The good, bad and ugly in changing tax landscape

With a firm and final nudge from its development partners, the government finally released for stakeholder comment the first public draft of the income tax bill. The oft-promised draft income tax bill is more overdue than timely since it is seeking to overhaul a four-decade old income tax.

When the final version of the income tax bill is enacted as an act, after the completion of the required legislative processes, it will mark the culmination of a deliberate effort to both supplant and introduce new tax laws. The quest for the modernisation and simplification of our archaic tax laws has been a critical part of the tax reform agenda that the government has been pushing. This has seen the recent overhaul of the Value Added Tax Act, the hiving of the Excise Duty Act from the now redundant Customs and Excise Act, which in turn had been replaced by the East African Community Customs Management Act.

The Tax Procedures Act and the Tax Appeals Tribunal Act have also been introduced to ease the administration of taxes and streamline the tax dispute resolution process. The mandatory requirement for stakeholder participation in the run up to the introduction of the new acts and the overhaul of the existing acts was met through a modicum of stakeholder involvement organized in various fora.

Against this backdrop there have been concerted efforts by the Kenya Revenue Authority (KRA) to increase taxpayer education on key tax matters at a general level and from a sectorial standpoint. KRA has also sought to automate its internal processes and taxpayer interfaces so as to smoothen the overall tax compliance processes and user experience.

A key feature of this automation has been the phased launch of the interactive iTax system that covers the key tax heads that has gradually taken root.

It is obvious that, with the ongoing refinement of the various acts, some key features of the tax legislative arena are now more clearly defined and there is less ambiguity, more certainty and greater uniformity and consistency in the tax laws. To the extent that some of the changes reflect best practice or are in line with general trends in taxation this is welcome. It is also clear that some of the recent developments highlighted above are having an impact, both positive and negative, on the aesthetic appeal of the changing tax landscape.

In recent years, Kenya has experienced a lot of self-inflicted budgetary pressures arising from expansionary expenditure demands that cannot be funded fully by the attendant tax revenues. This has seen an ever increasing budget deficit year on year. It is therefore not surprising that the tax legislative changes both for the enacted acts and the published and draft tax bills are all geared towards increasing tax inflows for the government.

The current VAT Act enacted in 2013 significantly reduced the number and extent of VAT exemptions. The Excise Duty Act has been used regularly to increase the quantum of the duties payable on excisable goods and services. The Betting and Gaming Act has seen astronomical increases in the magnitude of the taxes due from that industry. Finally, the draft income tax bill seeks to significantly increase the marginal rates of tax for ‘highly’ paid employees and to ramp up the taxes for high turnover businesses. The Tax Laws (Amendment) 2018 Bill seeks to further reduce the number of products and services that are currently zero rated — all in a push to increase revenue collections.

However, it is not clear to a discerning observer the direction of travel from a tax policy point of view. Given that tax policy is an integral component of fiscal policy, there is also a lack of clarity on the direction of fiscal policy. A clear tax policy should be spelt out and answer questions such as, Is there an intention to shift taxation to consumption from income or not? If yes, then the proposed changes to the income tax act notching up tax rates does not seem to bear this out. If not, why? Income tax, which is tax on earnings for both corporates and individuals, has always been the major contributor to government revenues in part because the taxpayer can be held captive once snared in the tax net. Income tax is easy to track down and collect, particularly as compared to VAT.

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However, with increasing digitization of economies it might be more efficient to collect transactional data from a VAT perspective and reconcile this with electronic VAT returns and then process the data to confirm the completeness of VAT filings for several taxpayers at a go. With proper digital tools the impact on corporate filings can also be ascertained. Where is Kenya on the journey towards digital taxation? The income tax bill makes a passing reference to the introduction of regulations to deal with the taxation of the digital economy. However, the actual draft regulations did not accompany the bill. Hopefully, when the rehashed bill is released again, it will have the regulations in tow.

How successful have the KRA’s efforts been to recruit new taxpayers, whether manually or digitally? As already stated, there are innovative ways that KRA can use to recruit new taxpayers using technology and digital tools that are readily available.

Many registered taxpayers would swear that the quest for incremental tax revenues seems to be focused only on existing taxpayers. Their view would be that the tax base is merely being deepened as opposed to being broadened. It would therefore be a case of double jeopardy for a good number of taxpayers if the draft income tax bill in its current form passes, since they would end up paying even higher amounts of income tax.

The general thrust of the recent changes to revenue generating tax laws has been to extract more taxes from taxpayers. The draft income tax bill, for instance, proposes to introduce a two-tier corporate tax rate of 30 and 35 per cent.

Steve Okello, PWC's Tax Services Leader in Kenya and the East African region.