THOGO: Is this the taxman’s road to Damascus moment?

Last week, the Kenya Revenue Authority (KRA) commissioner- general appeared before the National Assembly’s Labour and Social Welfare committee to respond to the committee’s concerns on whether betting firms currently operating in Kenya were paying their fair share of taxes.

In response, he seemed to suggest that indeed they were and the 183 per cent growth in tax revenue that he has collected over a period of two years was testament to this.

In the same breath, he indicated that there should be a new law in the horizon aimed at the industry. However, what captured my attention were the commissioner-general’s sentiments about taxing the industry given the current trajectory in amount of taxes collected.

He is quoted as having said that increasing taxes could drive the practice underground and lead to illegal gambling. He went on to give the alcoholic beverages example when he reminded the committee that an increase in taxes had negative consequences on the entire value-chain and he singled out the Senator keg beer experience a few years back.

Consumption of this beer brand, which targets a specific market segment, fell noticeably when excise tax was increased in 2014 and it is thought to have contributed to the rise in consumption of illicit alcohol.

Higher up the value chain, this meant that farmers who were producing the key raw material for this beer, sorghum, found themselves with stockpiles of sorghum with no market.

The commissioner-general is quoted as having acknowledged to the House team that high tax rates for commodities deemed to be socially unacceptable lead to reduced demand and growth of underground channels.

It is this last statement while examined in the context of what the commissioner-general was talking about that I thought I should write about.

Is an increase in taxes or indeed introduction of new taxes counterproductive?

Let’s look at the banking industry for example which in 2016 was besieged from all angles. Banks have found themselves between a rock and hard place with the Central Bank of Kenya and the KRA pulling in different directions on the issue of non-performing loans.

While the CBK’s criteria for what qualifies as a bank debt is low, the KRA’s threshold is quite high and thus most banks find themselves torn between two masters.

Since the KRA’s criteria are in law while the CBK’s are in the form of industry accounting guidelines, the result is that banks find themselves leaning more towards the law and as a result find themselves with low accounting profits (which is what you read in the media) but high taxable profits (which will often go unnoticed) and consequently more tax.

Imposing tax on what the CBK has acknowledged and directed banks to treat as non-performing loans is not fair. This is one area where all the players – banks, KRA and CBK – need to sit down and smoke the peace pipe if the headlines highlighting the results from the banking industry so far are anything to go by.

In the past few years, it seems like the government’s tax of choice has been excise duty, which currently seems to apply to everything – alcoholic beverages, tobacco products, petroleum products, telephone services, internet services, banking services – and even on basic goods such as water.

The unfortunate thing is that when it is imposed or when there is an increase, the excise duty element is passed on to the consumer, which in turn makes the product unaffordable and encourages consumers to explore other alternatives.

Tax should be more than a source of revenue for the government; it should also discourage or encourage certain trends in society.

Hence the question, given all the positives that the mobile money platforms have achieved in terms of extending quasi-banking services to more people, helping the migration from a cash-economy to an e-commerce economy, why impose 10 per cent excise duty?

I am sure that it can be sliced in different ways and that there are any many opinions as there are people. However, to me tax collection should be volume-based, not margin-based.

The aim should be to collect a reasonable amount from as many people as possible and not a high amount from a handful of people.

Often by design, high or new taxes only serve to encourage nefarious behaviour – tax evasion, smuggling etc. – and as a result excludes more people and transactions from the tax net.

Obviously an increase in taxes results in increased tax revenues, but this is often momentarily and after a while the graph starts heading in the wrong direction.