The mounting fiscal pressures and debt burden plaguing most African countries have seen increased vigour in efforts to enhance domestic resource mobilisation. These efforts have taken the form of modernised tax systems, streamlining tax policies and establishing structures and guidelines for minimising/curbing illicit financial flows. Whilst there have been notable successes, as demonstrated by increased tax revenues in countries like Kenya, many countries are yet to figure out how best to tax a potential source of revenue –  the informal sector.

The informal sector forms a large proportion of the economy in many developing countries. In sub-Saharan Africa, the sector contributes between 25 and 65 percent of GDP.[1] Additionally, it is estimated that the informal sector provides employment for more than 70% of the population in Sub-Saharan Africa.[2] In Kenya, the informal sector has grown substantively over the years and is estimated to account for 35% of Gross Domestic Product[3] while in Uganda and Tanzania, the sector covers more than 50% of GDP.[4]

Size of informal sector in Sub-Saharan Africa | AfDB

The massive contribution of the informal sector to the economy is attributable to its free nature that allows for easy entry and innovation for anyone capable of monetising their skills. The sector also provides an alternative avenue for the trade of goods and services affordably, especially for middle and low-income earners.

Whilst the size of the informal sector portends the potential for broadening the tax base and bridging fiscal deficits, the nature of the informal sector makes it challenging to harness this potential. The architecture of the sector comprises largely unstructured and unregistered businesses, which makes it difficult for the government to capture their contribution to the economy using mainstream tax structures. The fluid structure of the sector means informal workers are not subjected to paying VAT as is the case with formal businesses. In essence, the tax compliance structures adopted for formal businesses are not effective in taxing the informal sector.

Over the past years, revenue authorities have been keen to streamline taxation frameworks to bring the informal sector into the tax bracket. These have mostly been in the form of a presumptive tax scheme, which manifests as a simplified tax schedule that aims to encourage record keeping and tax computation. Despite the various efforts made, the level of tax compliance among traders remains low. In Kenya, for instance, high administrative costs, low awareness and understanding of the taxes, mistrust and weak structural dialogue between the informal sector and government have contributed to low levels of tax compliance.[5] The rising cost of living also discourages most actors in the informal sector to adhere to these structures and provisions, as most seek to sustain their working capital, amid dwindling profit margins.

Jua Kali workers | Source: Business Daily

In Uganda, the presumptive tax system in place for the informal sector takes the form of a top-down approach where tax authorities impose taxes on businesses and force them to comply. The current relationship between tax authorities and taxpayers resembles that of a “cops and robbers” scenario. This has continued to erode the trust of taxpayers in government, particularly owing to the fact that, to the majority, government has failed in its mandate to deliver public goods and services effectively.[6]

In Tanzania, implementation of the presumptive income tax scheme applied to street vendors has been affected by the lack of a proper regulatory framework to accommodate the use of urban spaces. The presumptive tax requires street vendors to have a business license. But to obtain a business license, one needs a physical address whereas, street vendors operate in undesignated areas. The government, therefore, needs to collaborate with vendor associations to set up good working environments to accommodate street traders.[7]

These cases point to the need for a more pragmatic approach from the government to capture the informal sector within the tax bracket. This should begin by first strengthening communication and engagement with the informal sector actors to foster trust and incentivise them to fulfil their tax obligations. There is also need for more transparency with regard to government budgeting and the utilization of tax revenues.

It is also important to note that taxing the informal sector is not a ‘one size fits all’ affair. As such, efforts to tax the informal sector should begin with defining what the informal sector comprises. The International Labour Organisation uses various operational criteria such as registration, licensing, taxation and labour standards to define the informal sector.[8] Borrowing from this, the informal sector encompasses activities from petty traders operating in the streets of urban centres. For instance, traders involved in the sale of second-hand items like clothes, some in the business of shoe shining, street vendors, carpentry, vegetable selling, repair, construction work among others. The informal sector also comprises of better off ‘urban professionals’ such as doctors, lawyers, architects etc. who operate as unregistered businesses.

However, the definition should be further adapted to fit specific contexts. This definition is critical in establishing appropriate thresholds distinguishing those earning too little to meet VAT or income tax thresholds and those ‘hiding’ in the informal economy to evade taxes. Having a clear definition will chip into realising tax justice, bearing in mind that the informal sector already bears much of the tax burden through indirect taxes such VAT.

Lastly, taxing the informal sector should be coupled with critical reforms to curtail the loss of revenue such as reduction of loss in tax revenue through tax incentives and curbing illicit financial flows.

