Tax revenue is the main source of finance for most governments across the world. It is even more critical in countries that do not have major non-tax sources of revenue such as Kenya.
In the absence of sufficient tax collections, the government mainly relies on debt to finance its budget obligations. There has been a growing concern over Kenya’s debt level, and this has jolted the government into action to ensure long-term debt sustainability.
The Treasury recently released the 2023 tax expenditure report. The report summarises national tax expenditure in a particular year of income. Tax expenditures entail tax foregone by the government through exemptions, tax deductions, tax credits, zero-rating, concessional tax rates, among other forms.
It is the difference between whatever tax would have been paid under a defined benchmark tax law and the amount that was actually paid to the revenue authority.
Generally, tax expenditure is used by governments as a form of a subsidy since it is expected to lower the cost of goods or increase disposable income. They may also be used as a tool to influence behaviour by encouraging preferred economic activities.
The government has indicated that it is putting in place measures to slow down the annual growth in public debt without compromising service delivery to citizens. A lot of effort has thus been put on expanding revenue mobilisation through a mix of tax policy and administrative changes to enhance tax compliance.
Reducing tax expenditure by eliminating unproductive tax incentives has been identified as a key measure for protecting the country’s tax base. The government has indicated that it will focus on enhancing tax expenditures that promote investments.
Some of the key interventions that the government intends to implement in the next three years include the review and rationalisation of exemptions on entities, the review and rationalisation of exemptions on individuals, the review of tax reliefs, the review and rationalisation of exempt/zero-rated supplies on individuals.
The review and reduction of tax expenditure may be a low-hanging fruit for the government in its quest to increase tax revenue collections. This is largely due to the ease with which relevant tax changes can be made and the almost predictable tax revenue gain from a change in the relevant tax laws.
The government has indicated that, going forward, it will mainly focus on tax expenditures that promote investments. It is notable that certain tax expenditures play a greater role in the economy such as reducing the cost of goods, increasing the disposable income, increasing access to certain goods or services among other purposes.
These may have other societal impacts such as reducing income inequality, protection of vulnerable persons among other critical aspects.
It is thus critical that the Government puts into consideration broader economic aspects and not just the investment promotion impact of tax expenditure in rationalizing tax expenditures.
This will ensure that positive economic impact of certain tax expenditure is not eroded at the expense of additional tax revenue collections which may not have the same impact to the society.
By and large, an all-round analysis of each tax expenditure should be performed to determine the pros and cons of repealing related exemptions, incentives, or such other measures. This is important in ensuring that an overzealous attempt to increase tax revenue collections does not compromise the general welfare of the citizenry and more so vulnerable persons in the society.
Robert Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.
