Oversimplification of tax regime can up disputes

CPA Edwin Makori, Chief Executive Officer of the Institute of Certified Public Accountants of Kenya.

Taxation is the largest source of government revenue in Kenya. In our analysis, income tax contributes to approximately 40 per cent of the country’s total tax revenue.

Over the last few years, Kenya has experienced reforms in its tax system that has involved policy, legal and administrative reforms aimed at modernising and simplifying the administration of tax in the country.

We have seen the enactment of the Value Added Tax Act 2013, Tax Procedures Act 2015, Excise Duty Act 2015, Tax Appeals Tribunal Act 2015, and adoption of Alternative Dispute Resolution (ADR) framework and the review of the Income Tax Act among other reforms. 

It is worth noting that the current income tax regime was developed in 1974. Since then, there has been no substantive review other than regulatory and administrative amendments made annually through Finance Acts as part of each national budget cycle.

These have at times contradicted other statutes and made the income tax regime complex.

The reviews, though factoring in changing economic environment, did not in their entirety adopt a framework to forecast an increased government spending, a new constitutional dispensation, globalisation and ever-changing modern technology.

Policy perspective

As we grapple on a new income tax regime in Kenya, through the amendment of the Income Tax Act, we need to address it accurately from a policy perspective.

This should include a definition of income that makes it easy for the revenue administrator and the taxpayer to determine taxable income to avoid the current scenario of billions of shillings in tax disputes.

This will significantly reduce the higher costs of compliance that has caused an ever-growing level of evasion by taxpayers.

Another key consideration is to recognise emerging economic sectors such as the service sector and the digital economy, which are increasingly becoming the economic drivers of our time and portentous sources of government revenue.

The Institute believes that the development of a tax policy framework should be a precursor to the drafting or revision of any tax legislation.

This will provide guidelines that allow both corporate and individual taxpayers to readily understand and determine their tax obligations.

It will also facilitate predictability of tax increments and ensuring businesses stability, as well as delivering a fair tax distribution system for Kenyans.

Overarching tax policy will further facilitate equitable revenue mobilisation to enable sustainable social-economic development.

The stability of a tax system is realised when it is designed against the principles of equity, neutrality and predictability.

Equity is the fairness of the system, that is, taxing both horizontally and vertically to facilitate the fair redistribution of resources within an economy.

Neutrality is achieved when a tax system raises revenues while minimising discrimination in favour of or against any economic group.

Predictability, on the other hand, implies that tax rules are clear and simple enough for the taxpayers to make optimal decisions and respond to the intended policy choices.

Political will

Naturally, there are risks involved in this process. Firstly, simplifying the tax system will require a review of the tax law and subsidiary legislation which is a time-consuming process. It requires political will, which may not be easy to secure due to the complexity of taxation matters.

Moreover, oversimplification of the tax regime may create room for varied interpretations of the legislation - resulting in increased disputes between taxpayers and the taxman.

Secondly, resource constraints (both human and financial) may impede the implementation of an efficient tax system.

Furthermore, fear of public backlash against increased taxation or resistance from stakeholders may hamper the process.

Nevertheless, the benefits of a new framework are numerous and these risks should not discourage us from pushing this agenda.                                                                                                                             

All in all, the design of Kenya’s income tax regime should enable a rewrite of the law to simplify the Income Tax Statute.

This will ease compliance for taxpayers and enhance efficiency in revenue administration.

 Ultimately, all factors need to be appropriately considered to ensure that the design facilitates an enabling environment for business while promoting economic growth, realising the Big Four Agenda and Vision 2030.

Consequently, the Institute of Certified Public Accountants of Kenya (ICPAK) has organised the 6th Annual Tax Convention, themed, “Taxation and Public Finance – Consolidating the Gains in a Digital Market Place” from September 23-27, 2019 to discuss the subject among other sessions in a comprehensive manner.

 CPA Edwin Makori

The writer is the Institute of Certified Public Accountants of Kenya CEO