With the recent release of the BBI Report, some noteworthy points were made about encouraging youth entrepreneurship, lowering the tax burden on the lowest earners and making the overall system fairer.
Concurrently the new Kenya Revenue Authority commissioner-general has been making changes to go after the wealthiest evaders, the new Cabinet Secretary at Treasury is making the right noises about reducing the outflow of money from Treasury and not to mention the Central Bank Governor has issued thunderous sermons about fiscal incontinence in the past having affected the monetary policy negatively.
The time is now ripe for reshaping Kenya’s entire taxation system to create a low-tax, high-incentive and robust taxation system. Creating incentives to create jobs, provide healthcare and housing and education would be the ideal outcome, and the BBI report makes plain that Kenyan’s opined that fairness and progressiveness was just as important.
Whatever the origins, our personal taxation system has evolved into a web of consumption taxes under various guises (VAT, levies, duties, excise and so on), and a system of corporate taxes set off by subsidies. This is failing to generate sufficient revenue, may well be jamming up the economy and is starting to lose legitimacy in the minds of Wananchi.
The complexity of this system is akin to a bigger economy with the capacity to absorb compliance, regulation, monitoring and enforcement costs. Here, where we gather 17% of GDP value through taxation, our complex model should not be ideally considered fit-for-purpose anymore.
When the BBI committee heard about lack of fairness, remember our Pay-As-You-Earn system generates 33% of Government revenue from only 10% of the population, and remarkably manages to tax housemaids and shamba workers at higher rates than owners of the land they work on and the slum-lords they pay rent to.
Broadening the tax net has to be a priority - the current system is not generating enough to sustain Government’s role in economic growth. Whether that speaks to Government spending too much money from what it receives improperly is another matter the Report touches on, but not within the scope of this discussion.
What would a new system look like?
A portion of the country’s lowest earners should simply pay no more tax. Every family collectively earning less than Sh540,000 per year (Band 1) pays no taxes, no NSSF, no NHIF, nothing. For families earning Sh540,000 to Sh1.2 million (Band 2) charge a 10 percent rate, and above Sh1.2 million (Band 3) make it 20 percent. No deductibles, no exemptions and no subsidies. Income would be defined as all salaries, allowances and bank or debt instrument interest.
The flipside of this slashing of income taxes would be using higher consumption tax. Thus duties, excise, levies and VAT would be consolidated into a single VAT rate applied on everything at a high 30 percent. Only raw food products, medical services and pharma, school-books and materials, contraceptive and menstrual aides, and monthly rent on housing below Sh40,000 would be exempt.
The writer is a financial analyst in Canada.