Let’s finance deficit by controlling expenditure, not adding taxes

The 2021/22 budget is perhaps one of the most difficult ones in post-independent Kenya. The country has, like most parts of the world, been hit by a pandemic the like of which has not been seen for more than a century. The entire world went into some form of lockdown in 2020. Some countries, including Kenya, are still partially in that mode. 

Global economies have gone into recession, a situation not been seen since the Great Depression of the 1930s. In a world where everything is inter-connected, we have witnessed significant disruption of supply chains affecting imports and exports and a whole scale shutdown of industries, particularly in tourism and hospitality. Virtually everywhere, health care infrastructure collapsed under the pressure of an increasing number of Covid-19 patients. Shortages of ICU beds and oxygen became the norm.

During this time of meltdown – Kenya’s economy contracted by two per cent in 2020 – tax revenue decreased and government debt rose. What did not reduce by any great amounts was recurring government expenditure, which served to widen the deficit. Businesses were either on the brink of going down or simply collapsed, and with that came higher unemployment and lower disposable income. A perfect storm was what we found ourselves in. Treasury Cabinet Secretary Ukur Yatani was right in the midst of it in coming up with his proposals.

The general expectation was that we would see major tax increases in the light of the above and in view of the renewed support from international financial institutions. And yes, there were some of these in the Finance Bill highlighted in yesterday’s budget speech. Interestingly, and perhaps fortunately for the taxpayer, it could have been worse.

The major thrust of the tax proposals seem to be directed at administration and seeking to put a dampener on tax avoidance, particularly in respect of cross-border transactions. This follows the global Base Erosion and Profit Shifting initiative that is designed to ensure every jurisdiction gets its fair share of revenue.

While this is perhaps welcome, some of the measures announced – broader definition of control, restricting interest deductions and expanding the definition of permanent establishments, country by country reporting and common reporting standards – could go further than intended and Kenya may lose its competitive edge.

Tax relief for employers

There will be significantly more disclosure and reporting required and countries will now be exchanging information on taxpayers who are present, in some shape or form, in more than one jurisdiction. If it helps catch the evaders, then we are probably on the right track, but hopefully not at the cost of increasing doing business for the honest!

So what is in the budget for the average person? It is pretty much a mixture of the good, the bad and the ugly. There are beneficial measures and others that will hurt our pockets. 

Tax increases were expected, given the current scenario of government spending. However, some of them do not seem logical, sensible or fair when disposable incomes are already down.

Contributions towards the National Hospital Insurance Fund will become deductible for individuals. While this will not be a significant saving, every shilling probably counts today. 

The tax relief for employers who hire at least 10 university graduates as apprentices has been widened to include those under technical and vocational education and training institutions. This makes sense as the one area lacking in our education system is vocational training.

The shift of ordinary bread from being zero-rated to standard will result in a rise in the price of what is really a basic commodity. This change is strange when people are experiencing a reduction in income. 

Gainers and losers

There is also a change to the VAT status of cooking gas from zero-rated to exempt that is not included in the current Finance Bill. 

The change was enacted in the Finance Act 2020 but is to come into force on July 1. Cooking gas prices will increase as a result of this.

The bill also proposes to change the basis of excise duty on motorcycles from a rate of Sh11,608 to an ad valorem rate of 15 per cent, which may result in a jump in prices. Certain jewellery and products containing nicotine or nicotine substitutes will also become more expensive with higher excise duty. 

Gaming is targeted once again with 20 per cent excise duty on the amount wagered or staked. This seems to be part of the general trend in the last few years of going after what has been, at least in the eyes of the government, a lucrative industry. The cost of borrowing is likely to increase as processing fee becomes subject to 20 per cent excise duty.

Mr Yatani announced some of the changes that the East African Community agreed in May 2021, and which will come into effect on July 1. These measures are mainly targeted at protecting local industry by keeping import duty in place or reducing it for inputs on goods manufactured locally. The industries that will benefit are iron and steel, leather and footwear, motorcycle assembly, inputs for the textile and baby diaper manufacturers and furniture.

In a nutshell, budget 2021 is a mixed bag with gainers and losers. The concern though is that the government is looking to finance its deficit through an already beleaguered taxpayer rather than look at controlling expenditure, which is really the crux of Kenya’s financial turmoil.

Nikhil Hira is a Director Bowmans Kenya. The views expressed in this article are the authors and not necessarily those of the company.