance in the global business space, reason enough for government to focus more on fighting corruption than in designing tax breaks.

Across the world, it is quite difficult to rope in the informal sector to make contributions, though the argument that jua kali does not contribute to taxes has been discounted as simplistic since they contribute significantly to indirect tax collections. As such, it makes better sense to rely more on indirect taxes such as VAT and Excise but with a corresponding decrease in corporate and individual taxes. This is in sync with global trends where countries which rank high in the fiscal competitiveness index are those which charge lower corporate and individual taxes.

The other significant problem in the Kenyan context is the consistently rising gap between the rich and the poor. It is estimated that only 8,000 Kenyans own more than all the rest of the populace combined, with the implication that the economic growth rates that have been reflected over the years trickle down to the pockets of a few individuals. This needs to be checked with policies being put in place to deliberately ensure that a good section of the population is in the middle class.

In countries that rank meanly in the corruption index, it is more meaningful to reduce the government budget (hence making less cash available for corruption) and encouraging businesses to perform government roles, such as providing education, healthcare, roads maintenance, employment among others. It is probably the only way to maximise Foreign Direct Investment as Multi National Enterprises (MNEs) generally prefer low tax jurisdictions. The treasury should therefore encourage businesses to invest in public utilities for which they can take tax deductions.

It is also time to check out harmful predatory economic practices, such as holding land idle for speculative purposes, uncontrolled traffic losses and paper losses recorded by companies. To tame this, there should be punitive taxes on idle commercial land, traffic tax for use of private and low capacity vehicles in CBDs, and at least 1% tax on the gross turnover of loss making companies which can be recovered once the business starts making profits.

Kipkemboi Rotuk is a Chevening Scholar at Queen Mary, University of London