Sh480bn: Price Kenyans are paying for tax breaks

The cost of tax incentives that Treasury gives companies and individuals has risen significantly, almost touching Sh500 billion per year, even as the Kenya Revenue Authority (KRA) continues to miss the annual revenue collection targets set for it by the Treasury.

KRA — which missed its 2018/19 target by Sh300 billion — told Parliament this week that the uncollected revenues, technically called tax expenditures, ballooned to Sh478 billion in 2017 alone.

Tax expenditure occurs as a result of tax concessions or preferential treatment to particular classes of taxpayers or activities.

The figures reveal that KRA can either narrow its deficit or meet its revenue collection targets if tax incentives are either streamlined or reduced.

Shortfalls in revenue collection targets usually increase a country’s Budget deficit.

This gap is then bridged through increased borrowing to meet the government’s recurrent and development spending.

Heavy borrowing

Kenya has been borrowing heavily to fund infrastructure projects such as railway lines, roads, bridges, power plants and transmission lines.

“Right now the country’s tax expenditure stands at Sh478 billion or 5.9 percent of the GDP, which is very high.

"This is money we ought to be collecting but we are not, because it has been given away,” KRA commissioner-general Githii Mburu told the National Assembly’s Committee on Finance on Monday.

The five classes of tax expenditures are; credits (deductions from tax liability), tax relief (reduced tax rate) and exemptions granted to traders.

Others are tax deferral -- which means delaying the paying of tax liability -- and allowances such as the 10-year tax holiday given to Export Promotion Zone firms.

Data from KRA shows that tax expenditure, which stood at Sh220.8 billion ten years ago, rose steadily to hit Sh455.7 billion in 2016, in effect more than doubling the relief offered to the beneficiary firms and individuals.

Biggest contributor

In 2017, the biggest contributor to the rise in tax expenditure was Value Added Tax (VAT) exemptions, which stood at Sh307.7 billion.

This was dominated by goods (other than exports) that were either zero-rated or exempt. Aside from a friendly VAT regime, Kenya allowed machinery importers to enjoy incentives to grow the manufacturing sector.

Currently, manufacturers are allowed to import machinery without payment of duty then claim 100 percent of their investment in a move ideally meant to spur job creation, industrialisation and value addition.

Last year, manufacturing contributed 7.7 per cent of the Gross Domestic Product. Output stood at Sh689.3 billion.

When he appeared before MPs, Mr Mburu said that the preferential treatment of some companies and individuals was eating into the country’s revenues yet such measures hardly benefit taxpayers and, as a result, require a rethink at a policy and strategic level.

“Even if we zero-rate maize, it does not mean that the price will go down. That money may just go to the manufacturer and the common mwananchi will not have anything to take home,” he said.

Preferential treatment

He told the lawmakers that contrary to common belief, tax incentives and preferential treatment are hardly priority considerations for investors.

“Research shows that taxing ranks at number 11 in the things investors consider. They do not come to this country because of the preferential treatment in matters of tax,” he said.

The priority considerations for investors, he said, are economic stability and an assurance that they can generate demand for their goods.

According to World Investment 2019 report, Kenya’s foreign direct investment (FDI) rose 27.53 percent in 2018 to hit a new high of Sh164.84 billion.

This was largely driven by increased flows into manufacturing, chemicals, hospitality, as well as oil and gas.

The report by the United Nations Conference on Trade and Development (UNCTAD) also indicates that foreign investments last year were Sh13.69 billion more than the 2017 inflows.

End loser

The report noted that business facilitation measures and investment-ready special economic zones (SEZs) contributed to the increase in FDI.

Mr Mburu said that whereas it was good that businesses lobby for themselves and get tax reliefs, “the end loser is the common mwananchi”.

This year, the Treasury has asked KRA to collect Sh1.938 trillion in tax and other revenue.

Last year, the taxman missed his target by almost Sh300 billion after collecting Sh1.58 trillion against a target of Sh1.81 trillion.

Already, agro-chemical manufacturers are pushing for zero-rated status for pesticides.

They argue that under zero-rated status, whatever costs they incur during manufacturing will be netted off and recovered from the government, making their products cheaper for farmers.