Treasury CS Henry Rotich. We will be keenly watching the Treasury’s proposals and their effective dates. FILE PHOTO | NMG
Commenting on the adoption
of the new US constitution, Benjamin Franklin, said that “in this world
nothing can be said to be certain, except death and taxes.” This quote
is intriguing because we all
know that one day, death shall come calling. We also know that tax is the price we pay for a civilised society.
know that one day, death shall come calling. We also know that tax is the price we pay for a civilised society.
However, not many can confidently say they
know their tax liability with absolute certainty even though they will
indeed pay the tax.
Tax
is guided by canons of taxation. These basic canons or principles
suggest that tax ought to be, among other things, simple, equitable,
productive and certain. The principle of certainty means that taxpayers
ought to know what income or transaction is taxable, the applicable tax
rate, the due date for the payment of such tax and the resultant
penalties in the event that the tax is not paid by the due date.
Recent
studies, including some by the World Bank, indicate that most
investment decisions are based on tax certainty and not tax incentives.
Businesses prefer operating in an environment where their tax
obligations are certain as this facilitates long-term planning.
The
Public Finance Management Act, 2012, introduced the concept of
publication of budget estimates. Thus, today, the National Treasury
publishes the revenue and expenditure estimates.
This is how the public knows the budget to be unveiled during
the budget speech. It is from these estimates that we also know what
Kenya Revenue Authority (KRA) is expected to collect as taxes.
In
my view, the Treasury has a golden opportunity to enhance
operationalisation of the canon of tax certainty through the budgeting
process. Many countries including the UK and South Africa routinely
publish tax proposals for public debate ahead of the budget proposals.
By publicising the budget proposals, the government is able to get
feedback and perspectives to consider before passing the tax proposals.
We
need not look far for an example. Uganda has, for three years now, been
publishing its budget proposals before budget day. Once published in
March, the Ugandan parliament scrutinises the proposals in April and
May. In the just-concluded scrutiny, Parliament rejected the proposal to
limit the tax loss carry forward period to seven years. Similarly,
Parliament declined to assent to the proposal introducing an alternative
minimum tax of 0.5 per cent of turnover for loss making companies.
As
part of its initiative to bolster tax revenues, the government of
Uganda introduced a one per cent withholding tax on agricultural
produce.
This meant that appointed withholding tax
agents such as hotels and restaurants paid farmers the sales proceeds
less the one per cent withholding tax. In exercise of its legislative
power, Parliament introduced a new proposal to repeal the one per cent
withholding tax.
The most poignant proposal from the
parliamentary scrutiny is perhaps the withholding VAT (WHVAT). In 2018,
taxpayers in Uganda were required to withhold the entire VAT on a
supply.
Naturally, this caused massive cash flow
challenges as the suppliers were still required to account for the
entire VAT. Parliament has concurred with proposals to reduce the WHVAT
to six per cent of the 18 per cent VAT, effective July 1, 2019.
The
benefits of early publication of the budget proposals are clear. The
Treasury can ensure sufficient public participation as is required under
both the Constitution and Public Finance Management Act.
In
addition, with a broad agreement of the proposals before budget day,
the effective date of the amendments can be as soon as July 1, meaning
that the KRA has a better chance of meeting its revenue targets. For
taxpayers, such early publication and debate afford the much-needed tax
certainty for business planning.
Where there might be
administrative implementation challenges, taxpayers and the KRA are
afforded the opportunity to discuss and agree on an acceptable way
forward.
Most importantly, with advance publication of
the budget proposals and public debate, the challenges enunciated by the
High Court in the Okiya Omtatah case around Parliament’s legislative
role and effective date of the Finance Bill will be a thing of the past.
For this year though, we will be keenly watching the Treasury’s proposals and their effective dates, come budget day.
Robert Waruiru is an Associate Director with KPMG Advisory Services Limited. rwaruiru@kpmg.co.ke.
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