The tax amendments bill before Parliament could sound the death knell for Kenya’s capital markets if allowed to pass in its current form.
Introduced in response to the presidential directive to cushion and stabilise the economy in the wake of the Covid-19 pandemic, it could end up fuelling greater economic turmoil.
The bill has problematic sections and omissions that need to be urgently amended lest the new tax regime decimate trading activity on the bourse, undermine Nairobi’s place as the regional financial hub, drive away foreign and local investors, cause massive job losses in the financial industry and cost the country billions, if not trillions, of shillings in economic opportunities.
The bill also carries significant risks for this and future governments. The national government is one of the largest participants in our capital markets.
It dominates the bond market and has significant equity stakes in blue chip companies — such as Safaricom, where its 35 per cent stake yielded a dividend payout of Sh26.2 billion in 2019. Just like the financial industry, it stands to lose in a major way from a dysfunctional capital market.
The proposal to repeal the tax-exempt status of green bonds and infrastructure bonds, for instance, needs to be rejected flat out.
Barely a year after promising tax exemptions to local and international investors who bought the inaugural green bond in 2019, this is not the time to flip-flop and introduce taxes on interest income.
We cannot afford to lose credibility so flagrantly as we will need the full trust of investors when we return to local and international markets to look for funds in the imminent future.
It is important to note that environmental sustainability — which is essentially what green bonds are designed to fund by matching green projects with affordable capital — is one of the defining issues of our time.
We cannot cut off funding to it — which is what could happen if the bill is passed — without pulling the plug on our future.
In the same vein, the proposal to tax infrastructure bonds is way out of touch with the underlying state of our economy.
The bonds are longer-tenured, meaning their repayment schedules are more manageable and do not put unnecessary strain on government taxes and expenditures as short-term debt.
It is, therefore, self-sabotaging to take away the incentives that attract investors to long-term infrastructure bonds when our public balance sheet is laden with short-term debt.
Data from Capital Economics and the World Bank released earlier in the month shows the amount of money needed to service short-term external debt as a percentage of forex reserves is above 70 per cent, highlighting the need for longer-term debt such as infrastructure bonds.
Other proposals in the bill that pose a clear danger to our capital markets include introducing 14 per cent VAT on brokerage services, which are exempt, increasing withholding tax on dividends for non-residents from 10 per cent to 15 per cent, reducing tax exemption for pooled funds, like retirement schemes, and removing corporation tax incentives for newly listed companies.
The inevitable outcome of these proposed tax changes is that trading activity on the Nairobi Securities Exchange (NSE) will drastically fall to economically unviable levels.
This will not only put dozens of firms in the financial industry out of business but also negate the progress Kenya has made to position itself as the financial gateway to Africa.
The NSE is one of the best-performing bourses in Africa, the current bear run notwithstanding.
Recent innovations such as the launch of M-Akiba, exchange-traded funds and derivatives will come to naught.
The Ibuka Programme, which encourages listings by incubating promising unlisted business, will face challenges as companies shun listing for alternative sources of capital. This will extend the initial public offering (IPO) drought and bear run, eroding wealth from our economy.
Capital markets are the greatest wealth creation machines ever: before capital is turned into profit, it creates jobs and transforms the economy by funding production, supply chains, trade, infrastructure and real estate.
You cannot restrict capital flows through disproportionate tax hikes without seriously undermining long-term economic prospects. You cannot slay the goose that lays the golden egg in pursuit of quick gold.
The capital markets must be shielded from a hostile tax regime, lest we come to the painful discovery that Pulitzer Prize-winning author Thomas Friedman was actually right when he said: “Capital is a coward.”
Mr Kittony, vice-chair, World Chambers Federation, sits on the Board of Directors of the Nairobi Securities Exchange (NSE).
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