Treasury’s new taxes to fund Sh1.6 trillion expenditure

By MARK KAPCHANGA

The Government appears intent on carrying out its crusade to raise taxes, even for the poorest households. Hardly has the calamitous impact of the reviewed Value Added Tax (VAT) been completely felt, it is already projecting an evaluation of the Incomes Tax Act and Excise Act that is likely to see new wave of price increases in the various economic sectors.

At the International Monetary Fund’s ‘Ready for Take Off’ conference in Nairobi last week, Cabinet Secretary to the National Treasury Henry Rotich said the new revenue streams would finance Vision 2030 projects.

Untaxed zones

From July 1, all goods imported into Kenya were charged 1.5 per cent of the customs value of the goods. The revenues generated, about Sh15 billion, would finance the construction of a standard gauge railway line from Mombasa to Kisumu.

This week, the Finance Bill will be seeking to bring on board some untaxed zones, such as gaming and betting. The gamblers would pay at least 20 per cent of their loot to the Kenya Revenue Authority.

Under the Income Tax Act, the Government is also pursuing an assessment of the controversial capital gains act that will see individuals’ and corporations’ profits realised from the sale of assets charged.

While the casual observation is that they will raise more revenues, there are fears that the expanded taxes would inevitably come with a huge economic cost. The new Railway Development Levy, for instance, would have adverse effect on the economy as Kenya imports all its fuel.

“The cost of doing business and that of living is being pushed up. This is hurting our competitiveness,” said Robert Shaw, a public policy analyst. The country, he claims, has lost its attractiveness. “The only thing that pulls investors to Kenya is its strategic location. It is pathetic.”

Unanimously, critics say a confluence of these fiscal changes would fall heavily on the entrepreneurial sector despite its capability of bringing jobs, new ideas and products to market. Worse, they are going to do little to explain the widening gap between the rich and the poor.

“New jobs are mainly being generated in the informal sector. This means the real economy is not growing that much in terms of productiveness,” said Mr Shaw. Last year, the informal sector created 591,400 new jobs as compared to the 587,200 jobs created in 2011.

This represented 89.7 per cent of all new jobs created.

Broken promise

Economists say the past tax measures have broken the premise under which higher tax operates to favour the rich more than the poor. The high taxes, they observe, would discourage work and depress savings as taxpayers rearrange their tax affairs and rebalance their investments towards tax-exempt government bonds.

“Every time a taxpayer makes a decision based on tax considerations rather than economic merit, the entire economy loses it,” he said. The matter is as distressing to millions of Kenyans as is with the Finance, Trade and Planning Committee Chairman Benjamin Lang’at.

He says the revenues raised from the new tax measures should be prudently managed.

“The tax reviews are informed by the need to shift the country’s economic growth to the first lane,” said Mr Lang’at.

“But this can only happen if the funds are channelled to development-oriented projects.”

Despite the constricting revenues, a huge chunk of Government revenues are spent on recurrent expenditure. These are funds set aside to cover for the salaries of civil servants, who make up 1.3 per cent of the population. In this financial year, about 42.9 per cent of total recurrent expenditure will go to compensation of employees. This implies that fewer resources will be ploughed back for investment purposes. Indeed, out of the Sh225 billion allocated to state corporations in the 2012/13 budget, Sh135 billion was spent on employee salaries and wages.

Experts say the principle behind tax changes is quite fine. But the country’s expenditures are irritably extraordinary. This calls for civil service reforms to bring down the high recurrent expenditure.

Capacity

“It is a big concern. Parliament is in constant chat with the Treasury to cut wastages by 30 per cent,” said Mr Lang’at.

The Cabinet Secretary reckons that focus is now on Excise Duty and the Income tax before the review shifts to address high public expenditure. “We want to make income tax more progressive; those who are able to pay should pay more so as to lessen the burden faced by the poor.”

He said the review of the income tax is not a priority, as the Treasury assesses the successes or failures of the new VAT law.

“If it proves a success, we may even opt to review the income tax downwards.”

On the expenditure bit, the Government says it would automate its procurement to ensure the government gets the right prices for goods and services it procures.

“We are reviewing our priorities. We have been told that our education allocation is quite huge compared to other countries. We are auditing every sector of the economy to get the precise mix of resources,” explained Rotich.

Analysts say Mr Rotich has a hard task ahead, as the country’s debt levels surge. As at June, Kenya’s external debt had reached Sh843.6 billion as compared to last year’s Sh774.6 billion, while the domestic debt hit Sh1.05 trillion, Sh192.2 billion more than that of June 2012.

 Estimated ordinary revenue covers only 58 per cent of Rotich’s Sh1.6 trillion budget. “If the projected revenue targets are not met then this could potentially force the Government to seek more domestic borrowing,” indicated reviews by economic experts.

In the last financial year, for instance, domestic borrowing target was Sh165.7 billion. However, this was later revised upwards by Sh4.1 billion.

Pressure on rates

Any increment in the domestic debt means investments will be expensive as it exerts more pressure on interest rates, exchange rates and the country’s competitiveness.

Kenyatta University Economics Lecturer Emmanuel Manyasa says increased borrowing and upward revision of the debt ceiling is influenced by anticipation of oil revenue.

“Prudent financial management calls for anticipation of expenditure and costs only. You cannot expect revenues until it is realised,” said Dr Manyasa.

The don said the country was spending too much on activities it should not such as additional allowances for extended sittings for MPs.