Tax is the most important source of revenue for the Government.
However, Adam Smith, the famous economist way back in the 18th century set the four rules that should govern the system of taxation.
Rule one requires that citizens contribute to the support of the Government.
This should be in proportion to the revenue which they respectively enjoy under the protection of the State.
Rule two is that the tax everyone is bound to pay ought to be certain and not arbitrary.
That is, the time of payment, the manner of payment, and the quantity to be paid ought to be clear and plain to the contributors.
Rule three is that every tax ought to be levied at the time or in the manner that is most likely to be convenient to the contributor.
The last rule is that every tax ought to be fixed to take out as little as possible from the contributors and above what it brings into the public treasury of the State.
The Kenyan tax system is biased towards the belief that taxes must be based on an individual’s ability to pay but tend to ignore the benefit principle.
The benefit principle insists on the equality between what the taxpayer pays and the benefit derived from that tax.
Cost-effective
The Government must raise revenue through taxes, but such taxes must be fair, reasonable and cost-effective in terms of implementation.
Unfortunately, many of our tax laws are incomprehensible to many taxpayers.
However, we have to give KRA credit on their attempt to educate taxpayers.
The two taxes that are difficult to understand are capital gains tax and gambling tax.
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The rule is to tax income - the difference between revenue and expenses as defined within tax laws.
The focus here is on tax on gambling wins. One of the cardinal rules of taxation is equity, and the tax law on gambling downplays this rule.
The tax law is complex, and many small-time gamblers have neither the time nor the capacity to peruse through Betting, Lotteries and Gaming Act (1966).
The Act is specific on rules and regulations to abide with when betting.
Up to 2018, there were no taxes on winnings, yet the 1966 Act required that tax is chargeable on gaming revenue at the rate of 15 per cent.
The law now requires that betting companies withhold winnings at the rate of 20 per cent.
Therefore, if you bet with Sh10,000 and win only Sh8,000 you are paid Sh6,400 and the Sh1600 is remitted to Kenya Revenue Authority.
This is despite losing your 2,000. The gambling income tax law is not clear on winnings or ignores how gambling losses are to be accounted for.
This arises from the argument that gambling cannot be a trade or business. Unfortunately for too many Kenyans, gambling is a business, and professional gamblers exist.
In the US, gambling income is taxed at a flat rate of 30 per cent, but gamblers are allowed to deduct gambling losses unless you are a nonresident. Maybe we can borrow from them.
Tax rates
The US tax law states that losses from gambling may be deducted from the extent of gains from gambling activities.
Therefore, in America, the taxpayer’s gambling is treated as a business.
Our law should make a distinction between recreational gamblers and professional gamblers. Distinction gamblers must be visible in terms of the difference in tax rates.
In the UK, winnings from gambling are not taxable and thus losses cannot be deductible. The argument is that gambling lacks predictability.
In Germany, on the other hand, winnings are taxed at the rate of five per cent.
In India, gambling is elaborately defined. In fact, the individual states enact legislation to govern gambling and there exist price competition laws.
Service providers making payment to winners must withhold tax of 30 per cent.
In South Africa, the law recognises professional gamblers - a gambler who has no other job and is taxable. They must, however, declare their expenses income.
Here, gambling income is considered nontaxable if it is an occasional hobby.
However, tax can apply to control bad behaviour.
-The writer teaches at the University of Nairobi