How minimum tax will step up revenue growth

Most countries are walking a tight rope as they strive to mobilise adequate domestic revenue to fund development and growth agenda. Kenya has focused its efforts on reducing poverty and inequality, ensuring adequate health and education, and development of basic infrastructure to support more inclusive growth. 

Despite significant progress, the country still faces challenges in domestic resource mobilisation characterised by a narrow tax base, limited natural resource endowment and significantly low compliance levels. The need for strategies to revolutionise the tax legislative framework and improve the capacity of the tax administration cannot be overemphasised. 

This has informed the need for a raft of new strategic fiscal policy measures in every fiscal budget cycle with a key emphasis on tax-base expansion. Similarly, deliberate steps have been taken to improve the tax revenue administration, with focus on development of staff capacity to support tax reforms and compliance management.

Robust reforms focus not only on ways to increase revenue collection, but also see how to do so in ways that consider efficiency and equity impact of particular policy choices. It is therefore important to focus on sustained revenue mobilisation and consistent institutional development over time as well as attention to basic processes and reforms.

The more a country progresses development-wise, the more resources government requires. The fruition of the Big Four agenda, for instance, is heavily reliant on ability to raise domestic resources.

Tax-base expansion is a key strategy for enhancing revenue mobilisation. Globally, as countries look inward for local growth options, the government has to rethink its revenue base to expand it for sustainable domestic resource mobilisation.

This strategy is among key initiatives outlined in the Kenya Revenue Authority’s (KRA) strategic corporate plan. Through exploration of untapped sectors of the economy, expansion of the tax-base ensures more revenue in the government coffers, without necessarily putting additional burden on taxpayers already in the tax net. As such, tax-base expansion aligns with equity and fairness principle which epitomises an effective tax administration system. In addition, tax-base expansion promotes inclusivity thereby ensuring the tax burden is evenly shouldered across board.

To expand the tax-base government, through Finance Act 2020, introduced new tax measures from January 1. One of the tax measures implemented early this month is the minimum tax. The minimum tax is payable by business entities that are carrying out business and have physical presence in Kenya. The tax will be payable at a rate of one per cent of the gross sales.

Contrary to industry concerns, business enterprises registered under the turnover tax (ToT) regime will not be liable to pay the minimum tax. The qualifying threshold for ToT registration is an annual turnover exceeding one million shillings but less than Sh50 million.

Essentially, the minimum tax will be an alternative tax to instalment tax and will only be payable where it exceeds the instalment tax. In cases where the instalment tax is higher than the minimum tax, the former will be due. With this arrangement in place therefore, there will be no case of double taxation as it has been the fear of many industry players.

Apart from tax-base expansion, the minimum tax will level operating playfield for businesses by ensuring that all business ventures contribute towards the government effort to mobilise resources for growth and development. It is unfortunate to note that there have been cases where some entities have been avoiding payment of instalment taxes by perpetually declaring losses.

 -CPA Maurice Oray is the Deputy Commissioner for Corporate Policy at the Kenya Revenue Authority.