Rotich narrow options to tax his way to Sh2.2 trillion from you

Treasury Cabinet Secretary Henry Rotich. [File]

Kenyans will be staring at increased taxation when the national budget is unveiled before Parliament on Thursday.

Besides a possible raise in value added tax (VAT) from the current 16 per cent - the lowest among the East African Community nations - other likely targets are the betting industry and capital gains tax, which targets the wealthy.

Uganda and Tanzania, whose budgets will also be unveiled tomorrow, charge 18 per cent VAT.

Taxation experts, after a lengthy review of the options available to Treasury Cabinet Secretary Henry Rotich, are predicting the VAT increase given the country’s lower rate.

Any marginal increase in VAT, which is an indirect tax that is lumped on the cost of nearly all goods and services, could be the silver bullet in a tough year that has seen Mr Rotich set an extremely ambitious tax revenue target of Sh2.2 trillion up from Sh1.9 trillion.

Experts agree that Rotich’s Sh3.02 trillion budget would benefit from reducing waste and plugging revenue leaks.

Bowmans Director Nikhil Hira, a long-serving tax practitioner, said he expects an increase in several prevailing tax rates rather than an introduction of new levies due to Rotich’s inability to catch tax evaders.

Mr Nikhil said he feared that targeting existing taxpayers with rate hikes would be counterproductive as it would encourage tax dodging.

“It is very detrimental to go after the same people, year in year out. This would not solve the (revenue) problem in the long run,” he said.

Nikhil noted that the urge to spend by the Government was not in tandem with its capacity to collect additional taxes. This, he added, had only translated into an insatiable appetite to borrow and an imminent debt repayment crisis.

“I am a little concerned that Rotich will increase rates, though my personal view is that slashing tax rates would encourage consumption, and ultimately, more revenue collection.”

Nikhil told The Standard that it was during the times that Kenya eased its tax rates during the mid-1990s that revenue collections soared fastest.

Finance Minister Musalia Mudavadi oversaw the reduction of income tax and corporation taxes by half, helping book the fastest growth rates in history.

“The growth for the years was a steady 45 per cent, which is attributable to higher compliance when tax rates are friendly,” Nikhil said.

And to qualify his rather counter-intuitive take on lowering taxes to raise revenues, the director cited the harmful impact on consumption following the levying of eight per cent excise duty on petroleum products.

Motorists reacted by reducing their consumption whose ripple effect was reduced excise collections. This was besides the VAT charges and subsequent road maintenance levy applied on every litre of fuel sold.

Nikhil’s fear about an increase in taxes was shared by another taxation expert who stated his belief that Rotich would target the poor and rich equally.

Andersen Tax, Kenya MD Philip Muema said the options available to the CS are minimal outside of stiffer taxes considering the huge size of the national budget to be funded and the declining opportunities for borrowing.    

“I am certain that new taxes are inevitable,” said Mr Muema.

And unlike previous years, the repayment of foreign debts is projected at Sh800 billion which is half of the more realistic revenue collection by Kenya Revenue Authority.

The Government’s scope for borrowing to finance the budget has narrowed, given fatigue among potential lenders amid soaring concerns about the country’s ability to repay in the near future.

“You can expect that Rotich will double the capital gains tax to 10 per cent, which is still the lowest in the region,” Muema said.

On gambling, Muema said that the position held by Interior CS Fred Matiang’i on erecting stricter betting controls would inform new taxes, which would act as a deterrent as well as a cash cow.

But more immediate concerns about raising tax rates include the possibility that consumers will be unwilling to spend.