Taxation: A case of damned if you do, damned if you don’t

Nikhil Hira. [Photo: Courtesy]

Question: How crucial are the new taxation measures for the Treasury? Can the country do away with them?

Answer: Kenya has been running a deficit for a while now and this seems to be growing annually. When you add the increased borrowing, it is clear that additional recurring revenue is very important for the Government. This revenue will also help in achieving the Big Four agenda and indeed a number of the amendments are targeted at raising revenue for this. In that sense, these revenue measures are critical for the country.

However, the effect of some of these measures is going to have a direct impact on the cost of living and will also impact spending power. We may, therefore, end up in a vicious cycle where the lack of consumer spending impacts economic growth, which means less tax collected.

Q: What are the other options for the country should the proposals fail to pass?

A: Government recurrent expenditure is increasing and, some say, spiralling out of control. As the President clearly pointed out in his memo, the Constitution makes the running of Government expensive but we cannot easily address this. What is critical is for the Government to look carefully at its spending and cut out wastage. This would also include ensuring tighter control on corruption and funds going missing.

Reducing expenditure with carefully targeted austerity measures will reduce the budget gap and may reduce the need for higher taxes. To me, higher taxes invariably lead to lower collection as people’s disposable income is reduced and evasion increases. We saw the impact of lowering taxes in the nineties on our revenue collections, which increased significantly as a result.

At the same time, the various tax measures will affect the population as a whole but I think that we need to look at expanding our tax base in the country. This needs to be done, not by over-burdening existing taxpayers but bringing the evaders into the net.

Q: What does the current financial crunch say about the next financial year and budget?

A: Clearly we are headed to a widening deficit unless revenue increases and, more importantly, expenditure is curtailed. We have a significant amount of debt to service and this in itself requires revenue to fund it. It may be a difficult 12 months for the Government and the population as a whole.

Q: What are the reactions by the corporate sector to the new taxes?

A: The corporate world is clearly concerned that higher taxes will mean less spending by the population. This in turn impacts their own results even though, as we have already seen, they will increase prices. But with additional burden on people’s pockets, spending patterns are likely to change and prioritising essential spending will be what happens. This may not help the economy as a whole.

Q: How significantly will the proposed budget cuts and new tax measures help reduce the budget deficit?

A: If everything is implemented, there will be some impact. The issue is that it is one thing to raise taxes (though as I said above it may not have the desired effect) but completely another to curtail expenditure. Politics and the institutions set up around the Constitution play a big part in Government expenditure and austerity measures are never easy. If this is to succeed, it will be critical that the country stick to the expenditure reductions that are proposed, and wastage be tackled head on.

[Mr Hira is an independent tax consultant and director at Bowmans Coulson Harney law firm]