East African bud­gets are gear­ing for growth

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker

EAST African gov­ern­ments have in­creased their an­nual bud­gets for 2015-16 with more spend­ing di­rected to­wards se­cu­rity and key sec­tors ex­pected to drive growth. Ac­cord­ing to East African news pub­li­ca­tions this comes against the back­drop of fal­ter­ing rev­enue col­lec­tion and de­clin­ing donor sup­port, cre­at­ing a fer­tile ground for in­creased do­mes­tic bor­row­ing.

The Kenya Bud­get and Ap­pro­pri­a­tions Com­mit­tee re­port on the 2015 Bud­get and Pol­icy State­ment of March 2015 raises con­cerns about the dan­ger of bal­loon­ing public ex­pen­di­ture. De­spite set­ting the tar­get for to­tal ex­pen­di­ture for 2014-15 at 28.4% of GDP in the 2014 state­ment, this ap­pears to have in­creased to 33.1% of the GDP as per the Bud­get and Pol­icy State­ment 2015. The na­tional trea­sury tar­gets rev­enue to grow by 21.8% of GDP over the medium term, but the com­mit­tee notes that there has been a con­tin­ued ten­dency of lay­ing am­bi­tious tar­gets which over time seem un­achiev­able and with no clear mea­sures as to how this is to be achieved.

The tax and rev­enue re­form ob­jec­tives set by the pol­icy state­ment 2014 have also not been achieved. The sim­pli­fi­ca­tion of the tax sys­tems and en­act­ment of mod­ern tax laws through the sub­mis­sion of the Ex­cise Duty Bill and Tax Pro­ce­dure Bill to Par­lia­ment in 2014 were moved to 2015, the In­come Tax Act that was to be com­pleted in 2015 has been moved to 2016 and the re­or­gan­i­sa­tion and op­er­a­tional­i­sa­tion of the in­ter-de­pen­dent In­land Rev­enue Agency and the Cus­toms and Bor­der Pro­tec­tion Agency, which was to be achieved in 2014, has also been moved to 2015.

Ac­cord­ing to the com­mit­tee it is not clear how some of th­ese re­forms will im­me­di­ately af­fect or drive rev­enue col­lec­tions. Rather, im­proved im­ple­men­ta­tion of ex­ist­ing poli­cies such as cap­i­tal gains tax, value added tax and in­come tax could greatly en­hance rev­enue col­lec­tions dur­ing the com­ing fi­nan­cial year.

In a fur­ther bid to fund the ex­pand­ing bud­get, Kenya’s Bud­get Com­mit­tee is re­view­ing the pro­posal by the Kenya Rev­enue Author­ity to abol­ish cer­tain tax in­cen­tives, in­clud­ing the 10-year tax hol­i­day en­joyed by for­eign in­vestors in the ex­port pro­cess­ing zones. Ac­cord­ing to the rev­enue author­ity “the ef­fect of such con­ces­sions and in­cen­tives on in­vestor con­fi­dence re­mains min­i­mal”.

The 2015 Bud­get and Pol­icy State­ment prom­ises to have a busi­ness reg­u­la­tory re­form strat­egy in or­der to im­prove Kenya’s global rank­ing un­der the World Bank Ease of Do­ing Busi­ness In­di­ca­tors to not more than 60 by 2016. How­ever, there is no clear strat­egy as to how this will be achieved. The 2015 state­ment also again refers to the need to es­tab­lish tech­nol­ogy-based green industrial parks as well as spe­cial eco­nomic zones and free trade ar­eas to at­tract for­eign di­rect in­vest­ment and new tech­nol­ogy. Th­ese tar­gets were also con­tained in the 2014 state­ment.

In Rwanda, the 2014-15 re­vised bud­get of $2.46bn is pro­jected to in­crease to $2.47bn for fis­cal year 2015-16. Donor fund­ing is ex­pected to decline to 5.7% of GDP in 201516 from 7.3% in 2014-15 as devel­op­ment part­ners opt to chan­nel funds di­rectly to spe­cific projects and non-gov­ern­men­tal or­gan­i­sa­tions.