Until governments figure out the right taxation framework and enforcement mechanisms to ensure players comply, the sector continues to remain an untapped gold mine that has the potential to strengthen domestic resource mobilisation to fund government expenditures.

[1] https://www.imf.org/~/media/Files/Publications/REO/AFR/2017/May/pdf/sreo0517-chap3.ashx#:~:text=The%20informal%20economy%20is%20a,of%20total%20nonagricul%2D%20tural%20employment.

[2] https://www.un.org/en/ecosoc/integration/2015/pdf/eca.pdf

[3] https://s3-eu-west-1.amazonaws.com/s3.sourceafrica.net/documents/118220/The-informal-sector-and-taxation-in-Kenya-IEA.pdf

[4] https://www.repoa.or.tz/wp-content/uploads/2021/07/Taxing-the-informal-sector.pdf

[5] https://ijlhss.com/wp-content/uploads/2017/09/Informal-Sector-and-Taxation-in-Kenya-Causes-and-Effects.pdf

[6] http://jota.website/index.php/JoTA/article/view/232/181

[7] https://www.repoa.or.tz/wp-content/uploads/2021/07/Taxing-the-informal-sector.pdf

[8] https://www.ilo.org/wcmsp5/groups/public/---ed_emp/---emp_ent/documents/publication/wcms_820312.pdf

The government of Kenya continues to grapple with domestic resource mobilisation challenges that have manifested in an increasingly tight fiscal space that limits public expenditure on crucial public goods and services like health, education and social protection among others. This has been attributed to the ensuing public debt sustainability problem and low tax revenue generation in the past.

The National Treasury developed the draft National Tax Policy aimed at realising the country’s dream of having an efficient and fair tax system that promotes equity in tax administration and a predictable tax environment for businesses to operate. The Policy provides policy recommendations to address various challenges currently facing the taxation regime in the country such as hard to tax areas, unpredictability of tax rates, low tax compliance and high tax expenditures.

In compliance with Article 201 of the Constitution, The National Treasury issued a notice to provide comments on the policy prior to finalisation. As such various Civil Society Organisations (ACEPIS included) under the Okoa Uchumi Coalition – an initiative of civil society organisations interested in Kenyan public finance managements issues, submitted an analysis of the draft National tax policy and proposals for improvement of the policy.

The Civil Society review of the draft national Tax policy identified among other issues the following for consideration by the national Treasury and other related MDAs. The issues include: i) There is need for the enactment of the Public Participation Act or for the development of public participation guidelines to enable effective stakeholder engagement as tax issues are cross cutting and are matters of national importance. ii) There is need for developing a feedback mechanism and clarifying who has the role and responsibility to acknowledge and address the feedback. iii) Tax exemptions should not be arbitrary and discretionary as this increases the scope for tax abuse and reduces government revenue. iv) There is need for special VAT rates for special categories of good like LGP, given the ripple effects this has on the economy and the potential to hurt low income earners.

Acepis urges government (National Treasury and KRA) to seriously consider these policy proposals to facilitate inclusion, accountability, equity, and efficiency of the country’s tax regime to promote economic justice.

Find the full submission here: Civil Society Submission on The Kenya Draft National Tax Policy - ACEPIS.

Following the debt binge over the last couple of years, Kenya is set to spend KSh. 1.36 trillion towards debt repayment annually starting FY2022/23 going forward[1]. In light of this, debt repayments will consume approximately 65% of taxes. This signals that the country has a narrower fiscal space for balancing the budget and achieving equitable and sustainable economic development.

Nonetheless, it is notable that the Kenya government gives away or foregoes a lot of revenues that appears not to square out with its fiscal challenges. For instance, a 2021 Tax Expenditure Report published by the National Treasury highlights that Kenya has foregone on average Ksh383.9 billion worth of revenues between 2017 and 2020 to tax incentives. These revenue losses compare to equitable share revenues allocated to all counties in  FY2020/21[2]. Also, the report estimates that the country loses up to 6% of GDP through generous tax incentives. A 2017 publication by the IMF set the cost of tax incentives at KES 478 billion, a figure that accounts for 5.3% of the country’s GDP.

What then does this mean for fiscal justice in Kenya? At what cost is the government dishing out tax incentives for individuals and corporates established in Kenya? Is there room for better management and administration incentives/expenditures to ensure the economy reaps the most? Are tax expenditures as efficient as argued by the government?

World over, governments leverage tax incentives as a fiscal policy tool targeting to spur economic development by attracting investments. Tax incentives are preferential tax treatments accorded to specific segments of taxpayers. In Kenya, tax expenditures manifest in the form of tax deductions, credits, tax exemptions, deferrals, and tax rates designed to benefit specific economic activities or taxpayer groups. Such expenditures are considered as a basis for financial support from the government to both individuals and corporates established in the country.

