Why the time is wrong to widen tax base in Kenya

Over the last couple of months, Kenya has had the daunting task of easing the burden of tax on its citizens while having to raise enough revenue to sustain government operations and growing the economy.

The Tax Laws (Amendment) Act was applauded for reducing the Income Tax rates for both individuals and corporates, while in the same breath certain tax incentives, such as the lower tax rates that were available to companies who list on the Nairobi Securities Exchange (NSE), were withdrawn.

On April 8, the Finance Bill was released for public debate before it is debated in Parliament and passed into law. Since the Tax Laws (Amendment) Act came with many amendments, the expectation was that the Finance Bill would be less detailed and deal with more administrative issues on tax.

However, the Finance Bill clearly seeks to expand the tax base by doing away with a number of exemptions, which are indeed fundamental to any progressive tax regime, but the timing of such a move may be inappropriate considering the current economic situation.

Among other proposals, the Treasury Cabinet Secretary proposes to charge VAT at a standard rate on Liquefied Petroleum Gas (LPG).

LPG is widely used in many homesteads and thus an increase in price will definitely increase the cost of living for homesteads that are struggling due to the pandemic.

Further, the Bill seeks to charge VAT on raw materials used to make automotive and solar batteries in Kenya. Such a move will erode and undermine all the efforts in place to champion the use of clean energy.

The Bill also contains a proposal that the energy, aviation, agriculture (tractors) and manufacturing (plastics) sectors, which currently enjoy VAT exemptions, be subjected to VAT at 14 percent.

If these proposals pass, it will not come as a surprise if commodity prices to the final consumers increase, and this may further impact these sectors negatively.

However, the proposal to exempt ambulance services from VAT is a welcome move as it is expected to reduce the cost during the Covid-19 pandemic.

The Bill proposes to treat legal and other costs tied to listing on the NSE as non-deductible expenses in computing taxable profits, a move that may discourage companies from listing on the NSE.

The Bill also proposes to treat expenses incurred while carrying out projects of a social nature as non-deductible expenses. Such projects, which include schools, roads and dispensaries, may not lead to a direct increase in revenue of the company, but definitely have a positive impact in communities.

Whereas affordable housing is one of the government’s ‘Big 4 agenda’ items, the Finance Bill 2020 proposes to repeal sections of the Income Tax Act that encourage Home Ownership Savings Plans.

Whereas it has been argued that the uptake of Home Ownership Savings Plans has not been as positive as initially expected, one would have expected the government to encourage existence of these schemes to better its chances of delivering affordable housing.

Although the GoK is under immense pressure to collect revenue, some of the proposals were already rejected by Parliament when debating the Tax Laws (Amendment) Bill, 2020. It is important for policy makers to come up with more innovative ways of collecting revenue during the pandemic.