Tax policy lacks sense

KRA commissioner-general John Njiraini (left) and Pancracious Nyaga, large taxpayers commissioner, during a press briefing on revenue performance for the first quarter of 2013/14 at Times Towers in Nairobi on October 7, 2013. Whistleblowers are expected to use a new KRA site to secretly report crimes such as tax eva

In Summary

• Because VAT is a consumption tax, the government is bound to collect little revenue from the new levy.

Thousands of businesspeople and corporate executives say it is only a matter of time before they are proved right on the controversial VAT introduced on a large number of consumer goods in September.

The taxmen may not be seeing it yet but businesses say sales have plummeted by large margins since the tax was introduced a couple of months ago.

One of Kenya’s large taxpayers says sales of one of its major products that accounted for up to 20 per cent of sales has dropped by more than half. This means that consumption of these products has dropped by similar margins.

And because VAT is a consumption tax, the government is bound to collect little revenue from the new levy.

Even more important is the fact that when businesses are selling less, their revenue and ultimately their profits stagnate or drops. That may translate to huge cuts in corporate taxes, which at the top rate of 30 per cent is one of the largest contributors to government revenue.

Treasury mandarins may take comfort in the fact that they have the IMF’s backing on this one. But it is to the same IMF that they will run for help in the event of a big drop in revenues.

The question that begs an answer is this. Would it not be cheaper for the State to help nurture growth of business with these tax breaks and earn its money by taxing profits?