Elections, revenue target give Rotich a budget headache

Treasury secretary Henry Rotich. FILE PHOTO | NMG 

By NEVILLE OTUKI

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Summary

• The national budget is set to grow from Sh2.48 trillion in the current year to Sh2.6 trillion, an increase that must be financed by additional tax revenues or debt.
• The promise not to introduce any new taxes means revenue targets will be largely pegged on organic growth.
• The Kenyan economy is battling a steep downturn in credit growth that began in the third quarter of 2015.

Treasury secretary Henry Rotich is this afternoon expected to perform a delicate balancing act presenting a budget that will require him to significantly grow tax revenues while keeping the promise not to introduce any new taxes.

Mr Rotich’s task is complicated by the fact that he has prepared a Sh2.62 trillion spending plan that requires the taxman to collect Sh300 billion more in an economy where corporate profits are falling, thousands of workers are losing jobs and growth is expected to slow down ahead of the August elections.

The promise not to introduce any new taxes means revenue targets will be largely pegged on organic growth — arising from expanded economic activity — that is suffering a slowdown in investments ahead of the elections.

“This is going to be a difficult task for the CS [Cabinet Secretary] given it is an election year. The economy is already under strain and spending power has drastically reduced with tight liquidity and low consumer confidence,” said Nikhil Hira, a tax expert at Deloitte and Touche. “A raise in taxes or introduction of new taxes would only make matters worse.”

The Kenyan economy is battling a steep downturn in credit growth that began in the third quarter of 2015 but which the banks attribute to interest rate controls that came into force last September through an Act of Parliament.

Raising additional Sh300 billion in tax revenues without increasing or introducing new taxes is the elephant in the room that Mr Rotich must face.

The Kenya Revenue Authority (KRA) is expected to raise Sh1.7 trillion in the 2017/18 year, up from Sh1.4 trillion in the current financial year ending June.

The higher revenue target comes despite the fact that the taxman has consistently missed his quarterly revenue targets in the current financial year even as the country moves into an elevated debt servicing period and recurrent expenditure continues to rise, putting a strain on public coffers.

The national budget is set to grow from Sh2.48 trillion in the current year to Sh2.6 trillion, an increase that must be financed by additional tax revenues or debt.

Tax experts said any increase in taxes was likely to stifle consumer spending power and weaken aggregate demand for goods and services.

“Raising taxes may not achieve what the CS wants because when taxes rise beyond a certain level, empirical evidence suggests a reduction in collections,” said Mr Hira.

“The focus needs to be on improving tax administration — although we have had considerable improvement over the past few years — and use this as a means to enforce collection from those that evade taxes.”

The Treasury last week ruled out any tax increases a month after tabling budget estimates that demand significant growth in tax revenues.

“I have seen stories saying Kenyans should brace for tax increases. No, this is not the case,” Treasury’s director-general in charge of budgetary, fiscal and economic affairs, Geoffrey Mwau, said last week.

The tax freeze is in line with past trends that have seen the Treasury avoid introducing new taxes in an election year.

Kenyan consumers have absorbed multiple increases in taxes since President Uhuru Kenyatta took office four years ago.

They include roads maintenance levy, which doubled from Sh9 per litre of petrol and diesel to Sh18 as well as introduction of value added tax (VAT) on previously exempt goods like books and milk in 2013.

The VAT on electricity also shot to 16 per cent from 12 per cent.

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Last year, the Treasury raided the women’s purse with the introduction of a 10 per cent excise duty on cosmetics and beauty products while low-income households that rely on kerosene for lighting and cooking were hit by a Sh7.20 per litre excise duty.

The Treasury’s documents submitted to Parliament indicated that payroll and excise taxes topped the list of tax revues for government.  

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Mr Rotich has more recently pinned his hopes on the ongoing reforms in tax policy, including review of income tax law, alongside automation of revenue administration, but that does not appear to have come through.

The prevailing tough economic conditions have, however, seen several companies lay off hundreds of workers while others have frozen hiring, presenting a headache to the Treasury in generating payroll tax.

Mr Rotich’s projection for income tax revenue from individuals (PAYE) stands at Sh400.5 billion, an increase from this year’s Sh343.7 billion.

It now appears the target will be difficult to achieve at the current tax rates and with the hiring freeze in corporate Kenya.

In the projections, excise tax, which has previously targeted alcohol and cigarettes, is expected to grow by Sh19 billion to Sh199.8 billion.