Wealth, cash deposits low hanging fruit in expanding tax bracket


Apartments at the Garden City Mall in Nairobi on July 26, 2017. PHOTO | SALATON NJAU | NMG

On the expansion of the tax base, President William Ruto says his government will be taxing wealth, consumption, income, and trade in that order.

Taxing wealth is a noble idea, especially in a country where the gap between the rich and the poor is very wide.

According to the Oxfam report 2019, less than 0.1 per cent of the population (8,300 people) own more wealth than the bottom 99.9 per cent (more than 44 million people).

Income and consumption tax bases are already over-exploited, any further pressure on them may break the cord that holds the economy together.

Wealth tax is now being looked at as a new gold mine.

In Kenya, the closest resemblance of wealth tax is capital gains tax. Re-introduced in January 2015, it is levied at five per cent of the gains made on the sale of a property.

The rate is to be raised to 15 per cent effective January 2023.

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Data from OECD indicate that Kenya collected Sh4.5 billion in the year 2020/2021 from this segment. That is insignificant.

Which forms of wealth are there to be taxed? I would classify wealth into two: productive and non-productive.

Productive wealth is represented by investment in securities, real estate, intellectual property, and others.

This category includes returns by companies that are reinvested for growth. This form of wealth generates employment and other income.

Though this wealth is not taxed, the returns, thereof, form a huge chunk of income tax.

This productive wealth may also be called mobile capital in the sense that it can move from one investment destination to another.

Capital flight is a curse to job creation and production. No policymaker worth his salt would dare tax investment capital.

Non-productive wealth is not employed in production. Examples are idle land, unexplained cash reserves, and high-end luxury items.

Idle land is the best candidate for a wealth tax. Land used in this country is characterised by huge tracts punctuated by densely populated farmlands or high-rise flats in urban areas separated by walled properties marked 'Not for Sale.

These unused properties deprive the nation of the resources that would have been generated by their use.

The second form of wealth that the taxman should put on his radar is cash stashed either in local or foreign accounts.

Can a person be taxed for the mere fact of holding cash? Certainly not, however, the onus of explaining the source of the cash rests with the holder.

Invalid explanation leads to one conclusion, that the source is income subject to taxation.

Taxing unexplained reserves is not a thought out of the blue.

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India introduced an 83.25 per cent tax on unexplained cash credits to one’s bank account. In absence of a valid explanation of the source of the cash transfer, the State collects nearly everything.

This is a useful way of collecting money from illicit flows like corruption and drug trafficking.

It’s time we took filing returns to another level. All tax returns should be tied to wealth and bank deposits. Is it the same government that calls for the declaration of wealth and filing of tax returns and never ties the two?

The author is the Deputy Principal of  KCA University.