NGUYU: Plucking tax feathers without killing the goose

On April 25, President Uhuru Kenyatta assented to the Tax Laws (Amendment) Bill, 2020. By May 6, the Finance Bill, 2020 was submitted for debate by the National Assembly.

The three highlighted measures under the Income Tax Act (ITA) will take effect from January 1, 2021. First, the Residential Rental Income Tax has been streamlined to include individuals with residential income of up to Sh15 million per annum, from Sh10 million per annum at a rate of 10 per cent. 

Secondly, a minimum tax has been introduced based on one per cent of gross income for individuals who are not exempt within the ITA, to be paid in instalments. 

Lastly, the Finance Bill, 2020 reintroduces the digital services tax, to be paid on income believed to have been earned through online market platforms. 

Several tax measures were rejected by the legislators, owing to their possible effects on disposable income and environmental protection. 

For instance, the proposal to tax income earned by NSSF was vetoed, as it would lead to lower incomes being paid out to members.

The bill also suggested scrapping of tax exemptions on monthly pension for persons aged 65 and above. Tax on previously zero-rated items, such as LPG and manufacturing and assembly of energy-friendly cooking stoves, was also rejected.

TAX SYSTEM

The Tax Laws (Amendment) Act, 2020 framework needs to be designed to encourage efficiency and international adaptability. 

Bearing in mind the principles suggested in Adam Smith’s Wealth of Nations, does Kenya’s tax system promote the canon of equality, where the rich should pay more taxes; canon of certainty on how the tax should be paid and the quantity; the canon of convenience, that is, the mode and timing of payment should be appropriate to the taxpayer, and the canon of economy, which holds that the State should incur minimal costs in tax administration and tax collection?

In 2019, the ordinary revenue target was not realised. The country’s fiscal deficit currently stands at 7.8 per cent as a ratio of GDP against the desired fiscal balance target of three per cent as a ratio of GDP over the medium term.

To address the widening fiscal deficit, the state has proposed tax reforms contained in the Finance Bill, 2020.

In Taxes and the Economy, Willem Vermeend, Rick van der Ploe, Jan Willem Timmer note that tax reform measures should focus on widening tax bases, reducing marginal tax rates, should encourage a shift to environmentally friendly tax systems and consumption-based taxation, meaning taxes should be applied on goods and services such as sales tax/VAT, import duties and excise taxes.

GUIDING PRINCIPLE

In the proposed tax reforms, it is imperative to acknowledge that rational tax reforms call for a balance between supporting domestic revenue mobilisation, equity, simplicity and flexibility to the ever-changing requirements of the economy.

The finance minister during King Louis XIV’s reign, Jean-Baptiste Colbert, offered a classic taxation guiding principle: “The art of taxation consists in so plucking the goose as to get the largest amount of feathers with the least amount of hissing.” 

The Kenyan government has often faced challenges in increasing taxes to cater for growing public expenditure with relatively minimal costs and disruption to the economy, particularly to firms and households.

The writer is an economist