Next regime should prioritise ending double taxation

We are just two months shy of the General Elections that are slated to take place on August 9, 2022. The electioneering period is characterised by political promises and pronouncements. Politicians repeatedly promise to review the tax environment to address the concerns that are raised by the electorate.

The cost of living has risen steadily in the recent past due to a combination of internal and external shocks to the local and global economy. The cost rise has caused untold suffering to the most vulnerable in the society.

This has elicited public debate on the role of the government in shielding the citizenry from the adverse effects of economic changes. It is notable that taxes have been at the epicentre of these discussions with a segment of the population attributing taxation to the high cost of living.

The role of taxes in a countries economic growth and prosperity cannot be gainsaid. It is a fundamental cog in driving an economy and protecting the most vulnerable in the society through the social arm of the government.

The social welfare pillar of a country seeks to shield the most vulnerable in the society. Kenya has a large informal sector part of which comprises micro, small and medium size enterprises (MSME) which is vulnerable to economic shocks. MSMEs play a critical role in the economic growth and development of the country.

The business operating environment has a great influence on the success or otherwise of MSMEs. One important element of the operating environment is the taxation regime of a country.

Inevitably, taxes are the largest sources of revenue for most governments across the world. Governments thus seek ways of raising additional revenue in every budget cycle. This may be done through the introduction of new taxes, increase in tax rates or expansion of the tax base by bringing into the ambit of taxation incomes or persons that were not under the tax bracket.

Based on the 2022 Economic Survey, the national government is expected to raise Sh2.100.7 trillion in revenue, including grants in FY 2021/22. In the same period, the national government expenditure is estimated to rise to Sh3.373.8 trillion with recurrent expenditure estimated at Sh2.882 trillion and development expenditure at Sh491.7 billion.

On the other hand, county governments are expected to receive Sh409.9 billion as transfers from the national government. They are then expected to raise Sh56.5 billion as own source revenue in FY2021/22.

County governments have experienced challenges in raising own source revenue with very few managing to meet their targets in past financial years. This has pushed some county governments to increase levies, fees, permit fees, and related charges in a bid to plug the revenue shortfalls.

This has in some instances also led to a duplication of levies with some traders complaining that goods that are sourced from a certain county but delivered to another are subjected to similar levies or cess in the source and destination. In certain instances, companies that have branded vehicles are required to pay advertising levies in each county they traverse while distributing their goods.

The Constitution allows county governments to impose property rates; entertainment taxes; charges for services they provide; and any other tax or licensing fee authorised by an Act of Parliament.

The national government working in conjunction with county governments must ensure that there is harmony and coherence in the introduction of new levies or those already imposed.

The short-term, as well as the long-term fiscal and macroeconomic implications of taxes, levies and related charges, should be well evaluated by the respective policymakers. This will ensure that businesses are not overburdened with taxes and levies which stifle entrepreneurship.

Needless to say, county governments must strive to collect own source revenue, but this must be done in a sustainable manner putting into consideration local nuances and the national interest.

In conclusion, while taxes and levies are critical for the proper functioning of the national government and County governments, leaders should ensure that they protect existing businesses by putting in place the right economic and taxation policies.

Maina is a Senior Tax Manager at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY