No justification for planned tax rise

Reconnaissance International regional director Nicola Sudan (C), Kenya Revenue Authority commissioner-general John Njiraini (L) and Treasury PS Kamau Thugge during a tax forum. PHOTO | DIANA NGILA | NMG 

By ANZETSE WERE

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Summary

• The proposed presumptive tax on the informal sector, of 15 per cent payable by individuals with incomes below Sh5 million applying for single business permits, is unfair and short sighted.
• At the moment, the government provides basically no services to SMEs to support their productivity, profitability and growth.
• Most SMEs function in dilapidated shacks with no electricity, water and sanitation, and often next to open sewage and piles of garbage.

The National Treasury tabled the Income Tax Bill 2018, which, among other actions, has the general thrust of taxing individuals and companies at higher rates than previously was the case.

The focus here will be on the opposite ends of the financial spectrum: large companies with taxable income of more than Sh500 million and Small and Micro Enterprises (SMEs), most of whom have fewer than five employees and generally operate informally, outside what government considers to be the tax net.

Treasury’s rationale for the new taxes and tax increases is simple: government needs to raise more money to plug the fiscal deficit and reduce borrowing in the spirit of fiscal consolidation.

But the core question should be: Are these increases justified?

With regards to the corporate tax, while it can be argued that large companies can afford to pay the 35 per cent, the core question is, why? What will corporations get in exchange for the additional amount charged?

Rather than approaching the income tax bill from a perspective of service enhancement, the government is motivated by more aggressive revenue generation.

Given the reality of high costs of doing business in Kenya, the proposed increases simply add another stone on an already heavy load. Perhaps if costs such as electricity, land and transport were more manageable, the effect of added costs in the form of additional taxes would be less pronounced.

The proposed presumptive tax on the informal sector, of 15 per cent payable by individuals with incomes below Sh5 million applying for single business permits, is unfair and short sighted.

At the moment, the government provides basically no services to SMEs to support their productivity, profitability and growth.

Most SMEs function in dilapidated shacks with no electricity, water and sanitation, and often next to open sewage and piles of garbage. The government, at both national and county level, seems unable to invest in supporting SMEs, yet here is the State introducing a punitive new tax.

The question SMEs will have is, again, why? What will they get in return for paying this new tax? The presumptive tax may motivate informal SMEs to go further underground because they know they are the new tax target, and since most operate at a subsistence level, any additional cost will truly pinch.

Thus, rather than creating an enabling environment for them, the government will make it even riskier to conduct business in an already difficult environment.

However, the strongest argument against the tax increase is corruption and the flagrant lack of fiscal accountability.

This bill is being tabled in the context of one of the largest cases of the mismanagement of public funds Kenya has seen in recent years. Ergo, Kenyans will wonder whether these new tax rises will improve service provision, or the money will be used to buy public officials new properties and cars after being diverted into personal accounts.

Unless the government demonstrates that it is a responsible custodian of public funds, tax rates can continue to be escalated without translating into tangible benefits.

Rather than scrutinise its own failings, the government is being intellectually lazy and increasing tax on an already stretched private sector. Perhaps with some self-reflection and tough action within itself, the government would find it can live within its current means and need not saddle private sector with additional taxes.

Ms Were is a development economist. anzetsew@gmail.com