Kenya ripe for radical tax reforms


Kenya’s fiscal deficit, including grants, is projected at Sh718 billion (4.4 percent of GDP) this financial year that will be financed by net external and domestic borrowing.

The economy is characterised by high levels of informality at 16 million citizens as per the 2023 Economic Survey, making it difficult to tax the hard sectors, resulting in a low tax base.

Moreover, most transactions are still in cash at levels of 80 percent. Current approaches to improve the situation are not sufficient, calling for radical tax reforms.

The current strategy for reducing the tax debt portfolio is to provide a one-year amnesty on penalties and interest for the accrued tax debts. However, given the tough economic times, individuals and businesses cannot give what they do not have.

Moreover, the plan to reduce the fiscal deficit by reducing borrowing and reorganising expenditures is like rearranging chairs on the deck of the Titanic – it will not change the fundamentals.

Kenya needs to generate more government revenue by increasing tax collections; and this must not be achieved through further burdening of taxpayers.

The only long-term solution to Kenya's tax woes is to broaden the tax base. Currently, only three million Kenyans in formal employment contribute to PAYE, while the vast majority operate in the informal sector.

Agriculture contributes 22 percent of the GDP, while informal employment accounts for more than 80 percent of employment.

To save Kenya from the jaws of default, a radical reform of Kenya's tax laws is needed. This reform involves eliminating PAYE and VAT and replacing them with a Single Transaction Tax. This Transaction Tax should be omnipresent at all points of retail household transactions.

The tax could generate upwards of Sh7 trillion, which is significantly higher than the total tax collections of roughly Sh2 trillion and a different world from the PAYE and VAT collections of 461.815 billion and 244.693 billion.

Mobile money transfers increased in 2022 to Sh7.9 trillion while mobile commerce transactions grew by 32.7 percent to Sh20.3 trillion, which is estimated to be worth just 20 percent of all transactions in the country. This means that by applying simulation, the total could stand at Sh101.5 trillion.

Arbitrarily applying a 16 percent transaction tax on this would give us Sh16.16 trillion. A 16 percent tax, or even lower, will ease the burden on an already tax-fatigued formal sector while roping in all spending citizens into the tax bracket. Essentially, the government should tax spending, and not earning.

The increased revenue will improve the lives of those most vulnerable by addressing the fiscal deficit and funding the Consolidated Social Protection Fund.

This is crucial for providing effective social protection that requires adequate funding for programmes that support the most vulnerable populations as well as providing much-needed public service.

This approach takes advantage of our subconscious by eliminating mammoth deductions. Even if the maths is off by a few hundred billion, it's still a significant improvement to the status quo, both economically, politically, and socially.

The transaction tax will be charged over and above the purchase price and will be further split in two. Seventy percent will go to The National Fund, while the rest goes to a proposed Consolidated Social Protection Fund, as envisaged in Vision 2030, automatically getting Kenya way past its desired social protection goal.

Additionally, the National Fund collections will be split, say 50:50 in favour of county governments to ensure smooth service provision to the county governments subject to the approved budget allocations.

To this end, I propose The Consolidated Social Protection Fund pool to contribute to Universal Health Care, Universal Social Security, Universal Education, Universal Housing Project, Universal Savings Fund, other discretionary and emergency funds. Through this, all citizens will feel included in the great task of building the nation.

The writer is the CEO of CPF Group.

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Note: The results are not exact but very close to the actual.