March 30, 2017 will be the second time
in Kenya’s 54-year independence history that the budget will not be
presented to Parliament on the last Thursday before 15 June.
Just
over 30 years ago, the then Finance minister, Arthur Magugu, read his
budget speech one week later than usual to become the first minister to
delay budget presentation.
It is expected that the
2017/18 budget will be an interesting one given that Treasury secretary
Henry Rotich has to be bold and innovative.
If you
look at the 2016/17 budget, despite the government increasing the Kenya
Revenue Authority’s (KRA) revenue target, there were barely any headline
tax rate increases.
What we saw was an attempt at
broadening the tax base by enforcing greater compliance and transparency
with changes such as withholding tax on rental income (which is
problematic for real estate investors, who have significant borrowings,
but is a story for another day).
Budgeting is the act
of determining one’s expenses based on one’s income. In fact,
historically, the Chancellor of the Exchequer in presenting the
government expenditure and income (note the intentional reversal of the
order) would get his speech from a “small suitcase”, hence a “budget.”
Listening
to the President’s State of the Nation Address, and the particular
focus on Kenya’s wage bill, it is clear that Kenya needs to either
decrease the wage bill or increase the tax revenues.
That is the only way that our wage bill as a percentage
of revenue collection will come to within internationally accepted
levels.
Most important for this discourse is the KRA’s
revenue targets, which grew approximately 13 per cent to Sh1.55
trillion from 1.37 trillion. What will drive the increased tax revenues?
The key reason this year’s budget will be presented in March and not June is the coming General Election.
One
does not need to be a political science student to figure out that this
will be one of the most hotly contested presidential elections in
recent history. Bearing that in mind, it is unlikely that the current
administration will want to agitate the electorate with tax hikes. What
then are Mr Rotich’s real options?
In my view, one
trick will be diversifying into untaxed areas targeting the middle
class. The other one will be netting the untaxed informal sector. For
example, with the real prospects of exporting oil in the near term and
continued emergence of a middle income segment, I would not be surprised
if an environmental levy is imposed on motor vehicles.
The UK has successfully done it such that you pay a higher emissions tax the more emissions your car produces.
Another
area to watch out for is estate taxes, especially given the emergence
of new wealth. In 2015, the government re-introduced capital gains tax
after a 30-year hiatus. I doubt it will be long before government starts
thinking about re-introducing estate and wealth tax as a form of wealth
and income re-distribution.
On the untaxed informal
sector, there is ample evidence that a significant majority of income
tax comes from those in formal employment.
As an
employee, one does not have much choice about paying income tax: the
employer deducts it at source and remits it to the KRA. While recently
we had a ruckus about the government’s proposed access to telephones,
one has to ask whether such access could be used to drive greater tax
compliance. Today, in Kenya, you can pay for almost any transaction
using mobile money platforms.
Safaricom’s recent
statistics show Kenya moved about Sh3.4 trillion in one year. Do the
simple math: if 60 per cent of this amount was business transactions, it
means there was Sh2 trillion worth of sales.
Given
that the key users of these platforms are in the micro and small and
medium enterprise sector, take a profit margin of 20 per cent and
subject that to 30 per cent tax.
By conservative
estimates, you have the KRA collecting Sh120 billion, which is more than
half of the revenue target growth for 2017/18. Is it a wonder then that
the KRA has invested heavily in technology and transaction tracking?
My
guess is that the informal sector and its role in contributing to the
national purse will be in Mr Rotich’s cross-hairs come March 30, 2017.
Add to that the emerging middle class and you have new wealth. Let’s wait March 30, 2017 eagerly!
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