Experts poke holes in Ruto's tax proposals, warn of investor flight

President William Ruto during the ground breaking ceremony of the the LAPFUND Bellevue Park Residence Project in Nairobi. [PCS]

In the face of widespread criticism surrounding the Financial Bill 2023, President William Ruto has taken a firm stance, passionately defending his policies as the catalyst to uplift Kenya from its current state.

Speaking to journalists at State House Nairobi on Sunday, the Head of State shrewdly deflected any criticisms around the performance of his administration. He held that some of his publicly challenged decision such as the establishment of an inflated executive are necessary to ensure his government delivers on its plan.

In the appointments such as those of the Chief Administrative Secretary (CAS) which have come under sharp criticism, coupled with accusations of widespread ethnic-centred appointments in his regime, Ruto tactfully evaded the questions.

He centred his arguments on the things he has done since he took command of the government.

Comparing the country to an "economic peer" like South Africa, the president argued that Kenyans are not highly taxed. He said his plan is to increase taxes slowly every financial year, geared to supporting essential public services.

Better policies

Giving an example of member countries of the Organisation for Economic Co-operation and Development (OECD)-an international organisation that works to build better policies for better lives - such countries are taxed as a percentage of their Gross Domestic Product (GDP) ranging between 22 per cent and 34 per cent.

"Are we overtaxed, that is the question we need to ask," said Ruto "Kenya is at 14 per cent... Meaning we are paying half in terms of tax what our peers in our continent have. In fact, if we were to match our peers... by God's grace, maybe next year, we will be at 18 per cent... Maybe like that, because we have to be realistic," added the president.

However, Chief Economist at Mentoria Economics Ken Gichinga says that despite such countries having higher revenue collection to GDP, they don't depend on consumption tax but on property tax.

"They are generating more taxes per GDP but citizens are not burdened," said Gichinga.

According to Dr Samuel Nyandemo, a senior lecturer of economics at the University of Nairobi, Dr Ruto is "not informed on issues of economics and is in his own world."

Dr Nyandemo argues that comparing Kenya's tax rates to those of OECD countries is inappropriate. Instead, he suggests assessing Kenya's tax levels in comparison to its East African peers, where Kenyans currently face the highest tax burdens.

"The tax policy he is advocating for is not going to spur growth. Many investors are going to be forced to look for other markets. It's not friendly to the hustlers or the middle class. Kenya's tax regime is inconsistent, unstable and unpredictable to investors," said Dr Nyandemo.

Ruto has however argued that criticism around taxing is a failure to understand the reality of the situation. He says that it is through a practical tax policy that the country can be able to lift itself from its current economic predicament.

"If we do not pay taxes, we cannot be like the countries we want to be. If we want to be in their shoes. We can't be going backwards."

Revenue collection

Gichinga notes that even though Kenya has the potential for higher revenue collection, techniques and policies to support revenue collection are not in place. "We do not have a tax policy and this leaves the National Treasury Cabinet Secretary to decide on areas where they can raise revenue even when there is no strategy," said Gichinga.

The two economists agree that what Kenya needs is to have a tax policy with a human face and expand the base to rake revenue from other sectors of the economy that "are not contributing their fair share."

"What we have is a policy focused on consumption tax. It's regressive. Value Added Tax (VAT) on household commodities is not the way to go," said Gichinga.

"How can the country raise revenue without burdening citizens? That's the ultimate question. Therein lies the key," added the economist.

According to President Ruto, the proposal put forward by his economic advisory team to increase VAT on petroleum products would generate an additional Sh50 billion.

"This eight per cent we are adding will give us about Sh50 billion and begin to deal with the problem of roads in our country, but to balance it out, I have removed on the same fuel, 3.5 per cent road development levy, two per cent of IDF (Import Declaration Fees), and removed eight per cent VAT on gas," he said.

The economists criticised Ruto's proposal to increase VAT on fuel arguing that it will impose undue pressure on prices of commodities while also increasing production and manufacturing costs.