Treasury’s Sh2.1 trillion budget signals tax pain

Formal sector workers, landlords, corporations and ordinary consumers are headed for an anxious Thursday afternoon when Treasury secretary Henry Rotich presents his revenue raising plans for the Sh2.1 trillion budget to Parliament.

Anxiety has been building over Mr Rotich’s intentions since he tabled in Parliament estimates showing abnormal growth in specific segments of the tax revenues that analysts expect could only come with strong growth or higher tax rates.

“Real GDP growth is forecast to grow at 7.0 per cent in 2015/16 and over the medium term... total revenue is expected to improve gradually with ongoing tax reforms to reach 20.8 per cent of GDP in 2015/16 and 21.8 per cent over the medium term,” the Treasury said in the Budget Estimates.

Top on the list of targeted revenue sources is income tax, whose contribution to total revenues is expected to rise by Sh46 billion to Sh330.5 billion, signalling a possible announcement of new tax measures on workers’ salaries and wages.

Mr Rotich also plans to collect Sh44.8 billion more from corporations, raising their contribution to total revenues in the financial year starting July 1 to Sh293 billion.

Such levels of revenue growth are usually only possible in an environment of robust economic growth that increases the number of employees, yields higher salaries for those already working and raises corporate profits. The alternative is a rise in the tax rate.

The Kenyan economy has since January been cooling down, saddled by reduced earnings from exports and tourism that have seen the shilling go down tumbling against the US dollar.

These challenges last week saw the International Monetary Fund (IMF) downgrade Kenya’s growth prospects from an earlier projection of seven per cent to 6.5 per cent. Others have set it even lower at 6.1 per cent.

READ: Why Sh2.2 trillion budget signals more tax pain

The Treasury is also planning to increase its value added tax collection by Sh40.2 billion to Sh310.3 billion meaning the tax on select consumer goods could rise or VAT introduced on items that have been exempt.

Mr Rotich’s plan to raise his excise duty collection by Sh22.5 billion to Sh144.5 billion in the coming fiscal year is seen to signal a possible rise in the prices of beer and cigarettes — commonly known as sin taxes.

The Jubilee government’s Sh2 trillion budget is nearly 20 per cent higher than this year’s, with much of the expenditure earmarked for national security and infrastructure development.

Tax experts said amounts targeting certain segments of revenue sources were attainable but doubted the possibility of realising a 20 per cent increase in the tax revenues in a year.

The doubts are particularly hinged on the Treasury’s pegging of the tax revenues on a projected seven per cent economic growth rate, which is seen as too optimistic.

“A seven per cent economic growth projection is over-ambitious. It is one of the reasons revenues targets are missed,” said John Mutua, the budgeting programme officer at Nairobi-based Institute of Economic Affairs, adding that it would be prudent to work with conservative estimates because overzealousness leaves the economy with the risk of having to resort to borrowing when the targets are not realised.

Mr Mutua said it would have been easier for Mr Rotich to balance his budget by containing expenditure instead of stretching targets too far.

Kenya’s huge spending appetite has also attracted the attention of the IMF, which recently told the authorities to tame it, noting that it had already breached fiscal deficit targets.

“The [IMF] mission urged the authorities to boost efforts to mobilise domestic revenue and restrain current spending, so as to preserve room for critical priorities,” said the IMF in a statement last week.

The IMF gave the advisory at the end of a mission to Kenya between May 20 and June 2 to review economic developments since January when it offered the country a Sh67 billion precautionary loan facility.

The huge spending means the Treasury will still be left with a hole to the tune of Sh567 billion (which includes grants), part of which will be financed through net domestic borrowing amounting to Sh219.2 billion while the rest will come from external loans and grants.

The 2015-16 budget also comes with a 8.7 per cent deficit as a fraction of the gross domestic product (GDP) — higher than the preferred ceiling of five per cent.

The deficit is even higher at 10 per cent in the fiscal year ending June 30. Analysts also doubted the Treasury’s plans to collect Sh10 billion in capital gains tax (CGT), citing the challenges it has faced since its introduction early this year.

“Unless you sort out all the outstanding issues regarding the CGT collection, I don’t see the Kenya Revenue Authority managing to get that amount. Stockbrokers have pointed out the problems they face with the law and its implementation and you can’t raise Sh10 billion from them while these issues are outstanding,” said Steve Okoth, a tax adviser at the financial and audit firm RSM Ashvir.

The Parliamentary Budget Office (PBO) also warned the Treasury about its revenue targets, stressing that the economy was not likely to hit seven per cent any time soon. The PBO projected a six per cent GDP growth in the medium term.