Expand tax bracket to help pull many Kenyans out of poverty

News that Kenya’s economy had strongly rebounded beyond projections by the government, the Central Bank of Kenya and economists was greeted with mixed reactions.

The overall size of the economy -- calculated by summing up all goods and services produced at a given period, or gross domestic product (GDP) -- expanded by 6.3 per cent in the second quarter of 2018, signaling better standards of living for Kenyans.

The Kenya National Bureau of Statistics figures showed that Kenyans enjoyed a relatively better standard of living in the three months between April and June. This is despite the gloom that has greeted the punitive tax measures by President Uhuru Kenyatta.

It means that, technically, more goods and services were produced in the economy during this period, a situation that might have left Kenyans richer.

However, for the person on the street, this growth did not reflect their current state of financial affairs. And this must have been captured in another document that KNBS released, showing that in 12 months, Kenyans had paid so dearly for basic items in their monthly shopping basket.

Depressed supply of products

Prices of commodities this month increased by 5.7 per cent in September compared to a hike of 4.04 per cent in August, the highest rate since October last year when Kenya had a repeat election which depressed supply of products. The increase in inflation was occasioned by the 16 per cent value-added tax (VAT) on petroleum products which would later be halved by 50 per cent in the Finance Act, 2018.

The monthly basket of the poorest Kenyan was hit hardest with basic items necessary for survival rising by more than fifty per cent compared to last year.

The National Treasury officials should take this as a warning: That as much as conditions are right for economic take off, a sharp increase in prices of basic commodities could disrupt this growth.

In economics, they say that one man’s expenditure is another man’s income, if each Kenyan spends less, that means each Kenyan earns less and the spiral effect in extremes shrinks the economy.

Even before President Kenyatta assented to the Finance Bill, 2018 with a myriad tax measures, prices of a number of goods such as juice, bottled water, kerosene had already risen as the Kenya Revenue Authority adjusted the rate of inflation.

And with the Government coming up with a raft of new tax measures, economists say the country is going to experience higher inflation as the new tax measures take effect.

Affecting state collections

The government must also listen to the business community which has noted that the housing tax is an additional expense, and when businesses see cost, they cut workforce affecting state collections on the very incomes they wish to tax.

Analysts have pointed out that Finance Cabinet Secretary Henry Rotich has gone for soft options of petroleum because Kenya revenue Authority will basically just sit back and collect more since the petroleum companies are the tax collectors of the VAT.

However, the courageous and difficult thing to do is to expand the tax bracket so that the informal sector also helps in carrying the tax burden.

It is an open secret that only 4 million people are paying taxes in a country with 18 million voters. If the government ensured that KRA’s mandate is expanded they will collect more.

The presumptive tax introduced to replace Turn Over Tax is which has been abolished is a step in the right direction. This tax shall be calculated at 15 per cent of the business permit or trading license fees issued to informal sector players and will be final with effect from January 1, 2019. We are left to see how this will be implemented.