Innovation is the solution to tax revenues shortfall

National Treasury Cabinet Secretary Prof. Njuguna Ndung'u. [File, Standard]

The Finance Bill 2023 has trended since it was published. The focus is on higher tax rates and new taxes. Why not focus on the taxpayer and how to enhance his capacity to generate more profits and taxes? 

Let’s be bold. Higher taxes often mean you are making more profits.

Holding all factors constant, you will pay more taxes if your profits go up and the rate remains the same.

Say you make a profit of Sh10 million and the tax rate is 30 per cent. Your tax liability will be Sh3 million.

If your profit goes to Sh15 million and the same tax rate applies, you pay Sh5 million.  You are happy and the Kenya Revenue Authority (KRA), read government, is happy! Why can’t we flip the debate and ask how we can make more profits and keep the tax rates the same?

There are two simple approaches. You can raise your revenues, increase your sales and reduce your costs.

Raising more revenues would mean either increasing your price or units sold. Unless you are a monopolist, raising prices will lower your sales, the law of supply and demand insists.

The only other way is becoming innovative, taking something to the market that no one else has!  Our markets were liberalised 30 years ago and we even have the Competition Authority of Kenya to tame monopolistic tendencies, called market dominance.

A few monopolies still exist like the government itself. But through voting, you can reduce that monopoly, the essence of multi-partyism.

Each party tries to do its best to remain in power by offering the best services and at times the best propaganda.  The best option to increase revenues is to take something new to the market or improve the existing product to attract new customers.

Advertising is one way but it has limits. Customers eventually get used to adverts. In Kenya, your scream to them through a billboard. Enhancing quality will give you more customers and speaks louder than adverts. 

We should be having a robust debate on what our entrepreneurs should be taking to the market to make more money and pay more taxes.

Kenya Intellectual Property Institute (KIPI) should be the leader in the current debate on taxation.

We should be asking why our patents have not grown exponentially like in China. With more innovations, we have new products or services, more profits and more taxes.

Cryptocurrency and e-commerce

Think of the digital tax. It’s targeting innovations like cryptocurrency, e-commerce and other online services.

Do we support innovators? Curiously once the innovators take the new products into the market, the government will quickly start taxing them.

Why not support innovators through their supply chain to get you more firm and more tax?

Think of taxes from innovations such as M-Pesa, voice or data which we never had 30 years ago. Think of tax paid by Google, Facebook or Zoom.

Think of money made from new drugs, vaccines, medical advances like MRIs (Magnetic Resonance Imaging) or even satellites in space.

What of innovations in agriculture like hybrid maize? If we want more taxes, let’s help innovators, not just wait for their end products. Did you see the formula in the Finance Bill on how to tax intellectual property?

KRA should have a consulting arm to help innovators and businessmen improve their operations and innovation. Let’s focus on how the taxed profit is made and how it can be enhanced. 

Innovations call for investment in research and development (R&D).

It worries me when the debate on university education is just about student fees and not how research should be enhanced. Has the R&D budget been increased? Do we see R&D as an expense instead of an investment?

Innovation is the long-term solution to our tax revenue shortfall. It has another added advantage. We can get money from the rest of the world.

Don’t multinationals make money away from their mother country and bring bacon home? How better can it get? We should make innovations part of the national culture. I am still waiting to see high school science and technology congress winners in the State House together with drama and music festival winners.

More so when the current state house occupant is a scientist. What of the short-term solution?

Businesses and even the government can reduce costs by using innovations. How have M-Pesa, mobile phones, zoom, e-commerce and other innovations reduced your costs? What other innovation can you adopt to reduce your costs, make higher profits and pay higher taxes? Here comes the government. It should help us reduce the cost of doing business, make more profits and it gets higher taxes.

Think of the cost of building walls around business premises or hiring guards to increase security.

Bad roads

What about car maintenance because of bad roads? Power outages or buying water? And even good air quality!  And more important the health of the worker. The healthier the worker, the more productive and less costly to the firm. 

When good services are provided, we consume more, investors invest more and the economy expands creating more taxpayers!

The existing businesses can also make more money by improving the quality of goods and services to attract more customers.

The Finance Bill debate should focus more on how to make money, not just how to tax it.

This would be a win-win for the government and taxpayers.

We make more money, more profits and the government raises more taxes. In making money, we must remember our limits, with time to rest and exhale.

We should not build the nation by destroying ourselves. 

Finally, I fear such an aggressive tax regime could reduce tax revenues in the long run. We need to appreciate the pain taxpayers go through to make money.

Should you play music to your cow to get more milk or whip it? 

And I will not stop asking; have we tried reducing tax rates, we could end up raising more taxes.

Remember Laffer’s curve?