A petition by manufacturers asking the Kenya Revenue Authority (KRA) to postpone its planned tax increases on 31 products, including fuel, bottled water, juice and beer, is justified given the shaky state of the economy.
The taxman said last month taxes on these items would be adjusted in October by about five percent — being the average inflation for the year period ending June 2020 — and the cost passed onto consumers.
As the Kenya Association of Manufacturers (KAM) rightly points out, the move could affect demand and businesses already strained by the effects of the economic downturn fanned by the Covid-19 pandemic.
There is, however, more risk to the KRA plans than just what the manufacturers have raised. The financial and economic crisis we are witnessing presently comes with major challenges in tax administration.
Raising taxes at this time may prove deeply counter-productive because it could trigger an increase in non-compliance. Some cash- or credit-squeezed taxpayers may be tempted to evade tax and re-direct the money to keeping their business operations afloat.
In fact, in dire situations where taxpayers faced deep economic distress such as risk of bankruptcy, it is most likely that they would opt for the lesser risk of paying penalties for tax evasion than being wiped out through insolvency decrees.
The KRA should also be cautious of the fact that increasing taxes during crisis times may push more economic activity into the informal sector where enforcing compliance has proved problematic worldwide.
What the taxman requires during this crisis is a special strategy to improve compliance and not measures that will instead dent its revenue collection performance. The priority right now should be to help taxpayers to cope with the strains of the economic crisis and not push them out of the formal tax system through punitive measures of tax increases which suppress product demand and wipe out the little resources left.
This can be done through staggered or extended tax payments or speedy refund of taxes that help the firms to stay liquid and be able to service their dues in a structured manner.