Restructure taxation, audit firm tells government

Kenya Revenue Authority officers assist staff of Lang’ata Women’s Prison file their annual tax returns (PHOTO: FILE)

An audit firm wants the State to restructure the taxation regime amid an economic slowdown and reduction in revenues.

Ernst and Young Kenya (EY) says the restructuring will be a solution towards collecting more taxes and reviving the economy as the GDP is expected to slow down for yet another year and the budget to be lean with a drop in tax collection.

"The government would collect much more taxes by moving away from academic solutions to practical ways that have worked elsewhere,” said Hadijah Nannyomo, a tax partner at EY Kenya, during the firm’s virtual pre-budget media briefing.

“A change in taxation from the old ways of doing things will enable Treasury to fund the Big Four Agenda, Covid-19 vaccination campaigns and other political plans such as the referendum associated with the BBI.”

The firm says a revised tax regime will increase collections while at the same time attracting new investments for a struggling economy.

EY is also asking Treasury to partner with the private sector under public-private partnerships as a way of attracting new funding for infrastructure, health and energy projects.

“Partnering with the private sector through special purpose vehicles will allow government to extract much more benefits going forward,” Ms Nannyomo said.

Kenya’s economy, like every other in the world, has been adversely affected by the Covid-19 pandemic. With the partial reopening of the economy, there were signs of recovery, “but the gains may be reversed due to the rising infections, which have seen some counties go into lockdown,” EY noted.

“Management of the pandemic to reduce infection rates is key for the economy to rebound,” the firm said.

Many sectors have been negatively impacted by Covid- 19 containment measures, with the service sector being the hardest hit. A few sectors have, however, thrived.

The ICT and health sectors experienced growth of 7.3 per cent and 5.6 per cent respectively in 2020, according to EY.

The firm wants tax incentives that were initially extended to Kenyans reinstated.

"With businesses struggling to stay afloat we are likely to see a reduction in the major taxes collected by government,” EY said.

"Unfortunately, the reversal of the tax incentives given to taxpayers to cushion them against Covid-19 left taxpayers at a worse position."

In addition, the firm said, some of the new tax measures introduced by the government such as minimum tax have exacerbated an already bad situation, making it more challenging for businesses to survive.

“Government needs to consider ways of giving reprieve to taxpayers to enable them stay afloat and contribute to the economy,” it said.

There are concerns that Kenya may end up borrowing excessively, burdening taxpayers with a heavier debt load in future.

"The government is likely to resort to borrowing more to be able to meet its budget, which will further increase Kenya’s already high debt levels,” said EY.

“It may need to consider innovative ways of raising funds to reduce reliance on debt, while curbing wastage and channelling borrowed funds to projects that yield a high return.”

Kenya’s ability to have its citizens vaccinated by the second quarter of 2021, favourable tax policies and administration measures, and expenditure rationalisation by reducing recurrent spending are expected to be among measures that may cushion the country from an economic meltdown.