Every second Thursday of June is a special day in Kenya’s fiscal calendar.
This is the day people wait for surprises and reliefs, the hits and misses, goodies and losses, all contained in the briefcase from the Treasury. The goodies come in first; we get the allocations, then follows the dreaded part — the spelling out of new tax measures.
Change in tax policy is inevitable, of course the government and its subjects must keep adapting to the economic dynamics. However, the changes must be well-thought-out, fair to the masses and most importantly, predictable. It is not uncommon to see a new policy being implemented in one fiscal year yet to be withdrawn in the successive period.
The injudicious change in fiscal laws offend the second maxim in taxation, which is certainty. Stability is a close relative to certainty and the relationship is, certainty deals with a current situation while stability deals with how that situation will be in future.
Stable tax policy allows taxpayers and investors to make far-reaching decisions knowing future tax implications. Our current tax system doesn’t make any commitment or give any guarantee of what would be in force in any period, not even in the immediate future. As a developing economy, we need investors and of course very generous tax incentives have been extended. However, the fact that the incentives can be introduced and withdrawn at will doesn’t go down well. Bear in mind investments are long-term decisions.
Case in point, in November 2019 a lower rate of tax at 15 per cent was extended to plastic waste recycling operators. Barely six months later, this incentive was taken away by the Tax Laws Amendment Act 2020. Where did this leave an investor gearing up for this incentive, probably with his equipment in the high seas? Keep in mind that this happens in a country ever looking far beyond its borders for investors.
If tax incentives can be introduced and withdrawn at any time, then I dare say we have no incentives. Tax measures with long term implications need to have a fixed period over which they will be in force. Thus the introduction of a new law needs not to take immediate effect; investors need time to mobilize. Again when the new measures come in to force, there must be a term limit before they can be withdrawn. The law should be a little bit more stringent on awarding concessions but very consistent.
Stability is also necessary in the way new tax proposals are allowed to settle and gain acceptance by the stakeholders. To explain this, I use minimum tax as an example. This tax was introduced in January 2021 amidst a lot of protests; eventually the courts suspended it. I suggest that such controversial taxes should be allowed enough time before they become effective. In that intervening time whoever wants to go to court would go. That period would also be necessary for polishing finer details of the proposal instead of successive changes after changes.
Every new tax makes a demand on the assessors and the payers to learn it, sometimes making adjustments on the accounting system. Imagine the pain of building capacity every other year. With the obvious pain of taxes, policy should foster some relief and build taxpayers trust.
Faustin Mwinzi, lecturer at KCA University
