Where Rotich is likely to look for tax revenues

March 30, 2017 will be the second time in Kenya’s 54-year independence history that the budget will not be presented to Parliament on the last Thursday before 15 June.

Just over 30 years ago, the then Finance minister, Arthur Magugu, read his budget speech one week later than usual to become the first minister to delay budget presentation.

It is expected that the 2017/18 budget will be an interesting one given that Treasury secretary Henry Rotich has to be bold and innovative.

If you look at the 2016/17 budget, despite the government increasing the Kenya Revenue Authority’s (KRA) revenue target, there were barely any headline tax rate increases.

What we saw was an attempt at broadening the tax base by enforcing greater compliance and transparency with changes such as withholding tax on rental income (which is problematic for real estate investors, who have significant borrowings, but is a story for another day).

Budgeting is the act of determining one’s expenses based on one’s income. In fact, historically, the Chancellor of the Exchequer in presenting the government expenditure and income (note the intentional reversal of the order) would get his speech from a “small suitcase”, hence a “budget.”

Listening to the President’s State of the Nation Address, and the particular focus on Kenya’s wage bill, it is clear that Kenya needs to either decrease the wage bill or increase the tax revenues.

That is the only way that our wage bill as a percentage of revenue collection will come to within internationally accepted levels.

Most important for this discourse is the KRA’s revenue targets, which grew approximately 13 per cent to Sh1.55 trillion from 1.37 trillion. What will drive the increased tax revenues?

The key reason this year’s budget will be presented in March and not June is the coming General Election.

One does not need to be a political science student to figure out that this will be one of the most hotly contested presidential elections in recent history. Bearing that in mind, it is unlikely that the current administration will want to agitate the electorate with tax hikes. What then are Mr Rotich’s real options?

In my view, one trick will be diversifying into untaxed areas targeting the middle class. The other one will be netting the untaxed informal sector. For example, with the real prospects of exporting oil in the near term and continued emergence of a middle income segment, I would not be surprised if an environmental levy is imposed on motor vehicles.

The UK has successfully done it such that you pay a higher emissions tax the more emissions your car produces.

Another area to watch out for is estate taxes, especially given the emergence of new wealth. In 2015, the government re-introduced capital gains tax after a 30-year hiatus. I doubt it will be long before government starts thinking about re-introducing estate and wealth tax as a form of wealth and income re-distribution.

On the untaxed informal sector, there is ample evidence that a significant majority of income tax comes from those in formal employment.

As an employee, one does not have much choice about paying income tax: the employer deducts it at source and remits it to the KRA. While recently we had a ruckus about the government’s proposed access to telephones, one has to ask whether such access could be used to drive greater tax compliance. Today, in Kenya, you can pay for almost any transaction using mobile money platforms.

Safaricom’s recent statistics show Kenya moved about Sh3.4 trillion in one year. Do the simple math: if 60 per cent of this amount was business transactions, it means there was Sh2 trillion worth of sales.

Given that the key users of these platforms are in the micro and small and medium enterprise sector, take a profit margin of 20 per cent and subject that to 30 per cent tax.

By conservative estimates, you have the KRA collecting Sh120 billion, which is more than half of the revenue target growth for 2017/18. Is it a wonder then that the KRA has invested heavily in technology and transaction tracking?

My guess is that the informal sector and its role in contributing to the national purse will be in Mr Rotich’s cross-hairs come March 30, 2017.

Add to that the emerging middle class and you have new wealth. Let’s wait March 30, 2017 eagerly!