Kenya’s ability to generate higher revenue by introducing new taxes may have reached peak level, according to the World Bank.
Tax revenue as a ratio of the gross domestic product (GDP) fell to the lowest level in more than a decade in the fiscal year through June 2018.
The only way to turn this around is through reducing exemptions, improving collection administration and expanding the tax base, the Washington-based lender said.
“Given the continuous revenue decline at a time when nominal GDP is growing, the ability to raise more revenue could have plateaued and significant structural reforms may be needed to reverse this worrying trend,’’ the World Bank said in its economic update on Kenya released Thursday last week.
Kenyan tax revenue relative to the size of the economy is dropping. The government seeks to collect Sh1.69 trillion shillings in the current fiscal year to help narrow the budget deficit to 5.9 per cent of GDP from 6.9 per cent.
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To do this, the Treasury has introduced measures including an eight per cent value-added tax on petroleum products and doubled excise levies on mobile-money transfers.
“What is happening right now is that you are increasing taxes on an already-compliant population,” said Einstein Kihanda, a chief executive officer of Nairobi-based ICEA Lion Asset Management Ltd in an interview.
“You can only mine so much and at some point, you will start getting diminishing returns.’’
Lower profitability in the banking sector and an increase in the number of categories exempt from value-added tax contributed to a loss in revenue, according to the report.
raft legislation
Treasury Cabinet Secretary Henry Rotich said earlier this month that the State plans to overhaul its income-tax law and will soon introduce in Parliament draft legislation seeking to make the collection more efficient.
It may include a 35 per cent corporate tax rate. “We are either at breaking point or very close,’’ Kihanda said. “If you look at revenue growth, it clearly shows there is a need to deliberately rethink how we go about levying taxes.”
While the World Bank expects slower economic growth in the second half, it raised Kenya’s 2018 forecast by 0.2 percentage points to 5.7 per cent, citing rebounding agriculture and manufacturing, as well as a robust services sector.
The fourth quarter 2017 expansion will be hard to replicate this year, it said.
The lender also forecasts growth at 5.8 per cent next year and a six per cent in the following year as actual output catches up with potential and private-sector demand recovers.
“Kenya is like a Ferrari that’s going at 60 kilometres per hour but is capable of doing 150km per hour, we need to do some structural reforms to get there,” said Allen Dennis, a World Bank senior economist.
