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Why MPs oppose tax increase in Kenyan budget

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Kenyan legislators have warned Treasury Cabinet Secretary Henry Rotich against raising taxes in the coming budget, terming it unsustainable and risky to the country’s growth prospects.

Instead, the Parliamentary Budget Office wants the Treasury chief to focus on measures that seal the loopholes that allow loss of billions of shillings from public coffers through corruption and tax evasion.

They have also proposed the elimination of corporate income tax exemptions, removal of VAT exemptions and aligning of the VAT regime with the rest of the region, arguing that such measures could generate Ksh467 billion ($4.6 billion) in additional revenues.

Kenya levies a standard VAT rate of 16 per cent while Uganda, Tanzania, Rwanda and Burundi have VAT rates of 18 per cent.

Kenya loses close to a third of its annual budget to corruption alone. This will translate into Ksh810 billion ($8.1 billion) going by the Ksh2.7 trillion ($27 billion) budget for the 2019/20 fiscal year.

Mr Rotich, who has ignored public concerns over rising public debt and pushed the country into taking up more loans, is seeking to increase revenue collections and reduce the budget deficit.

According to the PBO, Kenya’s stock of public debt had reached Ksh5.6 trillion ($56 billion) by the end of September 2018, and without any policy intervention is projected to hit Ksh6.5 trillion ($65 billion) this year. Already, the government has taken a Ksh210 billion ($2.1 billion) Eurobond and another Ksh75 billion ($750 million) loan from the World Bank in less than a month.

With falling revenue collections amid growing expenditure pressures associated with an expanded system of government, the Treasury has resorted to borrowing to finance budget shortfalls, pushing up the debt service-to-revenue ratios to as high as 38 per cent, compared with 17 per cent in 2012, and increasing the risk of debt distress.

Kenya’s debt has also grown over the years largely on account of increases in debt service payments, yearly revenue shortfalls and weak commitment to fiscal consolidation by the government.

The Treasury has always targeted taxation and borrowing to fund the country’s expenditure plans.

Given the precarious state of the country’s finances, the MPs warn that raising taxes to increase revenue collections would be detrimental to the growth of the economy, especially if it is deemed punitive to businesses and consumers.

“Higher taxes may increase revenue in year of implementation but may disincentivise investment, resulting in lower revenues in the medium to long term,” the lawmakers said in their budget report, Budget Options for 2019/20 and the Medium Term: Ready for Take-off.

“Many businesses tend to view higher taxes, sometimes rightly so, as an additional cost to their businesses that is likely to narrow their profit margins. When these higher taxes target consumers, the result is a reduction in the purchasing power, which leads to lower aggregate demand. This invariably leads to a lower-than-expected GDP growth, rendering the move counterproductive in the short run.”

The lawmakers noted that increasing taxes without assessing the sector-wide effects sometimes carries negative implications and can discourage investment

“How well the economy performs will largely depend on how the government raises money, where this money is spent and the responsiveness of the national budget to the immediate needs of Kenyans,” says the PBO.

In the current fiscal year, the Kenya government has introduced a raft of taxation measures that have increased the general tax burden in the country. These included an eight per cent value added tax on petroleum products, an adulteration fee of Ksh18 ($0.18) per litre of kerosene in addition to VAT and a proposed 1.5 per cent National Housing Development Levy on gross monthly earnings of employees (to be matched by the employer).

The levy has, however, been suspended by a Nairobi court.

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