A Progressive Finance Bill is great; but is it impactful?

By Sachen Gudka,

Customarily each year, the National Treasury presents its revenue sources and expenditure proposals through the budget statement to inform the development of the Finance Bill. In a few days the National Assembly will debate the Finance Bill 2019 before it is handed over to H.E. the President for his assent. This debate is the make or break point for the revenue measures proposed, to spur market growth and ensure a robust circulation of money in the economy. Hence this is a critical point at which we should analyze and interrogate whether the proposed measures will actually deliver economic prosperity for the country despite the good intentions behind their formulation.

Taxation is a crucial element in the cost of doing business and the overall competitiveness of industry. This is why the 2019/2020 budget statement read earlier in the year was received with optimism by many in industry, because majority of the proposed measures seemed to have a leaning towards boosting the manufacturing sector. That said, it is important to ensure that the measures proposed can realistically bring about the desired outcome; which is to increase the sector’s contribution to GDP by 7% by the year 2022.

At the moment, unfortunately, some cracks are beginning to emerge in the proposed taxes raising questions on how thoroughly we have examined the practicality and impact of these measures. For Instance, the Finance Bill proposes the exemption of VAT on agricultural pest control products; and although this proposal seeks to reduce manufacturing costs, the current Kenya VAT exemption framework does not allow manufacturers to claim their input VAT.  Hence they will have to bear these costs leading to the increased cost of production, which they will ultimately pass to end users; i.e. both farmers and consumers.

Agricultural pest control products are key inputs in the agricultural sector, which the government has prioritized in the Big 4 Agenda, under the Food Security Pillar. The Pillar seeks to expand food production and supply, and reduce food prices to ensure affordability.

It ties in with the manufacturing pillar in terms of its support to value addition within the food processing value chain. Agriculture sector accounts for 75% of the country’s workforce and about 25% of the annual GDP. Raw materials and products such as tea, coffee and floriculture products are Kenya’s top export earners. Hence, zero-rating such inputs will see the government realize both its revenue goals and Big 4 Agenda aspirations.

Another example is the introduction of increased excise tax of nearly 10% on tobacco products and Ksh.20 per kg excise tax on sugar confectionery and chocolate. This increased tax means an increase in pricing, which will hit many consumers’ pockets. And as Consumers seek more affordable alternatives, it opens up loopholes for the burgeoning of illicit traders and counterfeiters.

Not only does illicit trade destabilize economies and stunt innovation, but it also threatens the health of citizens and increases the cost of public health. Additionally, such tax measures will result in the decline in the government’s revenue as illicit products infiltrate the market whilst legit businesses decrease their production capacities or worse, shut down operations. This will also reverse the gains that the sector has accrued over time through value chain integration.

We also need to be careful about resulting to increasing taxation as a knee-jerk reaction to shrinking revenue streams as a country. Additionally, unless critical measures are taken, the Finance Bill will have no realistic impact on government revenue or the manufacturing sector. There are instances where, for example, if the right environment is created then automatically, the effect on increased revenue collection will be felt immediately. Reducing the multiple taxes and levies that have become an infamous common feature of devolution is one. Others are reviewing our tax structures making them more flexible to accommodate the informal sector thereby increasing the tax base, and productivity of informal businesses. All of this is possible without further burdening the taxpayer.

It is important to also put into perspective proposed tax measures in past financial years to determine their sustainability in the long run, if we are to realize our economic and social goals as a nation. These measures should be informed by the state of the economy and the purchasing power of citizens.

Without this, the progressive tax measures in the Finance Bill will remain well-intentioned but have no meaningful or sustained effect on the growth of our economy.

The writer is the Chairman of the Kenya Association of Manufacturers and Vice Chair of the COMESA Business Council and can be reached on info@kam.co.ke.