Rotich's headache in plugging Sh640 billion deficit in next year's budget

National Treasury CS Henry Rotich has set sights on taxation measures as well as borrowing to finance Sh2.1 trillion 2015/16 Budget [PHOTO: BONIFACE OKENDO]

Kenyans are staring at heavy taxation in the next financial year as the National Treasury moved to increase budgetary allocation to fight insecurity. The exchequer will also have to borrow heavily from domestic and foreign money markets.

According to 2015/16 Budget estimates released on Thursday, the Treasury plans to raise spending by 25 per cent to Sh2.17 trillion in the financial year starting July, with the bulk going to energy, infrastructure and telecommunications.

Figures contained in the Budget Summary for the fiscal year, 2015/16, indicate a deficit of Sh640.5 billion against an estimated overall balance of Sh509.3 billion in the current financial year.

The 2015/16 budget targets revenue collection including appropriation-in-aid- ministries’ own revenue- of Sh1.358 trillion compared to Sh1.1646 trillion in the current financial year. This is against an overall expenditure in 2015/16 financial year including net lending of Sh1.998 trillion compared to an estimated 1.806 trillion in the 2014/15 financial year.

“The fiscal deficit in 2015/16 will be financed by net external financing of Sh340.5 billion, domestic loan repayments of Sh2 billion, National Bank of Kenya rights issue of Sh5 billion and Sh219.2 billion in net domestic borrowing,” said National Treasury Cabinet Secretary Henry Rotich.

However, the taxman is struggling to meet revenue targets from the country’s jewel sectors of agriculture, manufacturing and tourism, whose growth has been disappointing.

National Treasury has set its sights on increased taxation measures as well as borrowing to finance its Sh2.1 trillion 2015/16 budget.

“The National Treasury shall submit to the national assembly for debate and enactment, the simpler and modern Excise Management Bill and a Tax Procedure Bill. The government will also continue to rationalise existing distortionary tax incentives, expand the income tax base and remove tax exemptions as envisaged in the Constitution,” said Rotich.

Some tax measures already undertaken include enactment of income tax regime for the extractive industry, re-introduction of capital gains tax, introduction of VAT withholding of 6 per cent out of the 16 per cent and rolling of iTax.

Analysts say the Government could increase taxes on tobacco and enforce capital gains tax. “A number of key initiatives to finance this year’s budget is likely to be in form of additional taxes; specifically on tobacco products, continued enforcement of capital gains tax and widening the tax net to cover a wider part of the population. One key reform also expected is on rental income, to introduce a flat rate for simplicity and to enhance compliance,” said Eric Musau, analyst at Standard Investment Bank (SIB).

He said the Government is likely to borrow heavily into 2016. “I think a key highlight would be to float the Sukuk bond as well as raise other concessional financing as well as Public Private Partnership agreements (PPP) arrangements such as the annuity financing for roads. The key risk here for foreign borrowing remains exchange rate risk, when repayments kick-in,” said Musau.

“Revenue is going to be a challenge and the Government needs to fine tune more and be cognisant of how unthought out tax plans can be unravelled in minutes, look at Zambia for example,” said Aly Khan Satchu, an independent analyst. “The Government bagged some outsize funds last year via the Eurobond issue. However, big pillars of our economy remain very soft. There is no silver bullet for tourism. The Government tends to undershoot initial headline figures such as this Sh 2.17 trillion.”

The National Treasury’s medium term strategy focuses on deepening tax reforms to broaden the tax base, reduce compliance cost, facilitate private sector growth and enhance revenue yield.

Refunds and remissions

National Treasury intends to increase its revenue collection from taxes on income, profits and capital gains from Sh532.4 billion in the 2014/15 estimates to Sh623.2 billion in the next financial year.

Collections from taxes on property will increase significantly from Sh267 million in the 2014/15 revised estimates to Sh10.07 billion. tax collection on goods and services will increase from Sh389.6 billion to Sh452.4 billion in 2015/16.

Capital Gains Tax is expected to net Sh10 billion in the 2015/16 financial year from Sh200 million projected in the current financial year.

Collection from value added tax on domestic imported, refunds and remissions will rise to Sh310 billion in the 2015/16 financial year from Sh270 billion projected in the financial year ending this June.

National Treasury expects grants totaling Sh25.9 billion from foreign governments and Sh47 billion from international organisations and will borrow Sh219 billion from the domestic money market.