Issue 5 | December 19, 2018

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Revenue Mobilization and Effective Taxation Policies - The Case of Kenya

By Donald M. Odera FCCA, CPA(K), International Liaison & Advisory Partner Crowe Erastus & Co. (member firm of Crow Global) | @ACODE_Uganda

Benjamin Franklin (one time US President) was once quoted as saying “… that nothing in this world is certain except death and taxes”. It is a generally accepted fact that it is the duty of any government to ensure the provision of basic services to its citizens and these include security, food, shelter and health. The Constitution of Kenya that was promulgated in 2010 made the provision of certain of these basic services human rights that the state is duty bound to provide. A key method of raising revenue to fund the provision of goods and services for its citizens for any democratic nation is through taxes.

Role of Taxation in Economic Development

At the advent of independence of the 3 original East African States (Kenya, Uganda & Tanzania), the economies of these three nations were almost at the same level and to a great extent were as strong if not stronger than those of the so-called “Tiger Nations” of South East Asia. The latter nations stormed ahead in terms of economic growth leaving their African counterparts far behind. On the East African regional front Kenya appears to have outgrown its sister nations.

According to N. Kaldor in his article on ‘Taxation for Economic Development', Journal of Modern African Studies, 1963, “it is the shortage of resources and not inadequate incentives which limit the pace of economic growth”. Whereas Kaldor might have been alluding to financial resources in his statement, it has become clear over the years that resources also included human capital, systems & structures and political will. This writer believes that once the taxation systems and structures (which are a part of the nation’s systems) have matured and are stable, there is a place for incentives under special circumstances, such as when jump-starting a depressed economy. This was the case when Barrack Obama’s administration successfully lowered interest rates to near 0% to encourage industry to borrow and spend.

J. Rollings in a Report on the Role of Taxes in Developing Countries concluded that Low Income countries collect taxes on average at 10 – 20% of the country’s GDP, whereas High Income countries on the other hand collect on average 40% of their GDP. Where does the challenge lie and why is it that not as much revenue is collected from taxes in the Low Income countries. According to Concord a European NGO Confederation for Relief & Development at least USD 100 Billion is lost by developing countries through weak International Taxation Policies. Multinationals evade social responsibility through their failure to pay the appropriate taxes through ‘Transfer Pricing’. The cases of Google, Apple and a number of other multinationals that were fined by the EU for evading taxes demonstrates that this challenge is not confined to developing nations only. Another factor that negatively impacts development has been observed to be corruption, which is sometimes described as a form of extremely inefficient taxation, not by the state but by individuals.

Building on Kaldorf’s argument on the necessity of resources for economic growth, one may postulate that well a designed taxation system can minimize efficiency losses imposed by taxes, and even raise economic growth rates through the additional raising of revenues that can be spent on public goods and investments. The Taxation policies of most nations are designed to raise revenue, spur development, fund the provision of goods and services from revenues so generated, regulate economic activity, establish a contract of governance between the government and the people and redistribute wealth and income.

Funding of budgets in developing countries is most often undertaken through three major sources- taxation, debt/borrowing (internal or external) and grants.

An examination of the East Africa Region reveals the following data for 2017 on the performance of the economies:

Table 1: Analysis of Region’s 2017 GDP & Economic Performance

Area

Kenya

Tanzania

Uganda

Rwanda

GDP- USD Million

76,642

52,453

35,068

9,133

GDP Growth rate %

4.9

7.1

4.4

6.2

Population (million)

46.6

51.6

44.0

11.8

GDP Per Capita (USD)

1,645

1,017

797

774

Budget Deficit % of GDP

-7.2

-2.1

-4.8

-4.6

Total Public Debt (USD  million)

45,195

21,933

10,530

4,129

Tax Revenue (USD million)

14,501

5,571

3,773

1,487

Source: KPMG, Budget Brief: Kenya 2018

An examination of the 2018/19 Budget for Kenya reveals an attempt by the Cabinet Secretary of Finance to promote further growth in the economy through a managed fiscal policy, whilst at the same time reducing the budget deficit whose past financing through debt has incurred the wrath of citizens and their representatives in Parliament.

