Change of tack in taxation regime vital

With the shift towards globalization, the sacrifice of customs revenue at the altar of cross-border trade has meant governments have had to go back to the drawing board for creative solutions aimed at bridging the revenue shortfall from domestic taxes – income tax, VAT and excise duty. However the spotlight is now more focused on consumption taxes arising from the increased volume in trade.

For the past couple of years Kenya Revenue Authority’s good performance has been buoyed by a favourable economic environment, commendable steps aimed at reeling in more people into the tax net and improving overall tax administration particularly addressing revenue hemorrhage through innovation and cost effective means of collecting taxes.

Such measures like widening of the VAT net through the new VAT Act, the withholding VAT system and reforms in the collection of excise duty have proved to be a much needed shot in the arm for the government.

The growth in revenue has been supplemented by administrative measures geared towards streamlining tax collection and aggressive implementation of tax reforms.

With an impending new Income Tax Act that is currently being worked on to replace the current 1973 law and a relatively new comprehensive VAT Act, it means that the government has had to look to excise duty, which represents fruit that is nearest to the ground.

In the past few years the government has been casting the excise duty net ever so wider to include more goods and services into this tax net – various telecommunication fees, financial services to name but a few. Other than outright revenue generation, there is really no justification for the imposition of excise duty on these.

Given this, taxes must be policy driven and more so should be founded on established principles e.g. assisting in the re-distribution of wealth and resources, encouraging or deterring certain activities that are disapproved by society and raising revenue to fund government expenditure.

While the principles cut across all tax systems, differences arise in the weight given to each and the capacity of any tax regime to fulfil them.

Striking a balance between all these has always been an unenviable juggling act for anyone charge with that responsibility, just ask Treasury secretary Henry Rotich. Excise taxes (sin taxes!) are very tempting. They are usually levied at high rates on few commodities produced by large producers. Excise taxes have helped raise substantial revenue for the government at relatively low administrative and compliance costs. This is perhaps the reason why the government is slowly shifting towards excise duty.

However when all is said and done, the cardinal rule is that taxes (and in particular excise duty) should not just be a tollgate for government revenue; excise taxes taxation should be guided by sound and informed fiscal policy.

The same goes for income tax which at 52.6 per cent remains the primary source of tax revenue for the government.

The challenge with income tax has been how to grow revenue without increasing the rate given Kenya’s landscape.

With more people leaving employment sector and becoming entrepreneurs or joining the informal sector means a reduction in the personal tax that the government would ordinarily collect.

However the long arm of the taxman has faced challenges in trying to reach these people who run their own businesses – or hustlers, as they like to refer themselves as.

The tax revenue that is lost when people leave employment is not compensated from the tax revenue that should be collected on corporate income tax. I don’t envy Mr Rotich and neither would I like to be in his shoes, but let’s wait and see what he has planned for the country.