Questions are being raised on the benefits of tax incentives offered by the government to the private sector and needy Kenyans as members of parliament and civil society argue that some of them are revenue leakages.
The civil society has further asked the National Assembly to probe the incentives, which they say by extension, burden Kenyans with more deductions through Pay As You Earn (Paye) and value-added tax (VAT) on basic commodities.
The tax incentives are what the government uses through legislation to either attract investors, particularly foreign direct investment or protect the poor.
However, at a recent forum that brought together several stakeholders including civil society and members of parliament, it was observed that the incentives do not necessarily match the gains the government may claim to be getting by offering them.
The National Assembly was asked to scrutinise these benefits by probing the tax exemption reports which were first published by the National Treasury in 2021. According to the latest report published in September 2022, the government seems to be squeezing more year-on-year from these firms by shrinking these benefits.
In 2021, the figure for tax expenditure stood at Sh259.5 billion compared to Sh302.3 billion in 2020, Sh320.09 billion in 2019, Sh381.6 billion in 2018 and Sh404.9 billion in 2017.
“Total tax expenditure as a percentage of Gross Domestic Product(GDP) declined from 4.77 per cent in 2017 to 2.15 per cent in 2021,” the report says.
The National Coordinator at National Taxpayers Association (NTA) Irene Otieno, said over the years, the government keeps letting go of a lot of revenue that would have improved the lives of the common citizen.
“But we would want the committee (Finance and National Planning) to start interrogating National Treasury because of the thinking also in other countries. What is the best practice?” posed Ms Otieno.
The 2021 Tax Expenditure Report notes that the cost of tax expenditures in Kenya’s GDP is not only comparable to other African nations but also to other countries where the exemptions amount to an average of four per cent of the GDP in the European Union while in the US, it is more than seven per cent and above six per cent in the UK.
“It must however be noted that comparisons of tax expenditures between countries are always tricky, as the Benchmark Tax System used as a reference vary substantially,” reads the 2021 edition of the report.
Total tax expenditure
The same was said in the 2022 report which compared Kenya’s tax expenditure. “However, the total tax expenditure for Kenya is comparable to other countries which range from 1.38 per cent in Burkina Faso to 4.69 per cent in Poland and 6.13 per cent in Ghana according to Taxation, International Cooperation and the 2030 Sustainable Development Agenda; United Nations University Series on Regionalism,” reads the latest 2022 report.
Ms Otieno cites the incentives given to special economic zones as some of the revenue foregone. She adds that the country should first agree on what is ascribed as a tax expenditure.
“If you are ceding a huge amount of resources to attract foreign direct investment, I think that is problematic,” said Ms Otieno. “Can we interrogate what is the agreeable definition of tax expenditure, and what is enough to attract foreign direct investment and what is ceding too much?”
Ms Otieno said research from World Bank and Tax Justice Network has shown that tax breaks are not the only incentives that companies look at when they seek to invest in another country.
“There are other things like cost of power, security so we would want parliament to scrutinise the report,” she said. “How much deductions are we giving businesses that are continuing for 10 years but in terms of paying the tax, they are saying they are not breaking even?”
She said while manufacturing, which is a key driver of the economy does deserve these benefits, there is still a need to balance several interests.
Deputy Head of Policy at the Kenya Association of Manufacturers (KAM) Miriam Bomett expressed reservations about doing away with incentives, citing how this move might affect key trade agreements like the African Growth and Opportunity Act (Agoa) that the continent has with the United States.
Ms Bomett said while the agreement has 5,400 tariff lines, Kenya is utilising less than one per cent.
“We have an agreement that is duty-free but only 15 tariff lines are being utilised by manufacturers within the EPZ,” she said. “As much as we talk about taxing more and kicking out incentives and support we are putting in special economic zones which are happening globally, we need to also be looking at these other dynamics so that we balance out the proposals that we put into the government.”
She noted that doing away with these incentives might affect the country’s trading position globally. But the push to do away with the tax incentives is being seen as also a method of smoking out high net-worth individuals and firms who manipulate the tax exemptions and holidays to their own advantage.
Diana Gichengo, National Coordinator at The Institute for Social Accountability (Tisa) notes that this is the reason behind the decision of the one per cent minimum tax on gross turnover which was thrown out by the court on grounds of being unconstitutional. “It should be known who is not paying tax that is supposed to pay. Who is still benefiting in this country in unproportional way?” she said
Her counterpart Eric Kinaga, the Programmes Manager (Tisa) pointed out the need for an audit to unmask the faces behind these benefits. “We need to connect that (incentives) to the beneficial ownership to determine and ensure we do not have a conflict of interest arising from those who are benefiting from the tax incentives,” he said.
Kitui Rural MP David Mboni, who once worked as a chief economist at the National Treasury said some companies only set up in the country just to take advantage of these holidays and later relocate.
“They (companies) that come, we give them tax holidays for 10 years; after that, they go away. We need to also reconsider that,” he said. “To me, if you reduce the tax expenditures by three percentage points we will save Sh300 billion. The money which our president has been seeking to save.”
Kenya offers tax incentives through VAT, Income Tax (personal or corporate), and taxes on imports which may include VAT, customs duty or excise duty among others.
According to the 2022 Tax Exemption Report, VAT accounted for most of the tax expenditure or foregone revenue followed by income tax. “Excise duty contributed the least to the total tax expenditure,” the report reads.
“On average, tax expenditure on domestic VAT exemptions accounted 82.29 per cent of the total tax expenditure followed by tax expenditures on import VAT at 9.9 per cent.”
It adds: “Income tax expenditures (both personal and corporate income tax) accounted for about 6.75 per cent of the total tax expenditure for the last five years. Excise taxes account for the least at an average of 1.1 per cent.”