Ideas & Debate

Rethink the nuts and bolts of tax changes


We surely need to look at the tax changes from a wider perspective. FILE PHOTO | NMG

For the first time in the history of budget making process in Kenya, the Finance Bill 2020 is out over a month ahead of the Budget statement reading by the Treasury secretary. Historically and prior to the High Court ruling in Okiya Omtatah’s case around Parliament’s legislative role and effective date of the Finance Bills, most of the tax measures especially on transaction taxes likeVAT and excise taxes used to take effect on the midnight of the Budget day. This was irrespective of the fact that taxpayers needed to configure their systems to accommodate the changes.

As a result, the implementation of the tax changes in some cases posed significant administrative challenges culminating to disputes between the taxpayers and the Kenya Revenue Authority (KRA) and at times ending up in the corridors of justice. Undoubtedly, such disputes had far-reaching negative consequences on the ability of the KRA to meet the ambitious and ever-growing tax revenue targets.

Now Kenyans and taxpayers at large are psychologically prepared for the looming tax changes in the upcoming Budget statement. This gives room to think through the system alterations accompanying implementation of the new changes. The National Treasury on the other hand, will have some level of certainty that the new changes will be implemented with minimal hurdles.

Many have acknowledged that the change in the budget calendar is most welcome. These benefits cannot be overemphasized.

The above said, some of the recently passed tax changes in Kenya beg the question what really drives tax changes? Is it revenue generation, tax policy direction, investment to spur economic growth? Arguably, some of the recent tax changes, especially tax cuts, were driven by the current pandemic that has forced most of the governments across the globe to respond with measures to cushion citizens during these difficult and uncertain times.

However, one would not struggle to conclude that some of the changes were purely driven by the pressure to increase tax revenue, perhaps to compensate for the cuts. The sad news is that many of the changes aimed at increasing revenue tend to be short-term, have inherent drafting errors and have long-term negative ramifications.

It is against the backdrop of answering the above questions that one thinks that we, as a country, still have some strides to make as far as the impetus of tax changes or tax policy is concerned.

A good tax policy is key in not only raising revenue to drive the government’s agenda but also supports the creation of a business-enabling environment and the wellbeing of the public at large. A poorly designed tax policy may not only discourage investment but also encourage non-compliance and thus result in revenue shortage. Therefore, policy makers should ensure that the tax policy is sound and acceptable.

Globally, there have been campaigns to relook at the tax policy with various recommendations calling for a sweeping overhaul of the tax system and change of reliance on specific types of taxes or tweaking the existing taxes. Kenya has not been an exception with the recent efforts revolving around an overhaul of various tax legislations, automation of filing and payment of taxes, titivating of tax disputes resolution mechanism among other efforts.

Having made some positive steps as far as the tax changes are concerned, it is an opportune time for us to rethink the nuts and bolts of tax changes. For instance, consultation, benchmarking from best practice, and thorough scrutiny of legislative process should be the cornerstones of this approach. The new approach should be designed to keep taxes simple, easy to comply with, transparent, stable, predictable, attributable to the benefits and with minimal distortion in decision-making. A tax policy should increase predictability and certainty. Certainty goes beyond effective dates; it should speak to the bigger picture such as enabling taxpayers to make long-term plans with a relatively high degree of stability and less shock.

It should be certain to the taxpayer how much he has to pay, to whom and by what time the tax is to be paid. All the procedural information should be very clear. Certainty pre-empts any exploitation of the taxpayers by the tax authorities and reduces the cost of compliance.

A sound tax policy should exhibit some degree of simplicity. Simplicity breeds some sense of fairness among taxpayers and enhances a deeper understanding. In the recent past, there has been a tendency for the tax law being written very broadly prompting the KRA to issue public notices in response to the stakeholders’ outcry. To this end, the recommendation is to draft a clear tax legislation and, where possible, avoid making tax legislation unnecessarily complex.

This is achievable by ensuring that the requisite definitions are provided under the respective legislation as well as issuance of clear guidance and supporting regulations, which should take into account the taxpayers’ concerns and practical challenges. A perfect candidate to a seemingly complex change is the Digital Service Tax, which the Finance Bill 2020 seeks to introduce. Though the Finance Act 2019 had alluded to some guidelines aimed at providing more clarity, the regulations are yet to be published despite the proposed changes that will, if passed, take effect soon.

To achieve its intended objective, a tax change should not be solely driven by the urge to meet revenue targets. Without ignoring the fact that the government requires revenue to finance the provision of public goods and services. We surely need to look at the tax changes from a wider perspective and consider the impact of the changes from the broader implication on the economy, such as creation of employment opportunities, attraction of foreign domestic investments, promotion of priority sectors, among other considerations.

The writer is manager at Deloitte East Africa, [email protected] . The views expressed represent those of the author and do not necessarily represent those of Deloitte.