Economy

Taxes pain in Uhuru’s final Sh3.3trn budget

Uhuru Kenyatta New Year speech

President Uhuru Kenyatta. PHOTO | PSCU

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Summary

  • President Uhuru Kenyatta’s last budget will put his successor under pressure to raise Sh350.7 billion in additional revenue to implement his preferred projects, setting up Kenyans for higher taxation.
  • The front-runners in the 2022 presidential elections — opposition leader Raila Odinga and Deputy President William Ruto — have promised additional social spending.
  • Analysts expect the sharp growth in specific segments of the tax revenues to come with strong growth or higher tax rates.

President Uhuru Kenyatta’s last budget will put his successor under pressure to raise Sh350.7 billion in additional revenue to implement his preferred projects, setting up Kenyans for higher taxation and aggressive pursuit of tax cheats.

Treasury Cabinet Secretary Ukur Yatani will Thursday afternoon reveal to MPs how he will fund the record Sh3.31 trillion budget for the year starting July in a ritual that will take place two months earlier due to the August 9 poll.

The front-runners in the 2022 presidential elections — opposition leader Raila Odinga and Deputy President William Ruto — have promised additional social spending.

Formal sector workers, landlords, corporations and ordinary consumers are headed for an anxious afternoon as the Treasury targets Sh2.024 trillion in taxes, a growth of 20.9 percent on the current Sh1.67 trillion.

Analysts expect the sharp growth in specific segments of the tax revenues to come with strong growth or higher tax rates.

Top on the list of targeted revenue sources is income tax, whose additional revenue is expected to rise by Sh179.4 billion to Sh997.3 billion, signalling a possible announcement of new tax measures on workers’ salaries and company earnings.

Mr Yatani also plans to collect Sh107.6 billion more from VAT to Sh548.7 billion and excise duty, targeting items like beer, cigarette and soda, which is projected to rise Sh37.6 billion to Sh297.2 billion.

Such levels of revenue growth are usually only possible in an environment of robust economic growth that increases the number of employees, yields higher salaries for those already working and raises corporate profits.

The alternative is a rise in the tax rate.

The Kenyan economy is on a recovery mode from Covid-19 economic hardships, which triggered layoffs, pay cuts and business closures.

The Treasury had earlier announced a new crackdown on wealthy tax evaders as part of its budget for the year starting July, setting the stage for travel bans, assets freeze and deactivation of Personal Identification Numbers (PINs).

Tax experts said Mr Yatani will likely raid easy targets such as alcohol consumers and smokers for more taxes from beer, wines, spirits and cigarettes despite the goods being subjected to higher taxes every October in line with average inflation for the preceding financial year.

“Looking at this budget, it is inevitable taxes have to increase. From where I sit, the CS will increase ‘sin’ taxes. I don’t see any other way,” Philip Muema, a partner at tax and business advisory firm Andersen Kenya, said.

“Capital gains has been static for a while and it is now a good time for him to earn some more money. The banking sector may also see a tax being imposed on them given the way they have been reporting record profits post-Covid.”

Capital gains tax is a duty on the profit realised on the sale of an asset such as sale of stocks, bonds, precious metals, real estate, and property.

The government is trying to raise funds for development projects to spur growth and create jobs, but analysts say duties such as capital taxes could deter foreign investors.

Mr Kenyatta’s administration has made changes to the capital gains tax during its near 10-year tenure after it was dropped in the mid-1980s to attract foreign and local investment. In 2014, Mr Kenyatta signed into law a five percent capital gains tax.

Experts also expect a clampdown on the wealthy tax cheats, high-net-worth professionals and traders, to recover unpaid taxes in efforts to raise the national revenues.

Kenya Revenue Authority (KRA) detectives have identified firms and wealthy individuals that owe it more than Sh260 billion. Rich self-employed professionals like doctors, real estate investors, and lawyers are likely to be in the crosshairs of the taxman.

The tax cheats risk travel bans, collection of duty directly from their suppliers and bankers, and prosecution in what promises to be the biggest crackdown yet on high-net-worth persons.

The KRA is racing to bring more people into the tax brackets and curb tax evasion in the quest to meet targets in an economy where Covid-19 economic fallout has battered collections.

Hardships resulting from the pandemic have also forced the State to make minimal duty increases to defuse public outrage over rising consumer goods, especially fuel.

“The KRA is well-positioned to nab more tax cheats by leveraging on technological platforms such as iTax,” Stephen Waweru, a senior manager for tax services at consultancy and audit firm KPMG, said.

“It is currently introducing real-time filing of tax invoices by adoption of Tax Information Management System which will be synchronised or integrated with the iTax platform. This is likely to primarily nab the elusive unscrupulous taxpayers in the informal sector,” Mr Waweru said.

Besides the August 9 poll, the Treasury plans to spend Sh278.81 billion or 9.2 percent more than the budget for the current year in a bid to enhance investments in Mr Kenyatta’s legacy projects under the Post-Covid-19 Economic Recovery Strategy and the floundering ‘Big Four’ Agenda.

Kenya will continue to splurge on infrastructure projects and a stimulus plan to maintain economic growth in the face of the coronavirus crisis.

“The problem [with Mr Kenyatta’s administration] has been the runaway expenditure. The revenues have more than doubled, but the expenditure has grown faster without significant contribution to economic growth,” said John Nyangi, head of research at the Institute of Public Finance-Kenya, a think tank.

“We expect that when government is increasing the expenditure, more jobs are created, businesses make more profit and more taxes to be paid.”

Kenya projects its economy will expand by 6.6 percent this year. Growth plummeted to 0.6 percent last year as key sectors like tourism and related services collapsed at the onset of the coronavirus crisis.

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