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Kenya loses Sh478 billion on tax holidays

NEWS
By Dominic Omondi | April 15th 2020
Kenya loses close to half a trillion shillings annually from tax holidays

Kenya loses close to half a trillion shillings annually from tax holidays that have barely spurred investment and jobs, a new report by the Kenya Revenue Authority has shown.

The foregone revenue of Sh478 billion has increased almost five-fold from Sh100 billion in 2012, according to the report dubbed, Economic Impact and Cost-benefit Analysis of Tax Expenditures in Kenya.

This comes at a time when President Uhuru Kenyatta has instructed the National Treasury to implement various tax measures that will see value-added tax (VAT) reduced from 16 to 14 per cent and waiver of pay-as-you-earn tax for those earning a gross salary of Sh24,000 and below, to offer relief against the Covid-19 pandemic.

Corporate income tax, which is charged on profits, was slashed by five per cent to 25 per cent while turnover tax levied on small businesses with revenues of less than Sh5 million was cut from three per cent to one per cent.

The study noted that revenue lost in 2017 represented 5.9 per cent of gross domestic product (GDP), significantly above that of Mauritius and South Africa at 1.4 per cent and 3.9 per cent respectively.

KRA blames political interests, business lobbies and lack of transparency for the spike in costly tax incentives.

The biggest culprit, according to the study that covered the period from 2014 to 2019, is the manufacturing sector, which accounted for the highest level of capital-related deductions at 24 per cent.

On the other hand, the sector’s investment rate for the period of analysis was only 0.116 per cent.

Firms in the export processing zones (EPZ), for example, only contributed eight per cent of the exports while no firm in the special economic zones category was exporting.

“However, the EPZ firms contribute marginally to employment at 0.3 per cent, 0.5 per cent to employment expenditure, 0.1 per cent to total tax paid and consume 0.3 per cent of the total capital deduction,” read part of the report.

EPZs enjoy a 10-year tax holiday. Public firms, on the other hand, enjoy 33 per cent of capital deduction, but contribute significantly to employment expenditure and export values at 18 per cent and six per cent respectively.

Annually, the corporate income tax foregone to capital expenditure deductions is Sh60.367 billion, which outweighs the accruing benefits by Sh36.691 billion.  

Collects nothing

Some of the tax expenditures include exemptions where the taxman collects nothing.

Another class of tax expenditure is allowances, which involves allowing certain deductions on the base revenue before allowing the standard tax rate to apply. A good example is the industrial building deductions and mining deductions.

The third class is credits, which entail deductions from tax liabilities such as income tax relief granted to individual taxpayers every year.

There is also rate relief, which translates to reduced tax rate - such as the ones effected to mitigate the impact of Covid-19.

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