Pension fund boss pushes for 'Pay-As-You-Spend' tax

Close up view of elderly hands putting money in a piggy bank. [Getty Images]

CPF Financial Services has proposed a change in the tax regime, citing shortfalls in the government's current revenue collection structure.

Group Managing Director Hosea Kili in a proposal forwarded to the National Dialogue Committee wants a consumption-based tax regime, which should also be linked to social protection.

Mr Kili in his proposal notes that the current tax regime that comprises excise tax, Pay As You Earn(PAYE) and Value Added Tax(VAT) has a narrow base.

A consumption-based regime, he says, would improve revenue collections for the government.

He notes that Kenya's budget deficit of 5.7 per cent of the Gross Domestic Product (GDP), which is equivalent to Sh720 billion and revenue collection of 16 per cent of the GDP, is below the East African Community (EAC) target of 25 per cent.

Mr Kili also cites overreliance on formal sector workers, estimated at three million against 15 million workers in the informal sector.

Growth in total national expenditure increased from Sh2.4 trillion in 2018 to Sh3.36 trillion in 2022.

Mr Kili believes the solution to the current revenue collection challenges would be to introduce a "Pay-As-You-Spend (PAYS)" tax system.

"Introduce a new transactional tax based on consumption of goods and services, meaning citizens will pay as they spend," reads his submission to the committee in part. This transactional tax would then be linked to social protection benefits.

"Universalise social benefits by linking directly to citizens to get their buy-in," adds Mr Kili.

The proposal comes against the backdrop of dismal growth in revenue collections by the Kenya Revenue Authority (KRA) over the past decade from Sh0.7 trillion to an average of Sh2 trillion in the 2021/2022 financial year.

"Narrow tax base less than sh5 trillion for PAYE, Excise and VAT," he proposes. This is also considering that 80 per cent of transactions in the economy are still carried out in cash. Mr Kili said Kenya lags behind on its international commitment to social protection floors.

"Kenya has not yet implemented all the provisions to the International Labour Organisation (ILO) Social Protection Floors Recommendation, 2012," he says in the proposal.

Other challenges in the tax regime include poverty levels in the country which stand at 43.1 per cent as of 2020 and low coverage of social assistance programmes that cover only 13 per cent of the population.