Plan to improve tax collection
KENYA’S ability to generate higher revenue by introducing new taxes may have reached a peak, according to the World Bank.
Tax revenue as a ratio of gross domestic product fell to the lowest level in more than a decade in the fiscal year through June and the only way to turn this around is through reducing exemptions, improving collection administration and expanding the tax base, the US-based lender said.
“Given the continuous revenue decline at a time when nominal GDP is growing, the ability to raise more revenue could have plateaued and significant structural reforms may be needed to reverse this worrying trend,” the lender said in its economic update on Kenya released yesterday.
The government seeks to collect 1.69 trillion shillings ($16.8 billion) in the current fiscal year to help narrow the budget deficit to 5.9 percent of GDP from 6.9 percent.
To do this, the Treasury has introduced measures including an 8 percent value-added tax on petroleum products and doubled excise levies on mobile-money transfers.
“What is happening right now is that you are increasing taxes on an already-compliant population,” Einstein Kihanda, chief executive of Nairobi-based ICEA Lion Asset Management Ltd, said. “You can only mine so much and at some point you will start getting diminishing returns.”
Lower profitability in the banking sector and an increase in the number of categories exempt from value-added tax contributed to a loss in revenue.
The state plans to overhaul its income-tax law and will soon introduce draft legislation to make collection more efficient, Treasury secretary Henry Rotich said. It may include a 35 percent corporate-tax rate.
“We are either at breaking point or very close,” Kihanda said. “If you look at revenue growth, it clearly shows there is a need to deliberately rethink how we go about levying taxes.”
While the World Bank expects slower economic growth in the second half, it raised Kenya’s 2018 forecast by 0.2 percentage points to 5.7 percent. | Bloomberg