Proposed taxes not crisis-friendly

As the saying goes, a rollercoaster cannot always go up all the time but must come down. Kenya's rollercoaster tax revenue mobilisation has been going up for a period but now taking a downturn and the corona virus racing it down faster than expected.

Kenya's tax revenue to GDP ratio at some point eclipsed almost 19 percent in 2014/2015 but overtime has been dropping to now 15.9 percent according to the last fiscal year numbers. This fiscal year, tax collection numbers were already anticipated to drop, and the Kenya Revenue Authority (KRA) missing its target even before corona virus pandemic hit and Treasury even revised the targets.

With the corona virus hitting the economy hard, the irony is that this is when Treasury seem to think that they can apply some brakes on the rollercoaster and change its trajectory midway at a time when the corona virus containment policies have cut global supply chains, local supply chains have also been cut, business activity grounded because of drastic social distancing policies, business like entertainment joints shut, hotel and hospitality industry on its knees.

It; s as clear as the sky as the pope is catholic, that tax revenue will drastically fall and its upon government to cut its expenditure adjusting to the reality. But Treasury officials have a different perspective, they are reviewing tax policies to raise more revenue, the classic case of re-arranging the decks on the Titanic.

So, let us look at the proposed tax amendment Parliament is set to discuss today. Let me begin by highlighting an anomaly that happened and went unchecked without anyone calling it out. When the President presented his tax incentive measures to cushion Kenyans, one of the measures was reduction of VAT from 14 percent to 16 percent which was a welcome move.

Then the Treasury CS went ahead to gazette the VAT change before they were sanctioned by Parliament relying on a 2004 Act of Parliament. This was unconstitutional and went against the principles and spirit of Public Finance Management because the 2010 Constitution explicitly gives Parliament the final authority on taxation policy.

Back to the proposed tax amendments, the backdrop to analyse them is against one which government is responding to Covid-19 economic impact cushioning Kenyans from its adverse effects to ordinary Kenyans and businesses.

This means the government should be prioritising making essential commodities affordable to keep citizenry afloat since we are basically on survival mode. Therefore, basic food stuff and medicine and other medical supplies should either be tax zero-rated or have their taxes drastically reduced. Instead, govt has done the reverse commodities like milk, cream, bread cooking gas, fuel, vaccines and medical products are targeted by taxes.

What government has simply done is give tax incentives specifically PAYE and VAT reductions that targeted to boost household disposable income and enable them to afford essential items during this crisis and reclaim it at the purchasing end of these items with taxes.

The other item I wish to touch on is government planning to do away with the 30 percent electricity rebate awarded to manufacturers, which was introduced last year as a move meant to promote manufacturing in line with the Big Four agenda.

This was actually a mistake in the first place, it was a wrong policy because the biggest consumers of electricity in Kenya are not industries but households who consume about 70 percent of electricity. So, the 30 percent rebate was simply govt using households to subsidize industries creating a tax inequality defect. It's this kind of pro-business economic development model that has now caught up with government in this coronavirus crisis.

How government should have responded is looking at how to reduce cost of power generally and the starting point is on the crooked billing formula. But since we are all in survival mode including industries, government should probably reduce the rebate by half and not eliminate it until we are past corona pandemic then consider eliminating it.