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November 20, 2018

Kenya Is In Need Of Urgent Tax Regime Reforms

Watching MPs grilling cabinet nominees and nodding sagely at the answers, I can only hope the nominees are not as good actors as the MPs themselves.

These after all, are the same people who hoodwinked voters to send them to parliament to look after their needs only to turn around and seek to rob them blind with demands for outrageous salary hikes and other luxuries.

 Following the stiff resistance the members have faced in this quest, it should now dawn on them where the solution lies; lowered cost of living.

 From the lowest paid worker to nurses, teachers and doctors, to the MPs themselves, it is not a mindless quest for higher wages that motivates their demands, it is a struggle to stay afloat as prices of basic commodities continue to rise unabated.

 The 11th parliament must work on lowering the cost of living in this country and this means it must target the cost at which we produce or purchase things.

 One of the two ways a national government influences the national economy is through fiscal policy (the other is monetary policy). Fiscal policy includes such things as taxation, government spending and the like.

 Parliament can begin by looking at the issue of taxation. In this country, a very narrow band of people is taxed repeatedly whenever the government wants to raise quick cash.

 Treasury has become adept at taxing anything that seems to make money instead of creating the space that will see more businesses come up.

 A good example is money transfer. It took the then minister for Finance John Michuki, after a visit from then Safaricom CEO Michael Joseph, to prevent forces that wanted to finish M-PESA, Safaricom’s mobile money service.

 Since then it has become a cash cow. Treasury, predictably, has jumped on the bandwagon that it did little to get going and is now levying excise duty on all transactions Kenyans make through mobile money services.

 In the coming budget, there is talk of raising excise duty on such things as beer and cigarettes another easy target for treasury. Further there is even talk of raising employees, Pay As You Earn (P.A.Y.E) despite the feeling that already Kenyans are among the most heavily taxed lot in the world.

 According to the last household budget survey done by the government statistician, KNBS, a low income earner makes Sh23,670 monthly, middle income earners (between Sh23,671 and Sh120,000) and upper income are those earning more than Sh120,000.

 However, currently, those earning Sh50,000 and above are taxed at upper income levels. To add more taxes on an already overtaxed population will not only kill production but it may also foment unrest.

Just like the deputy president told Kenya Power when it sought to raise consumer bills, Treasury should also seek alternative means to raise revenue instead of repeatedly targeting the same crowd.

 MPs, who already don’t like paying taxes, will be quite useful in resisting these proposed tax hikes. Another ridiculous tax regime is that of import duty on vehicles. Ostensibly, this duty was initially set high to protect the local vehicle assembly industry.

 With time, inflation, and wage levels, it has become clear that few Kenyans can afford to buy locally assembled vehicles. The import market, which offers wider variety at good prices is where Kenyans have turned.

 Today, Kenya is the largest importer of used Japanese vehicles. The law limits the age of vehicles that can be imported to seven years and below. This is apparently, to make sure road worthy vehicles come into the market.

 The anomaly comes in when you look at how the revenue authority, KRA, levies taxes on vehicle imports. The newer the vehicle, the higher the taxes. In other words, although the law to bar dumping of old vehicles on Kenyan roads, the taxman, in his wisdom decides that, the less “old” the vehicle the more you have to pay. Is KRA encouraging Kenyans to bring in newer vehicles or discouraging them?

 A talk I had once with a retired KRA commissioner illustrates the disconnect in thinking when I asked him about the seemingly punitive vehicle import duties.

 “Where are they going to drive? The roads are congested!” So, for him to be chauffeured home smoothly, the tax boss is willing to make vehicles unaffordable to other Kenyans. Yet, when former Finance Minister Amos Kimunya zero rated tax on motor cycles with 250cc or less, a new industry, boda boda, boomed overnight providing a lot of youth with employment, people in far flung places with transport services, and the government with added fuel levy revenue.

 In this instance, a facilitative approach earns the government revenue while expanding the economy as opposed to an approach where the government seeks to increase fuel levy tariffs on existing motorists in order to earn the same revenue.

 A friend of mine recently told me he wants to go into the stone crushing business. But the import duty on machinery required is prohibitive, and even if he was to set up, Kenya Power bills would sink him.

If tax breaks and low cost power incentives were available to him, he would be creating wealth and jobs. This parliament should begin by looking at the tax regime with the goal of making things cheaper for the mwananchi.

It should understand that the cost of living, the cost of production, are linked to the tax regime in this country. It must reform the tax process and make it facilitative not restrictive.

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