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Incentives to firms shift tax load to individuals


Kenyan incentives to businesses have seen an increase in the tax burden on individuals. PHOTO | POOL

Kenyan incentives to businesses have seen an increase in the tax burden on individuals, a new report shows.

The country provides incentives in the form of capital deductions, tax holidays, special rates in free zones, and exemption from certain income taxes aimed at encouraging investment and the creation of jobs.

However, the report by Tax Justice Network Africa states that the foregone revenue has cost the taxpayers especially households as the authority resorts to inequitable means of raising revenue while still maintaining unevaluated tax incentives and exemptions.

"While Kenya, may have some of the highest standard corporate income tax (CIT) rates in the East African region, it offers some of the most permissive incentives,” said Tax Justice Network Africa.

“Tax holidays and incentives specific to Export Processing Zones are considered the most harmful. This puts to question the cost-effectiveness of tax incentives in such zone, Kenya continues to pursue the use of free zones to attract foreign investment, by establishing Special Economic Zones.”

Kenya scored 7.6 on the distribution of tax burden and progressivity and scored fairly at 6.88 on tax administration.

The country’s tax system includes preferential tax measures to benefit specific business activities and achieve targeted policy objectives.

According to Tax Expenditures Report 2021, tax expenditures including exclusions, deductions, deferrals and tax rates in 2020 were 2.96 per cent of GDP representing Sh318.32 billion.

The analysis revealed that tax expenditures have been steadily decreasing over the last four years and are markedly reduced from 4.9 per cent of GDP reported in 2017 when they were reported at Sh848.34 billion, indicating the clawing back some of the preferential rates of tax by the Treasury and the KRA chiefs in recent years been as part of the structural benchmarks with the International Monetary Fund (IMF).

The report also established that tax expenditures on domestic VAT account for the largest share of Sh234.38 billion (2.18 per cent of GDP in 2020) of total tax expenditures in Kenya spread across sectors including agriculture, manufacturing and transport.

Corporate income tax is the second largest contributor to total tax expenditures in Kenya at Sh56.74 billion in 2020.

“The bulk of these expenditures are tax allowances and deductions designed to encourage investment in plant and machinery,” KRA stated.

Personal income tax expenditures in 2020 stood at Sh4.12 billion, while tax expenditures related to taxes on imports (excise tax on imports and VAT on imports) were Sh5.39 billion.

Tax Justice Network Africa said the proliferation of these incentives has been worsened by a lack of a coordinated regime in providing and administering them.

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“Cost-benefit analyses should be carried out as we review the existing and planned tax incentives. Essentially, tax incentives should only be provided if the additional taxes revenues expected over the long-term compensate for taxes foregone in the immediate or medium term, or if measurable positive externalities can be identified with equivalent effect,” the report added.

The tax authority has been faulted for the growing lack of transparency in the administration of tax incentives in Kenya evidenced by its failure to publish tax expenditure information.

This is despite the constitutional mandate to issue tax expenditures and by the IMF which requires the Treasury to make public the benefits and their impact on the budget by end of September of each year.

IMF had argued the tax concessions have failed to benefit the economy through, increased growth in investments, employment opportunities and affordable prices for consumers.

“The Covid-19 pandemic has had a positive impact on the reduction of tax incentives, especially with regard to capital deductions. Since the onset of the pandemic, the government is continuously doing away with redundant incentives. Further, the Kenyan government seeks to domesticate the country-by-country (CbC) reporting framework in order to enhance tax transparency,” said the report.

READ: Tax benefit cuts squeeze Sh145bn from wealthy

During the financial year ended June 2021, KRA collected Sh1.669 trillion surpassing a target of Sh1.65 trillion, a 3.9 per cent rise from revenue collected in the financial year of Sh1.606 trillion due to improved economy from the impact of Covid-19 in the previous year.

The performance was also attributed to tax base expansion through newly adopted taxes such as digital service tax, minimum tax, and initiatives including voluntary tax disclosures that allowed KRA to recruit additional taxpayers.

Active taxpayers increased to 6.55 million from 3.94 million over a three-year period.

Corporate tax recorded a growth of 3.7 per cent in the financial year that ended June 2021 driven by increased remittance from the energy, agriculture and construction sectors.

Already KRA is faced with outstanding tax refunds that have hit Sh109 billion, hitting businesses' cash flow.

Tax refund claims rose by Sh3.2 billion in the year to June 2021, up from Sh106.7 billion the previous year, triggering a red flag from Auditor General Nancy Gathungu over the pile-up.

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