According to the 2023 Tax Expenditure Report, the total expenses increased to Sh393.6 billion in 2022, which was equivalent to 2.94 percent of the gross domestic product (GDP). This was an increase from Sh292.9 billion in 2021, equivalent to 2.44 percent of the GDP.
Notably, domestic value-added tax (VAT) was the largest contributor to the tax expenditures at 36.94 percent with corporate income tax following with 19.87 percent while VAT on fuel contributed 16.38 percent.
According to the Medium-Term Revenue Strategy for 2024-25 to 2026-27, the ordinary revenue collection as a percentage of GDP declined from 18.1 percent in 2013-14 to 14.1 percent in 2022-23. This is due to, among other reasons, an increase in tax expenditure and low tax compliance.
Over the past decade, the Treasury and legislators have introduced a wide range of goods and services to either the exempt or zero-rated categories.
The enactment of the VAT Act, 2013 elicited a lot of reaction from business circles and consumers alike.
Amid the outcry from certain sections of the economy it was lauded as a major milestone by the government in simplifying the tax laws.
The complexity of the repealed Act mainly caused by the long list of exempt and zero-rated goods and services was a major headache for businesses. Lest we forget, the long list was because of numerous amendments made over the years.
Businesses had to contend with endless changes to the classification of goods and services in the VAT Act, with some of them occasionally being caught up on the wrong side of the law, and as a result, suffering unwarranted penalties and interest. The cost of doing business was consequently high due to unpredictability in the VAT status of certain goods and services.
The principle of simplicity in taxation states that a tax should be formulated in a simple language that is easily understood by all who are subject to it. It should not be subject to multiple interpretations and constant change. To keep it as simple and clear as possible, a tax must have minimal exemptions.
In the current ever-changing global economy, certainty cannot be guaranteed. Businesses, however, need some level of certainty to be able to make long-term investment plans and decisions. A stable, predictable and reliable taxation system is critical in fulfilling the principle of certainty in taxation.
While it is inevitable that certain targeted tax measures will once in a while be taken due to changes in government priorities, economic circumstances as well as social considerations, the Treasury should be slow to use tax changes as the easiest available policy tool.
Whereas policy changes that are meant to cushion mwanachi from high cost of living, there is a need to focus on bold measures that will improve the overall economy and reduce the cost of doing business. Short-term measures are popular but do not provide the much-needed impetus to grow into a middle-income country by 2030 as envisaged in Vision 2030.
The national tax policy sets out broad parameters on tax policy and related tax matters. It also provides broad guidelines on tax administration and the general tax system. The policy proposes comprehensive review of tax laws every five years. This is in addition to the development of a framework for granting tax incentives.
The adoption of the recommended policy of reviewing tax laws every five years would give the government a chance to monitor the impact of specific tax policies and incentives.
On the other hand, businesses would operate in a more predictable tax environment thus enabling them to make long-term plans.
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