The government argues that existing tax incentives have positively impacted Kenya’s outlook as a favorable investment destination in East Africa and the larger Sub-Saharan Africa region. However, pundits have argued that the net effect of tax incentives/expenditures in the country is negative, with the revenues forgone far outweighing the volume and value of investments resulting from the said preferential tax treatments. Further, tax incentives are argued to be shrewd in secrecy and tend to receive less public scrutiny.

The frameworks that dictate the criteria for design and determination of beneficiaries of tax incentives are neither open nor inclusive as demanded by law and prudent public finance management. It remains unclear to what extent these preferential tax treatments have contributed to spurring investments and creating employment in the country. With limited transparency, some have argued that the existing tax incentives in Kenya benefit particular interest groups and advantaged firms, especially Multinational Corporations (MNCs).

As such, the utility and effectiveness of the existing tax incentives offered under the current tax regime have been a subject of debate, particularly considering that the foregone revenues would be useful in bridging the widening budget deficits and dealing with the ensuing public debt problem in the country.

The questions surrounding the utility of existing tax incentives in Kenya demand that relevant stakeholders revise the architecture of formulating tax incentives in the country to promote more transparency and accountability. This demands goodwill of various stakeholders. Policymakers need to enact suitable guidelines that inform how tax incentives are structured and the criteria for qualifying for the said incentives.

Relevant government agencies, particularly the Kenya Revenue Authority and the National Treasury, need to promote transparency and enhance multiagency cooperation. This can be demonstrated by adherence to provisions of the constitution and associated laws, encouraging inclusion and multi-stakeholder engagement in applying tax incentives, and maintaining openness with regards to application of tax incentives in the country by easing accessibility to data.

Currently, the utility of existing tax incentives in Kenya remains unclear, particularly with regards to attracting investments and creating employment opportunities in the country. Coming at a time when the tax regime in the country has been criticized for being punitive to businesses and citizens with increased taxation, tax incentives need to be streamlined to clearly demonstrate their adequacy, usefulness and overall efficiency to the economy.

A move towards positive reforms demands proper engagement and coordination by government through the National Treasury, KRA, Parliament, Auditor General, and the Office of the Controller of Budget, Civil Society, Private Sector, Researchers/Experts, and Media.

A good place to begin is rigorous analysis of the country’s framework of tax expenditures driven by government data from KRA, the National Treasury and the National Bureau of Statistics. Such analysis can shed light on sectors of the economy where incentives/expenditures are incurred, segments of the population (in terms of income levels) that benefit most, the balance of costs and benefits for local and international businesses among other pertinent considerations. That way, it can be possible to tell for sure whether the revenues forgone by KRA/Treasury are warranted when compared with the benefits accrued.

Civil society, academia and media can also play a role in conducting complementary analysis and providing supplementary information generated from monitoring and reporting on the economy.

[1] https://www.businessdailyafrica.com/bd/economy/debt-payments-surpass-state-running-expenses-3762312

[2] https://www.treasury.go.ke/wp-content/uploads/2021/09/2021-Tax-Expenditure-Report.pdf

With less than a year to Kenya’s 2022 general elections, the political elite are unleashing strategies in an attempt to clinch positions of power.

Political moves are furiously happening: breaking old alliances and forming new ones, jumping from one political party to another, among others. The country is back to promises mode, with political aspirants declaring the many things they intend to do should they get elected.

In recent weeks, ‘bottom-up’ and ‘trickle-down’ economic approaches have become political buzzwords. A heated debate has been brewing on the relevance of the ‘bottom-up’ approach, with its proponents citing failures of the ‘trickle-down’ approach, which they claim has been adopted by the previous regimes, to spur economic development.

Wheelbarrow used as a key symbol by proponents of the Bottoms-up economic model | Source: Daily Advent

Unfortunately, most Kenyans with limited understanding of these approaches and their impact on the economy have missed out on the debate.

To put it in a layman’s language, the ‘trickle-down’ approach entails advancing policies that favor big firms and established business entities. This is in line with supply-side economics, which ascribes economic growth to the production of goods for consumers. Some of the strategies adopted in the ‘trickle-down’ approach include tax cuts and subsidies which aim at reducing the cost of production for such entities and encourage expansion with the value trickling down to the masses in the form of employment opportunities.

