Inheritance, digital sector can yield more tax revenue

For most people, budgeting denotes designing a spending plan for a given amount of resources, usually money. Thus, when one earns income, one has a budget for rent, electricity, water, transport, food and if you are lucky, entertainment.

For government, however, the concept of budgeting is reversed - government first determines what it will spend on, including salaries, infrastructure, debt repayments and education, and then attempts to raise the money to be so spent. Invariably, most governments find that their spending plans often exceed the resource envelope at hand.

This is certainly not a new phenomenon. History teaches us that Caligula, the young Roman emperor was beloved of the Romans, particularly for re-introducing gladiatorial games that a generation had never witnessed. Caligula spent so much that the Roman treasury was near-bankrupt and he had little choice but to raise taxes for his mega projects. You guessed right - his near fanatical following was dealt a severe blow, from which he never recovered. Adam Smith, the great philosopher and economist, might have had Caligula in mind when he quipped “Little else is required to carry a state to the highest degree of opulence…but peace, easy taxes and a tolerable administration of justice.”

A look at the recent budgets shows that the Treasury Secretary has gone slow on introduction of new taxes and hiking tax rates. Admittedly, it is a sensitive balance between raising revenue and irking a population already lamenting the heavy taxation. So what real options does the minister have come this budget cycle?

In my view, the minister has no option but to be bold if he hopes to give the KRA a fighting chance of meeting its higher revenue targets. In 2018, the minister introduced presumptive tax as a means of expanding the tax base, a laudable move. Uganda successfully employed a similar tax to grow its revenues. My guess is that having recruited taxpayers, it is only a matter of time before these are brought into mainstream tax so that, for example, they pay income tax and VAT.

Although raising taxes is a gamble, as we recently saw with the eight percent VAT on petroleum and 35 percent top tax bracket proposal for individuals, without viable sources to bridge the deficit, my second guess is that the income streams which enjoyed lower taxes, such as rental income tax at 10 percent, will likely now be subject to higher tax rates.

DIGITAL ECONOMY

Perhaps a viable option for the minister this year is tax on the digital economy. Developed countries have thought this one through and, for example, the UK plans to introduce a two-percent tax on revenues derived from British users’ creation of value for digital services businesses. Croatia and Germany have considered similar taxes, albeit at higher rates.

Given Kenya’s internet penetration rate and the growing e-commerce ecosystem, such a tax is likely to be attractive to government. The headache, however, will be how to collect the tax, particularly given that technological change far outpaces tax law changes.

Wealth and inheritance tax is seldom discussed, perhaps because the policy drivers would be the most affected by such taxes. However, this tax regime has been successfully used in the US and the UK where inheritance tax is surprisingly high.

Apart from putting money into the exchequer’s coffers, inheritance tax often causes sale and disposal of assets, which not only limits idle assets but is also a boon to money circulation and further wealth creation. Plugging the fiscal deficit will likely require a bold discussion around Kenya’s re-introduction of inheritance tax.

Direct tax, which is tax on income, was long favoured as the primary source of government revenue. However, owing to challenges of inequity in tax burden, aggressive tax planning and globalisation of commerce, governments are slowly turning to indirect taxes, especially tax on consumption.

Generally, consumption taxes are broader in their reach because, one way or the other, we have to consume goods and services. Boldness might require expanding the items subject to consumption tax and rather than hitting the usual and already heavily taxed suspects, alcohol and tobacco, with tax increases.

A peek at the US elections reveals that tax raises are a thorny issue - principally because tax is penal in nature. When something is burdensome, we say it is taxing, a fitting description of how tax is viewed by many.

Jean-Baptiste Colbert, the 17th Century French Finance Minister said “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.”

I am sure that it must be taxing for the CS to grow the tax revenues to finance the 2019/20 budget, and despite the hissing, boldness and ingenuity are key.

The writer is Associate Director, Tax and Regulatory Services with KPMG Advisory Services Limited.