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Ideas & Debate

State interventions key to sustaining the economy

cash money
Lenders should agree with their borrowers on more feasible terms to service their loans. FILE PHOTO | NMG 

Over the past couple of weeks, the world has been battling with Covid — 19, whose impact cannot be overstated. The pandemic has already affected numerous businesses within the country and slowed down the global economy significantly.

If the global trajectory is anything to go by, it is not going to be business as usual for many firms whose capacity to provide otherwise usual services with ease is being curtailed by the progressive measures being put in place such as self-isolation and quarantine.

Buyers are also increasingly becoming wary of spending money except for things they consider to be necessities while a good number of companies have been asking their employees to take pay cuts or unpaid leave. It goes without saying that if the situation persists, the worst is yet to come — layoffs, scarcity of essentials such as food and other supplies and a significant economic downturn.

In such circumstances, among the costs of the coronavirus outbreak is that some businesses’ ability to honour their contractual and financial obligations could be compromised. Whether or not the outbreak warrants a force majeure event and hence relieves contractual parties off their obligations on grounds of “frustration” is another issue, but all factors held constant, the worldwide economic uncertainty that ensues affects supply chains and labour dynamics, with any business that relies on international export-import being the hardest hit.

To mitigate this, especially for small and medium enterprises (SMEs), cushioning interventions are critical as a reprieve to manage the crisis starting with the following four measures:

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The President has directed that Corporate Income Tax (CIT) be reduced from 30 percent to 25 percent however, this is not sufficient to ensure that businesses have sustainable cash flow. In addition to the 5 percent reduction, businesses should be allowed to defer payment of the Balance of Tax due in April with regards to 2019 CIT and the instalment tax due without any penalties accruing. Though this is not sustainable in the long term, in the short run it will offer a huge relief especially on cash flows.

This kind of tax relief has been proposed in France as part of its response to the Covid-19 outbreak. Further, there has been a reduction in Turnover Tax (ToT) charges from 3 to 1 percent, which will help significantly though the ideal would have been to defer the payment of ToT to a future date.

Iceland for example has suspended payment of all taxes by companies till next year and hotels are not expected to pay taxes till end of 2021. The Canadian government has also granted businesses up to end of August 2020 to pay any balance of taxes and instalment taxes which is a move aimed at mitigating any immediate cash flow issues.

It is commendable that the president has proposed a 100 percent PAYE waiver for anyone earning Sh24,000 and below. Further, PAYE is to be reduced from 30 to 25 percent for other income bands. The impact of this move will only be felt if the tax bands are increased to accommodate such changes and the first Sh24,000 is not taxed for all employees.

Another bold move on PAYE would be to have employers make the deduction as mandated in law but instead of remitting to Kenya Revenue Authority, retain the deducted amounts to be paid at a later date. This should be viewed as credit being extended by government to SMEs and the payments should not be subject to penalties at a later date. This will in turn ensure that businesses maintain cash flows.

The government proposes the Cash Reserve Ratio to reduce to 4.25 percent from 5.25 percent, to ensure more credit is available by banks to lend. However, this may not adequately ensure circulation of money in the economy and it also does not guarantee that SMEs will easily access this money from banks. The government can do more to ensure access to affordable credit for SMEs, which will in turn ensure that they stay afloat and boost their resilience.

To this end, a government guaranteed credit facility will go a long way in buffering businesses. Already, measures that help maintain credit access are being implemented in countries like Canada and France. The European Union has for instance guaranteed up to 8 billion euros in loans offered to 100,000 SMEs.

Renegotiation of affected contractual terms allows business contracts to vary the affected terms such as turnaround time, mode of payment and delivery of the goods/services in question. Renegotiating helps to agree on new timelines to deliver certain services, and when and how to make payments in light of the new circumstances. This extends to the repayments of loans.

Lenders should agree with their borrowers on more feasible terms to service their loans, for instance to increase duration of payment, offer grace periods on interest repayment to avoid borrowers being flagged for defaulting on loans and also in case of repayment of loans, varying the terms of agreement with financial institutions.

The aforementioned are some of the proposals which should be put on the table together with the President’s proposals for consideration by Parliament. There needs to be a compound vision which focuses on the needs of SMEs whose survival in these turbulent times is crucial to our economy.

The writer is a tax consultant at Andersen Tax.

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