Development economists have demonstrated that the ‘trickle down’ approach only benefits a few and by-passes the vast majority of hardworking and vulnerable segments of the population. For instance, it has been proven that tax cuts and subsidies do not necessarily spur economic growth in the long run. In as much as they promote investment and business expansion, the government still needs tax revenue from the masses to finance its spending.

Over the years, the Government of Kenya has maintained a constant corporate tax rate while using tax credits and incentives such as Export Processing Zones and Special Economic Zones to encourage investment. It is only in 2020 that the government imposed temporary tax interventions such as a cut in VAT and corporate tax to help cushion citizens from negative effects of the Covid-19 pandemic. Also, since 2013, the government has accumulated a huge amount of public debt, justified by the need to finance development projects – largely infrastructure and energy investments expected to reduce the cost of doing business and make the investment climate friendlier. The logic is that this spurs production, increases aggregate demand and hence drives economic growth. Such tax measures, public debt mechanisms and other related economic policies implemented in the past have given the impression that the Government of Kenya implements ‘top-down’ or ‘trickle-down’ economic approaches.

On the flipside, the ‘bottom-up’ approach entails formulation of policies that empower ordinary citizens, especially working-class segments of the population, directly by providing them resources that improve their livelihoods. The ‘bottom-up’ approach emphasizes empowerment of low and middle-income sections of the population, unskilled labour force and the youth. In a nutshell -  utilizing the potential of low and middle-income sections of the society to drive and support the economy.

However, a peek into economic policies and programmes pursued by the Government of Kenya at least over the past two decades indicates that the government has invested substantively in what may be considered ‘bottom-up’ approaches. Both regimes of President Mwai Kibaki and Uhuru Kenyatta have made efforts to empower the masses through direct development initiatives. Some of these include programs under the National Youth Service, Kazi kwa Vijana Project launched in 2009, the Kenya Youth Empowerment Program, social protection budgetary allocations and cash transfer programs targeting poor, vulnerable and marginalized populations.

Tree planting exercise under the Kazi Kwa Vijana Project | Source: Women eNews Kenya

Also, the Government of Kenya launched the Last Mile Project in 2015 targeted at connecting Kenyan households to the national network grid, particularly low-income groups living in informal settlements and isolated communities. One may argue that devolution itself is a massive bottom-up approach to economics and governance in the country. It allows the transfer of budget to the bottom-most parts of the country – wards and villages and proffers powers to ordinary citizens to determine how money devolved are spent.

Going by definition of the models and the nature of the development initiatives designed by the various regimes, elements of the ‘bottom-up’ model have all along been practiced in Kenya. Beyond the ongoing political rhetoric, it is clear that Kenya has pursued the ‘bottom-up’ approach in many ways – especially through budgetary allocations and special programmes.

In my view, the problem has not been about what economic model to pursue but rather the effectiveness of delivery. In both cases - where the government has pursued ‘trickle-down’ or ‘bottom-up’ policies, they have been undermined by corruption, poor economic planning and politicization. These vices are to blame and not necessarily the economic model adopted.  The journey to attaining a strong economy begins by eliminating these vices. This country does not need sweet promises of the political elite. All the country needs is a functional government which affects what it has been mandated. The decision to have such leaders lies with the citizens. It is high time that we make sober decisions and not be swayed by cheap and deceptive political elite.

CS Ukur Yatani : Image-Courtesy

The National Treasury recently tabled the 2021/22 budget estimates alongside the Finance Bill 2021. The proposed Ksh3.6 trillion budget is a 25% increase from the Ksh2.91 trillion in 2020/21.

The budget allocates Ksh1.8 trillion to the Executive, Ksh70 billion to counties, and another Ksh37 billion and Ksh17 billion to the National Assembly and the Judiciary respectively. If approved, this will represent the biggest budget yet in the history of our republic. The budget also sets aside Ksh26.2 billion for the post Covid-19 recovery strategy economic stimulus programme.

This comes as the Kenya Revenue Authority (KRA) experiences revenue shortfalls year after year, further worsened by the pandemic. In previous years, the Kenyan government has not been able to finance its budgets, resorting to continued borrowing.

The expanded budget is surprising, considering that Kenyans are already overburdened and weary from tough economic times, occasioned by Covid-19.  This, amidst concerns that the country might be unable to meet its debt obligations, considering the recent upgrade of its risk of debt distress from medium to high.   

To finance the 2021/22 budget, the Finance Bill proposes various amendments aimed at widening the tax bracket. These include; amendments to the Digital Service Tax (DST), review of Value Added Tax (VAT) status for certain goods from exempt to taxable, with ordinary bread shifting from zero-rating to the standard 16% rate. These tax amendments demonstrate desperation on the side of the government to generate sufficient revenue to meet its obligations. Despite these efforts, the proposed budget still threatens to worsen the country’s debt burden. 

