Here’s why taxation regimes need rethinking

By PRAVIN BOWRY

The recent levying of Value Added Tax (VAT) on many basic commodities such as books and food and its roll on effect has understandably created a furore, more so in low income households in the urban centres.

The effects of heavy taxation are going to be varied; increase in crime and the divide between the rich and poor must worry not only the politicians but also economists, planners and investors.

Taxes, including mandatory payments in Kenya, remain extremely high. Corporate income tax, National Social Security Fund, single business permit, standards levy, employer paid training levy, advance motor tax built into sale of fuel, taxes on interest and bank services, land rates, road maintenance levy, petroleum development levy, stamp duties on all legal documents are some of the taxes that Kenyans have to pay.

Additionally, other increases such as in court fines, cess, land transaction fees and now unilateral seeking of payments in the counties for doing business or commencing any project (a farmer in Kiambu County was asked to pay Sh1,000,000 to set up a greenhouse on a small shamba!) are countering recent gains made in the political and economic climate in the country.

It is estimated that a medium-sized company must pay within a given year up to 48 per cent of its profit to the Government in one way or the other — for every Sh100 of profit earned, Sh48 goes to the Government!

The influential and those in political power have historically contrived to protect their wealth by unusual legal means and the trend, it would appear, is likely to continue.

The most profound example came in 1982, when the Estate Duty Act was repealed without much debate. It is believed that the legislation was enacted to protect the massive estates of some influential deceased leaders.

If Kenyans were to dissect the list of the richest Kenyans, it would undoubtedly appear that the economy is controlled by about 50 families with large tracts of land and farms and with public quoted companies.

Informal businesses

There is a strong case for taxing the mega-rich as opposed to increasing VAT on basic items. The first step would be to introduce the Estate Duty or Inheritance tax, which was at one time the principal tax charged on property passing upon death.

The business community is extremely apprehensive about the prospect of the Capital Gains Tax (CGT). It is believed that CGT will only be introduced after the influential few have set their houses in order by pre-emptive transfers, creation of trusts and moving liquid assets to tax-free zones. CGT is best understood as an adjunct to tax on income, charged to those who receive returns from capital transactions rather than on income.

CGT generally applies to individuals, trustees and personal representatives of the deceased but not to companies, which are instead charged a corporation tax on receipts of both an income and a capital gain.

CGT was mentioned in the last budget. What the chargeable assets will be beyond the straightforward objects of ownership is the big question. Will CGT catch up with the new regime of assets, such as options, debts, incorporeal property and currency transactions other than Kenya Shillings?

In other jurisdictions CGT is being charged on crops, patents, copyrights and goodwill of businesses.

Will bargains not at arm’s length and transactions between “connected persons” — such as husband and wife, trustees, companies and shareholders — be caught up in the net?

The legislators are likely to provide for a significant list of exempted transactions and hopefully there will be a specific tax law applicable to bona fide trusts and charities.

The employed and self-employed tax-paying Kenyans have rightly complained about the reality of thousands of Kenyans not paying taxes at all and undertaking businesses “informally”. It is believed that only 10 per cent of income earners are registered tax payers with PIN numbers!

Informal economy refers to activities and incomes that are partially or fully outside Government regulation, taxation or observation and in Kenya, the extent of this economy cannot be underestimated.

The culture of paying for goods and services, including professional fees to building contractors, lawyers, doctors, architects and others in cash and without receipts, or to those not in the net of registered businesses does and must rob the Exchequer of billions of shillings annually. Closing these gaps would alleviate taxation on basic items.

Substantial saving

It is an open secret in Kenya that large shares of the population openly and corruptly ignore laws and regulations, especially in relation to taxes. This has weakened the respect citizens have for the state.

Unique to Kenya is the reality that the informal sector is not confined to the micro-enterprise sector or the jua kali sector but to most of the corporate and international organisations who see no wrong in participating in business activities informally on two important considerations — one of making a substantial saving and the other knowing well that in Kenya they can get away with impunity as there exist no realistic enforcement mechanisms to entrap the law breakers.

Taxation regimes undoubtedly need rethinking by economists and politicians alike to sustain the sensitive socio-economic balance lest it becomes a political weapon in the not too distant a future.

The writer is a lawyer.

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