Rwanda’s broader strat­egy to wean its econ­omy off aid and speed up devel­op­ment in­cludes the in­tro­duc­tion of a new In­vest­ment Code, which was passed by the par­lia­ment in Fe­bru­ary, re­plac­ing the ex­ist­ing 2005 leg­is­la­tion.

The In­vest­ment Code aims to limit in­cen­tives to in­vestors in pri­or­ity sec­tors (such as en­ergy, ICT, trans­port and lo­gis­tics, im­proved agri­cul­ture, tourism, man­u­fac­tur­ing, busi­ness process out­sourc­ing and real es­tate) as op­posed to the cur­rent blan­ket regime. The new leg­is­la­tion pro­vides for a pref­er­en­tial 50% re­duc­tion in cor­po­rate tax for in­vest­ments in pri­or­ity sec­tors, in­creased from the cur­rent 30%. The new law also pro­vides for clearly de­fined tax hol­i­days of up to seven years depend­ing on the sec­tor and size of in­vest­ment.

Ac­cord­ing to Tan­za­nia’s bud­get es­ti­mates re­leased in April, it plans to spend $12.31bn in 2015-16, com­pared to the cur­rent bud­get of $10.87bn. Its Par­lia­men­tary Bud­get Com­mit­tee raised con­cerns over dis­ci­pline in man­age­ment of public funds and the ‘“un­con­vinc­ing” trend in im­ple­men­ta­tion of the 2014-15 bud­get.

Donors have with­held more than three-quar­ters of $558m of promised bud­get sup­port to Tan­za­nia (one of Africa’s big­gest per capita aid re­cip­i­ents) in the 2014-15 fis­cal year fol­low­ing al­le­ga­tions of high-level graft in the coun­try’s en­ergy sec­tor. To off­set re­duced donor fund­ing, the gov­ern­ment plans to boost do­mes­tic rev­enue col­lec­tion and im­ple­ment a new VAT law.

The VAT Bill 2014 was ap­proved by the Tan­za­nian par­lia­ment late in 2014, but still needs the pres­i­dent’s as­sent to be en­acted and it is cur­rently not known when the VAT Act will be­come ef­fec­tive. The VAT Bill 2014 aims to ex­pand the tax base by cap­tur­ing most eco­nomic ac­tiv­i­ties, in­clud­ing cross-bor­der op­er­a­tions of elec­tronic and telecom­mu­ni­ca­tions busi­nesses.

Ac­cord­ing to the 2015-16 Ugan­dan Bud­get Frame­work Pa­per, which was pre­sented to par­lia­ment on 2 April, the gov­ern­ment pro­poses to in­crease its ex­pen­di­ture by 19.3% to $5.9bn. In or­der to ad­dress the chal­lenge of low tax to GDP ra­tio, key strate­gic in­ter­ven­tions as per the 2015-16 bud­get will fo­cus on ex­pand­ing the tax base, re­form­ing the struc­ture of tax­a­tion and im­prov­ing ef­fi­ciency in tax col­lec­tion and com­pli­ance. Ini­tia­tives in­clude com­plet­ing the Na­tional Iden­ti­fi­ca­tion Project, link­ing busi­ness reg­is­tra­tion data­bases to the Uganda Rev­enue Author­ity and also link­ing lo­cal gov­ern­ments and the Kam­pala Cap­i­tal City Author­ity trade reg­is­tra­tion to the rev­enue author­ity.

Although Uganda abol­ished most tax in­cen­tives in the 2014-15 fi­nan­cial year (which was ex­pected to in­crease rev­enue with $74.3m), it an­nounced in April that it will be ex­empt­ing op­er­a­tors in its oil and gas sec­tor from pay­ing VAT on up­stream in­vest­ments in an at­tempt to at­tract in­vestors to this sec­tor and to en­cour­age growth.

The re­gion’s fi­nal 2015-16 bud­get pro­pos­als are sched­uled to be ap­proved by the re­spec­tive par­lia­ments this month.

Bud­gets in­creased but spend­ing plans still be­ing rolled over from pre­vi­ous year

Celia Becker is an Africa Reg­u­la­tory and Busi­ness In­tel­li­gence ex­ec­u­tive at ENSafrica.

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