Expanding DST’s scope to hurt online businesses

On the DST, proposed amendments aim at expanding its scope to include income accruing from businesses conducted over the internet or an electronic network, including/or through a digital marketplace. This tax rate is levied at 1.5% of the gross transaction value. Although Kenya’s digital economy is still in infancy, KRA projects collecting up to Ksh5 billion in revenue from DST in the first six months of the FY2020/ 2021.

In expanding the scope of DST, the government seeks to bring more businesses that generate income over the internet or through an electric network into the tax bracket. Since DST is being imposed on all digital services, irrespective of their gross transaction value, it could result in undesirable implications, especially for persons whose primary income is derived from provision of digital services and are under the Turnover Tax regime and minimum tax bracket. The government should consider setting a minimum threshold for applicability of DST with exemptions for businesses that register low margins. To facilitate smooth filing of DST returns, KRA should also update its online filing platform, iTax.

Description of Digital Service Tax | Source: Trio Digital Marketing

Reviewing VAT status to increase prices of basic commodities

VAT is imposed whenever a value is added on applicable goods and services across the supply chain, from production to consumption. The tax, which is levied on taxable products and services supplied or imported into Kenya, is collected by registered persons at designated points in the supply chain before submission to KRA. The registered persons charge VAT at every stage along the supply line, which the final consumer bears.

The VAT amendments are set to affect prices of basic commodities, including bread and baby-infant milk, whose prices are set to rise on imposition of 16% VAT, from current zero-rated status. Since bread is consumed in many households, this will make it less affordable to the common mwananchi, coming only months after a Ksh5 price hike, following a surge in global wheat prices. This has led to an outcry, with Kenyans terming the amendment as unfair and uncalled for, considering the economic downturn caused by the pandemic. The Bakers Association of Kenya has warned that introducing 16% VAT on bread violates the fundamental right to affordable food, besides risking closure of some companies, that could in turn see up to 100000 people jobless.

Kenyans shopping at a Supermarket | Source: Kenyan.co.ke

Similarly, removal of baby infant milk, otherwise known as formula milk, from the tax-exempt bracket will increase its price, thus affecting families dependent on it. Other commodities such as eggs, milk and meat are also set to cost more due to the proposed taxation of inputs for producing animal feeds. This will affect both farmers and consumers, as production costs will rise, translating into prices of these goods shooting up. 

However, as much as the VAT amendments propose imposition of 16% tax on some items that were previously exempted, it also offers reprieve for some items by withdrawing the standard charge. The proposition to exclude the VAT levy on medical ventilators and inputs for manufacture of medical ventilators is laudable, since it encourages local innovations such as the one by students of Kenyatta University who designed and built a low-cost ventilator using locally sourced materials. With the exemption on materials for manufacturing ventilators, costs of procuring such inputs will drop. This is likely to encourage local production and reduce costs of ventilators and other related products, thus propping up management of Covid-19 in the country. Other items that have been excluded from VAT include: Insulin, Malaria test diagnostic kits, immunological products, Vitamin C and its derivatives, food supplements, protein concentrates, medical equipment and products, among others. The exemption will lower treatment costs for various ailments including diabetes, providing a relief to the health sector.

In this way, the VAT amendments signal a more considerate Treasury, especially towards the health sector. However, some discrepancies exist in the proposed policies. Some items which were exempted from the tax in the past are to be charged at a rate of 16%.  For example, syringes, which complement immunological products, vaccines and treatment, will be VAT-able. The result is cancellation of the effect of exempting some of the goods. In essence, what one hand giveth the other taketh away.

With the ongoing pandemic, one would expect the government to limit its expenditures and channel more efforts and resources towards vaccinating the population as a means of jumpstarting the economy. But if the proposed budget is anything to go by, there remains little to be optimistic about. With the proposed tax amendments, the huge public debt, and runaway corruption, Kenyans should brace for tough economic times as much of the expenditure burdens shifts to their shoulders.

However, following these proposed amendments, Kenyans raised concern and were given the opportunity to submit their opinion physically at Parliament Buildings or via email to the clerk by 2nd June 2021. The President is expected to assent to the legislation by June 30th 2021, paving way for KRA to start implementing them from July 1st 2021.

Ends…

By Eunice Wahito, Emmanuel Owuor and Janet Muchai

The writers are Graduate Interns at Africa Center for People, Institutions and Societies (Acepis).

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