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Address the high cost of doing business before increasing tax

By The Standard | Published Tue, May 22nd 2018 at 00:00, Updated May 22nd 2018 at 00:00 GMT +3
[Photo: Courtesy]

Despite various reports pointing at the improved ease of doing business, there are still many challenges standing in the way of the private sector. Instead of proposing increased taxes in the Income Tax Bill, the Government should focus on helping companies to compete in an environment of practicable and predictable legislation to allow them to grow their earnings.

Going by the performance of the 64 listed companies on the Nairobi Securities Exchange, the profits of most of these firms have been dwindling over the years as a handful dominate the corporate scene. Between 2013 and 2016 alone, data on 56 listed companies showed that profits had shrunk by about a third, and last year was no better. Many chief executive officers continue to cite red tape, corruption and ever-changing legislation among the factors that complicate the business environment.

While last year was problematic due to an extended electioneering period, both the national and country governments made it worse for businesses by delaying to honour payments for goods and services supplied. Many small businesses have complained that payment is unpredictable when doing business with the Government. In the end, some have incurred higher costs of interest on loans they took to finance their business while others have seen their assets attached by financial providers. This has hurt businesses and stifled growth, denying the Government tax revenue that would have come from the growth of these firms.

 Political stability

Factors such as political stability, strong regulations and predictable taxation regimes are key to promoting transparency and are, therefore, vital ingredients for any economy keen on attracting and retaining investment. Many companies continue to face tax disputes with KRA, a pointer that some of the legislations are not easy to interpret. East African Breweries Limited, Del Monte, Nairobi Bottlers Company Limited, Kenya Power and Lighting Company, Nakumatt Supermarkets, China Wu Yi, DHL, Mater Hospital and Wells Fargo are among companies that have been involved in disputes with the taxman.

Magnate Ventures, Vivo East Africa, Bollore Logistics, and Mastermind Tobacco Company have also had a dispute with the State. Letting such disputes run for long in courts only disrupts the attention of businesses. Sometimes disputes arise out of unclear laws. For instance, those doing business in special economic zones have complained that they are unsure about the incentives provided in the law.

Genuine documents

The money and hours spent in litigation could be more useful in generating revenue. Some firms buy land, get genuine documents from the Government and set up business, only to end up in ownership tussles over the land. The Government can do better by ensuring that property ownership is not manipulated since this not only slows down business but also harms reputations.

The corruption menace, estimated to cost the taxpayer Sh6.5 billion annually, should be uprooted from the business environment to ensure a level playing ground. Businesses want an environment in which they can bid for and win State tenders based on merit. They also want to be able to apply for and get licences in the shortest time possible without being arm-twisted to incur additional and unexplained costs.

Only by addressing such key concerns can the private sector thrive both in the number of firms and volumes of profit and, therefore, lead to higher tax revenues, making it unnecessary to raise taxation regimes. While the World Bank's ease of doing business report has been on the lips of many Government officials when they want to show that strides have been made, a lot more remains to be done if the full potential of the economy is to be unlocked.

In the World Bank ranking, Kenya moved from position 129 in 2014 to 113 in 2015. In 2016, the country jumped to position 92 and improved further to position 80 last year. But the reliability of this economic report is now in question. In January, the World Bank’s chief economist, Paul Romer, issued an apology saying the ranking process was unfair and misleading and that the firm would do the listing afresh going back at least four years.

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