Table 2: Analysis of Kenya’s Tax Revenue & Expenditure: 2016/7 – 2018/9

Area

2018/9

2017/8

2016/7

Tax Revenue- USD Billion

19.49

14.67

12.77

Total Expenditure-USD Billion

25.62

27.88

22.83

Recurrent Expenditure- USD Billion

15.50

17.62

13.55

Development Expenditure- USD Billion

6.25

6.71

6.25

Transfer to Counties- USD- Billion

3.87

3.45

3.02

Source: Kenya National Bureau of Statistics (KNBS) and 2018 Budget Statement y Cabinet Secretary

Tax Revenue collection for Kenya has averaged at 20% of the GDP over the last decade, with Government expenditure sometimes reaching 27% of GDP. Much more requires to be done to ensure that revenue raised through taxes reaches the levels of developed economies of 40% and above of GDP. In an effort to stimulate growth in the economy the Cabinet Secretary has pursued various fiscal initiatives. For the Financial Year 2018/9, the Government has focused on the provision of what it has referred to as the Big Four Agenda- Affordable Housing, Manufacture, Universal Health Care, Food and Nutrition. Additional emphasis has been placed on these areas with more funding focused here than in prior years with the aim of not only providing the desired services for the people but growing the economy and creating more jobs. However an analysis of the jobs created over the years in Kenya, clearly shows that these have mostly been in the informal sector, which by its very definition does not easily directly contribute revenue to the economy through direct taxes.

Table 3: Annual Job Creation: 2016/7- 2018/9 (Kenya)

 

2018/9
(projected)

2017/8

2016/7

Total New Jobs Created

800,000

898,000

833,000

Informal

700,000

787,000

747,000

Formal

100,000

110,000

84,800

Source: Kenya National Bureau of Statistics (KNBS) and 2018 Budget Statement y Cabinet Secretary

To generate the additional tax revenue, the Cabinet Secretary has introduced or modified various taxes. New taxes include the National Housing Development Fund where 0.5% of an employee’s gross salary is deducted, with the employer paying an equivalent amount. In addition an attempt has been made to widen the tax base by including more from the informal sector. A presumption tax based on the cost of Single Business License at 15% for those with an annual turnover of less than KES 5 million (USD 50,000). This tax will replace the unsuccessful “Turnover Tax” which was meant to be based on the turnover of the informal businesses, but which had little impact. As all businesses regardless of their sizes must register, the government believes it shall be successful in getting them to pay the Presumptive Tax.

Corporation Tax has been reduced to 15% for those entities constructing more than 100 low cost housing units per year. In order to promote business and exports, Corporation Tax for those setting up business in the Export Processing Zones has been reduced to 0% for the first 10 years, 25% for the next 10 years, and 30% thereafter.

A ‘Robin Hood Tax’ an Excise Duty of 0.05% has however been levied on financial transactions of KES 500,000 or USD 5,000, this is in recognition of the fact that trillions of shillings are transacted through the banks and mobile money.

It is clear that the Cabinet Secretary has given with one hand and taken with the other, in attempt to stimulate economic growth. Past initiatives that have not been broad based, or that were observed to be punitive have often not generated the desired income nor spurred the requisite growth. It is therefore very likely that Kenyans will find alternative ways to circumvent the Robin Hood Tax on money transfers.

The greatest impact on revenue generation through taxation has been made when the system was tightened through the introduction of I-Tax- a digital tax platform that all citizens in employment must be registered with.

In addition the government has integrated its services through an extensive program of digitization. This commenced with all Kenyans over the age of 18 years requiring a Personal Identification Number (PIN) which is not only on an e-platform, but is necessary for almost all formal transactions including opening of bank accounts, application for government services and payment of taxes. This has enabled the government to generate information on tax payers and monitor this against what they are actually paying.

Summary

The Kenyan economy has grown steadily over the years with much of this growth being spurred on by good fiscal policy. Kenya unlike its neighbours has reduced to a minimum its dependence on foreign aid assistance in the funding of its annual budget, depending instead on its own revenue generation through taxation. The Cabinet Secretary or Minister of Finance as the case might have been used astute fiscal policies in order to spur or manage development. The strengthening of the taxation system in Kenya such as that undertaken through the introduction of the I-Tax and PIN system as well as the digitization of the tax system itself, has possibly made greater impact on the revenue collection through taxes than other measure. This increased revenue has enabled various Kenyan governments to ensure the growth in size of the economy is maintained.

Revenue collection through taxation is still however negatively impacted through inefficiencies brought about by corruption and unfair international trade practices and transfer pricing, which will have to continue to be reined in.
 

                              
                              

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