Understanding Kenya’s tax system ahead of budget day

Treasury Cabinet Secretary Henry Rotich before previous budget presentation (PHOTO: FILE)

NAIROBI, KENYA: On Thursday, Cabinet Secretary Henry Rotich will step out to break down 2018/19 budget which will highlight allocations to various state functions. Many Kenyans will be looking forward to how the government will finance projects in this year’s Sh3.07 trillion budget.

In understanding areas of taxation, Standard Digital engages experts from PricewaterhouseCoopers to shed light on various areas of taxation and how it will affect individuals and businesses.

Question: Kenyans believe they are the most taxed society yet in East Africa we pay 16 percent VAT compared to our neighbors who pay slightly higher.  Is the complaint justified?

The VAT rate in Uganda, Rwanda and Tanzania is 18 percent. However, other countries such as South Africa have lower rates of VAT. South Africa has a rate of 15 percent, Nigeria has a rate of 6 percent and Egypt 13 percent. If we compare ourselves to these economies, then our VAT rate is high. To make Kenya more competitive and attract investments and capital, the VAT rate should not be increased but probably reduced to align to economies that are bigger than Kenya’s.

Question:      Kenyans are paying dearly (through tax) for utilities like power and fuel which has increased the cost of living. What is the rationale of taxing basics?

This is a way of collecting revenues to fund other government initiatives…for instance, the levies such as WARMA (0.05 cents/KwH); ERC (3 cents/KwH), REP (5 percent of the cost of the units) are used to fund other organizations.

Question:      We are seeing a lot of manufacturing firms relocating their operations for various reasons among them, high taxes. How can GoK encourage investors especially in a key area like manufacturing?

From a tax perspective, there should be targeted incentives granted to the manufacturing sector. For example, motor vehicle assemblers have a reduced corporate tax of 15 percent for the first five years from the year of commencement of operations.

Over and above the tax incentives, the Government should ensure there is world class infrastructure, security, affordable power, skilled labour among others. The government should seek to expand the current economic bloc outside the East African Community to increase market for manufacturers and ensure free movement of capital, labour and goods.

Question:      World Bank is pushing GoK to increase VAT to aid in financing local projects. Do you see this happening in the current budget? If so, what are the likely consequences?

It is unlikely that there will be an increase in the VAT rates. However, products that were previously zero rated or exempt may be reclassified to standard rate of 16 percent e.g Fuel is likely to move from exempt to 16 percent VAT.

In the Tax Law Amendments Bill 2018, cooking gas, milk, flour will move from zero rated to exempt. The above will increase the cost of living for the ordinary mwananchi.

Question:      How can KRA can cast the tax net wider without injuring low income earners?

As such, the government has to get creative and looks for ways of expanding the current tax base. This entails bringing into tax net, potential taxpayers that are currently outside the net.

Continous improvement in the ease of doing business in Kenya coupled with incentivizing investments will certainly grow the economy and the government will have substantial revenue to tax.

The Kenya Revenue Authority (KRA) also has to continue embracing technology and like other revenue authorities adopt appropriate tools to assist in early detection, deterrence and elimination of harmful behavior of taxpayers that lead to revenue leakage.

More importantly, the government and Kenya Revenue Authority ought to incentivise tax compliance. It hurts to celebrate zero budget deficits and then lose ahuge chunk of taxpayers’ money through corruption and theft. Curbing corruption, increasing accountability and optimal employment of public resources will increase the probability of taxpayers complying voluntarily, and improve revenue collection.

Question:      The new tax bill aims at 35 percent corporate tax. What are the ramifications?

Increasing tax rate could help increase the revenue collected at least in the short run. However, in the long run the high tax rate coupled with other factors could reduce Kenya’s attractiveness to business investors and lose Kenya vital places in the competitiveness league as a regional hub.

Notably, the proposed top rate of 35 percent for corporations is significantly higher than the current global statutory average rate of 22.5 percent and Africa’s average rate of 28.5 percent. The rate will also be the highest in the region with Uganda, Rwanda and Tanzania at 30 percent. It is also one of the highest in Africa’s top 10 economies by GDP

Question:   What can be done to reduce tax evasion?

High tax rates encourage tax evasion. The government should ensure that the rates are fair enough to encourage compliance. Institute enforcement measures against tax evaders.

Question:      Entrepreneurship is a key driver in economic growth. What advice would you give people with start-ups as far as ensuring their tax records are in order?

Start by maintaining proper accounting records; consult professionals when it comes to tax matters. Maintain your records for at least five years