One of the more pointed statements in President William Ruto’s New Year’s interview with media houses was on tax incentives.
The President stated: "There will be no waiver for nobody...This is not the animal farm where some are more equal than others. Everyone must pay tax."
Indeed, there are some mind-boggling policy positions on the books. For instance, Section 21 of the Finance Act 2022 begs the question; why and how did Kenya come to have a capital allowance of 150 percent as a tax incentive for a minimum value of qualifying investment set at Sh2 billion?
Granted, the purpose is to spur investment out of Nairobi and Mombasa counties. But is it logical to recoup your whole cost plus more via a tax deduction?
As a tax layman, I would leave this to the experts and aficionados as a professional challenge to offer better clarity. Nonetheless, tax expenditures refer to revenues forgone by the government through granting preferential treatment to certain incomes or groups of people.
These waivers are intended to serve as incentives that spur investments hence there being referred to as tax incentives.
While a legal framework on tax expenditures together with their reporting exists and can be trusted by various stakeholders to promote transparency, accountability, equity, plus efficiency, a litany of problems persists.
This is because a tradition of poor practices has made the tax expenditure process opaque, with limited government accountability, and prone to manipulation or abuse by special interests.
Firstly, the purposes of tax expenditures are expressed in generalisations that make it difficult to scrutinise and determine what they’re meant to achieve.
Moreover, legal gaps exist in their management, eligibility for issuance, and review. This allows abusers of the tax expenditure system to get away with non-performing incentives.
The situation is further compounded by a complex mechanism of clearly calculating benchmarks and components of existing tax expenditures for which no real benefit is known.
Inequalities continue to endure as domestic companies that mostly don’t benefit from tax expenditures become uncompetitive and lose out to international companies that do.
Also, informal businesses become stifled and cannot move into the mainstream due to inaccessibility to such advantages.
Considering the vast impact of tax expenditures across sectors plus the various interested actors, there is a need for greater involvement and collaboration towards ensuring the effective monitoring or reporting of the cost and benefits associated with tax expenditures.
The National Assembly through the Departmental Committee on Finance and Planning needs to enhance its scrutiny of tax expenditures.
