Align tax policies with best practices
The government depends on taxes to finance its recurrent and development obligations in whose absence Treasury is tasked to go for debt, grants, fines and other fees to help fuel the economy.
It is always safe for a government to take care of obligations using its own resources, but as it were, Kenya has not been able to collect adequate money to fund the budget, which has resulted in a surge in demand for debt.
Unfortunately, there is a debt ceiling, hence the Treasury’s attempts to increase the amount of money it can borrow from the current Sh9 trillion to Sh12 trillion, which has faced resistance, hence making the case for the need to deepen own resources.
In this regard, Treasury has made strides in improving the tax regime through digitisation of Kenya Revenue Authority (KRA) operations and overhauled several tax laws in a bid to modernise them.
For example, the VAT Act, which was applicable since 1990, was repealed and replaced with a new, simplified law. This was followed by the enactment of the Excise Duty Act that led to the repeal of the Customs and Excise Act.
Unfortunately, the elephant in the room when these taxes are being rolled out is that they come with amendments that turn out to be counterproductive and put into question the long-term tax policies.
For example, the introduction of a reduced corporate income tax rate of 15 per cent in 2019 for businesses operating plastic recycling plants was repealed in April 2020 potentially destabilising investors who had put in place plans to set up plastic recycling plants in Kenya.
It is such misalignment of changes in Kenya’s tax regime that undoubtedly brings to the fore fundamental questions and calls for a different approach in appraising taxes to ensure they are balanced and objective.
The Treasury must consider setting aside a minimum period within which policies will be effective to enable investors and other affected players to plan and where applicable realign their long-term plans. Knee-jerk reactions to policy changes make it difficult for investors to plan and also disrupts the performance of companies which leads to a dip in economic growth.
To this end, policymakers must include tax incentives clauses that serve a specific purpose over a defined timeframe so that they are predictable. Otherwise, their efforts will be akin to playing Russian roulette which ends up tragically.
