The place of a prudent tax regime in financing UHC in Kenya

Treasury Cabinet Secretary Henry Rotich outside Treasury Building before he left to present the 2018-2019 Budget in Parliament. Universal Health Coverage is part of the Big Four Agenda set by the Government. [File, Standard]

The achievement of Universal Health Coverage (UHC), one of Kenya’s four-point development agenda, will be contingent on the establishment of an efficient, adequately equipped health system capable of providing universal access to good quality healthcare. This will require a functional financial system that enables the country to not only create adequate fiscal space for health but also protect all citizens from financial hardship and impoverishment that could arise from healthcare costs.

The financing aspect of UHC in Kenya is critical since the country is yet to attain critical UHC-requisite thresholds. An analysis of the fiscal space for health in Kenya conducted by E&K Consulting Firm reveals that overall, Kenya suffers from a relatively low quantum of overall Government spending on health – which in itself is a significant barrier to the attainment of UHC.

Government’s budgetary allocation towards health as a percentage of GDP stands at 2.2 per cent yet scientific evidence shows that countries that have made progress towards UHC spend public funds at 5 per cent of GDP.

On per capita basis, the Government’s contribution to health expenditure falls short of the $86 threshold required to attain UHC by approximately an entire $50. The shortfalls in Government-led expenditure in health have been filled, in part, by out-of-pocket payments (OOP) resulting in close to one-third of Kenya’s total health expenditure being borne by the private sector largely through OOP payments made by households.

Money transfer

On the basis of the limited fiscal space for health in Kenya, the country needs to consider prudent mechanisms for financing UHC. In a bid to generate more tax revenue to finance UHC, the Treasury introduced a ‘Robin Hood’ tax, which consists of a 2 per cent increment on excise duty on mobile money transfer services by cellular phone service providers and the introduction of a 0.05 per cent excise duty on amounts of Sh500,000 or more transferred through banks and other financial institutions.

Following that announcement, the Kenya Bankers Association filed a suit on July 2 seeking to suspend the implementation of the 0.05 per cent excise duty, terming the move unconstitutional.

The 'Robin Hood' tax proposal is flawed. First, there is merit in efficiently collecting taxes under the pre-existing tax regime before introducing new taxes – a fact the Robin Hood tax proposal ignores. Resources to fund UHC should first be sourced by increasing efficiency in revenue collection particularly for corporate income tax (CIT) and value added tax (VAT).

Kenya faces a number of challenges in enhancing revenue yield on property taxation, CIT and VAT, yet these three tax sources offer the best opportunities in the tax blend for substantial revenue improvements.

There are significant variations across sectors in terms of their contribution to GDP and CIT revenues. Sectors such as agriculture, wholesale and retail trade, whose contribution of CIT is disproportionately lower than their contribution to GDP, represent opportunities for enhanced CIT revenue collection.

The Robin Hood Tax proposal is at loggerheads with these facts since it aims to collect more taxes from the financial sectors, yet these sectors are already contributing disproportionately higher taxes relative to their contribution to GDP. 

Tax proposal

Second, the 'Robin Hood' tax proposal is not supported by analysis that demonstrates the benefits of its introduction exceed the potential downsides – key among them, deterioration of the ease of doing business and hampered growth of some sectors besides the potential negative long-term effects such as loss of employment in the affected sectors.

The bottom line is that while the ‘Robin Hood’ tax may be a solution, it is not the most sustainable solution to financing UHC. With the clarion call for changes in the health system in order to achieve UHC, there is merit in equivalent focus on optimising governance and tax administration regimes put forward to finance UHC.

While there is need for wider stakeholder engagement prior to the finalisation of new tax proposals, there is even greater merit in economic analysis of the long-term effects of new tax proposals.

This will ensure that while tax revenues are generated to support the noble UHC mission, the mechanisms of generating this tax revenue do not jeopardise the ease of doing business and the growth trajectories of key sectors of the economy.

If this is not done, the new tax proposals may in the long term slow down Kenya’s economy (and thus reduce overall growth in tax revenues), reduce Kenya’s competitiveness as an investment destination and preclude the realisation of other pillars of the Government’s Big Four agenda - not to mention the risk of making the long-term sustainability of UHC not so sustainable after all.

Dr Rono is a health finance specialist and co-founder and managing partner at E&K Consulting Firm; [email protected]

Ms Maoga is an actuarial scientist and business analyst at E&K Consulting Firm