Why Kenya needs a stable and predictable tax regime

Anthony Mwangi. It is through taxation that the government works towards the efficient provision of public goods and services. [File, Standard]

The importance of predictable and stable policies in driving the realisation of a country's socio-economic goals cannot be over-emphasised. One of the key elements on this front is taxation, which is fundamental for any government in raising revenue.

It is through taxation that the government works towards the efficient provision of public goods and services.

To the investors, a stable tax regime allows businesses to consciously make investment decisions without worrying about the uncertainty and costs associated with reviews of taxation laws.

An unstable and unpredictable tax regime does the opposite - hinders investors' progress, thus stagnating a country's growth.

A look at Kenya's taxation regime raises three key concerns - lack of clear tax policy objectives; erratic changes in the tax code; and multiple taxation at the national and county levels of government.

I will share shortly some examples of how unpredictable policies negatively impacts business and the economy.

An example of unpredictability and instability of our tax regime is the proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations, 2023 that seek to increase the rates of excise stamps for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products and export products subject to excise with effect from 1st March 2023.

The proposal comes barely four months after a 6.3 per cent inflation adjustment on specific excise tax rates that was effected on October 1, 2022, impacting cosmetics, confectionary, alcoholic and non-alcoholic beverages, including bottled water, and tobacco and nicotine products, among other products.

Three months before the inflation adjustment, there was an increase in excise taxes from July 1, 2022 by between 10 per cent and 20 per cent through the Finance Act, 2022. From the onset, our position has been that the government needs to retain the current charges on the excise stamps.

Another example is the limitation of interest deduction to 30 per cent of Earnings Before Interest Tax, Depreciation and Amortisation (EBITDA) in the Finance Act, 2021.

This measure restricted the amount of interest and other financing amounts that a company may deduct in computing its profits for Corporation Tax purposes. The EBITDA policy harms capital-intensive industries, such as manufacturing, housing and transport. Combined, these industries contribute 25 per cent to the country's GDP.

The limitation of interest deduction to 30 per cent of EBITDA goes against the government's commitment to driving industrial growth in the country.

Such tax provisions shall hinder investments and hurt State priorities by slowing down economic growth, generation of tax revenue as well as job creation. Specifically, EBITDA shall impede the realisation of the Affordable Housing goal and increase investment costs in the manufacturing, transport, and housing industries.

The ideal solution we are advocating for is to revert to the pre-Finance Act, 2021's basis for interest restriction under thin capitalization rules, whereby the ratio of debt to equity was 3:1.

Revenue collection

It is critical to note that Kenya's tax system is too complex, which leads to losses in revenue collection.

Additionally, revenue generated from taxes was 13.8 per cent in the financial year 2020/21, which is below the required East African Community's target of 25 per cent.

This is despite heavy investments by the government to transform the tax system. What, then, is an ideal tax system for Kenya? The Oklahoma Institute of Policy describes a good tax system as one that meets five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease.

One of the ways of reaching these basic conditions is by finalising and implementing the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code. If implemented, it shall drive our competitiveness, enable the creation of stable and predictable tax policies that support long-term planning by businesses; and drive export-led growth.

Sudden changes in fiscal policy and regulations divert the industry's resource allocation from productivity to meeting the costs associated with changes towards fast compliance.