Experts warn on risks of States’s erratic tax policy

Monday, June 14th, 2021 10:42 | By
Treasury Cabinet Secretary Ukur Yattani. Photo/People Daily/Library

As Treasury Cabinet Secretary Ukur Yatani settles down after presenting the ambitious Sh3.6 trillion budget, experts warn that Kenya’s inconsistent tax policy is hurting economic growth as it scares away potential investors.

The concern comes at a time when government needs to attract more investments and spur growth, amidst a fatigued and overtaxed population and soaring public debt which has hit Sh7.3 trillion.

“Yes, the tax code in the country is not really designed to spur growth. It is punitive in many places, but the main problem is that it is not consistent,” said Reginald Kadzutu, a fi nance and economics analyst.

He gave an example of the 20 per cent excise duty on loans that the government introduced in the 2020/21 fi nancial year but removed in the fi nancial period beginning July 2021 as an example of tax policies that stifl e economic growth.

Kadzutu said there is a lot of guess work that is involved, adding, “where there is no policy consistency it makes investors hold off investing.”

Since 2014, the government has introduced taxes such as the capital gains tax on the sale of property, rental income tax, turnover tax, minimum tax and now, the digital services tax.

Foreign investors Titus Mukora, Tax partner at PwC Kenya said introduction of new taxes within a relatively short period of time creates uncertainty and confusion for taxpayers to the extent of deterring foreign investors.

“In extreme circumstances, it can deter foreign investors when the tax environment is perceived as unpredictable,” he said.

According to Ken Gichinga, the Chief Economist at Mentoria Economics, the most legitimate form of taxes are those that are applied to the factors of production, such as land, labour, capital and, enterprise.

He said though in the strict economic sense money or loans are not considered capital, the reality today is that most business capital is financed through loans which make it a factor of production in its own right.

“The return to capital is interest and therefore the legitimate taxation should be only on the interest component of the loan and not the entire principal, “ said Gichinga.

Over the last seven years, the government has doubled tax revenue collected from Sh759 billion to Sh1.475 billion. However, revenue collected as a percentage of gross domestic product (GDP) has shrunk over the same period.

But according to Kadzutu, the National Treasury has used infl ated GDP fi gures to support the Sh3.66 trillion spend without justifying the 2020/21 performance.

“There is a document called projectbased budget that has key performance indicators (KPIs). If you have not done an analysis on whether you met the 2020 KPIs or not, how do you plan for another Sh3 trillion,” he said.

Measurable focus Kadzutu added: “The budget lacks a clear measurable focus on what they want to achieve which just makes it an incremental budget not a targeted budget with tangible results.”

For the fi rst time, National Budget was drafted without input of the Economic Survey data. This is probably the first time since independence the government has not released an economic survey before the budget speech, a move that left experts concerned about the accuracy of the proposed estimates and the knock-on effects.

The survey provides a wide range of data upon which Treasury relies to make projections for the next financial year.

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