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Tax policy key to rallying the elusive public backing


Ideas & Debate

Tax policy key to rallying the elusive public backing

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Summary

  • Despite this week’s about-face by the Energy and Petroleum Regulatory Authority (Epra) on fuel price hikes, we refuse to discuss multiple levies and taxes that make up half of the pump price.
  • Don’t believe Parliament’s promise to investigate this price make-up when they earlier lined up like lemmings to add eight per cent value-added tax (VAT).
  • Beware the International Monetary Fund’s (IMF) “policy suggestion” that this Covid-19 moment is a good time to double VAT on fuel to the standard 16 per cent rate as a “positive shock” for Kenya.

Despite this week’s about-face by the Energy and Petroleum Regulatory Authority (Epra) on fuel price hikes, we refuse to discuss multiple levies and taxes that make up half of the pump price.

Don’t believe Parliament’s promise to investigate this price make-up when they earlier lined up like lemmings to add eight per cent value-added tax (VAT). Beware the International Monetary Fund’s (IMF) “policy suggestion” that this Covid-19 moment is a good time to double VAT on fuel to the standard 16 per cent rate as a “positive shock” for Kenya.

But, is our tax agenda about transactional or policy questions? Let’s tease out a couple of angles.

In addition to recommendations to improve revenue targeting, forecasting, administration, collection, reporting and reconciliation, the parliamentary Public Accounts Committee (PAC) report on the national government’s 2017/18 financial statements proposes the formation of “a national task force to review the national tax systems (sic) with a view to developing a national tax policy based on principles of equity and fairness, low compliance and administration cost, flexibility, economic growth, and efficiency”.

The Treasury has three months to form the task force; and three more to report back to Parliament. Yet, in a couple of weeks, the same Treasury is poised to spring the 2021 Finance Bill on Kenyans. We know the 2021/22 tax targets. What we don’t know is the measures or rationale.

But it’s more than that. First, thinking about tax beyond super-aggressive revenue collection to pay for public spending. For Kenyans as citizens with rights and obligations, not customers seeking services.

Second, as an evaluation of the policy progress of our vaunted Tax Modernisation Reform since 1986.

At the time, our Bretton Woods-assisted thinking was two-fold. Shift reliance from direct taxes to indirect taxes to finance the budget. Use this focus on consumption taxes to reduce the apparent income tax burden to stimulate savings and investment. Let’s hold our final thought for the end.

The Building Bridges Initiative (BBI) report we didn’t read heroically identifies tax policy as one of 12 proposed policy guides that don’t need a referendum. The guide opens with the earth-shaking declaration that “without tax, there can be no Kenya”, and offers that “tax is the basis of government and…the promises and commitments the Kenyan people have made for themselves in the Constitution”.

It suggests that “tax policy is key for (sic) incentivising the right behaviour, and vice versa”. Then, after outlining a couple of principles of good tax policy — equity, adequacy, simplicity, neutrality (efficiency) — it concludes, after bemoaning the lack of policy “for a country with such a sophisticated financial system and mixed economy”, that “different political dispensations, as reflected in political party platforms, should have the…opportunity to make tax policy more progressive, flat or regressive”.

Given that reported upper-end estimates of the constitutional cost impact of BBI is an additional 10 to 15 per cent of our already unsustainable expenditure framework, that is, excluding policy, legal and administrative proposals, let’s park these “benevolently taxing big brother” BBI thoughts for now.

Our recently signed-off IMF programme is more pragmatic on matters tax policy. For example, from June, new risk-based compliance strategies will be pursued for “two to three non-compliant sectors” — professionals, high-net-worth individuals and the real estate sector — as well as the extractive sector, while audits in high-risk sectors will prioritise large and medium importers and VAT-dodging sectors.

To recall, the 2021 Finance Bill looms. Expect the usual transactional impact analysis of such provisions.

But, here is my roundabout third and final tax policy thought, using our fiscals in monthly equivalent. This year (2020/21) we project a final collection of Sh150 billion per month in revenues, with taxes contributing Sh120 million, of which half is income tax — so much for tax reform.

By spending Sh240 billion, the gap to borrow this year is Sh90 billion a month, with half domestically funded, crowding out the private sector, and potential tax yields from the productive use of that credit.

Next year (2021/22) we’re looking at a monthly tax take of Sh140 billion (Sh20 billion more — equally split between income and other taxes) out of the revenue of Sh170 billion with monthly spending at Sh250 billion, which equates to falling Sh80 billion short each month.

Remember President Uhuru Kenyatta’s Sh2 billion a day (Sh60 billion a month) number? OK, bounce that Sh60 billion “monthly loss” against either of the top-line numbers, or individual components (in 2020/21 — direct and indirect taxes Sh60 billion each, or counties Sh30 billion, wages and debt interest Sh40 billion each, procurement/service delivery Sh45 billion or development Sh50 billion).

Is this fruitless pursuit of uncontrolled expenditure our unwritten tax policy? Is the Finance Bill part of our “extremist tax and spend” design? Shouldn’t we move from “whose country is this” to “this is my country” on tax policy? Even better, how do we build vertical accountability into our tax system in a way that involves taxpayers in tax policy reform? Because, as Winston Churchill said, “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle”.

Hence chicken and egg: tax policy, or Finance Bill first? Answers on the back of your NIL return, please!

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