The only way a country can succeed in bridging the relationship gap between its citizens and the government – enriching the quality of our democracy and reducing apathy – is through the institution of efficient and fair tax systems.
During this year’s World Economic Forum (WEF) in Kigali, the issue of public finance as it relates to democracy and economic prosperity was central to the discussions as can be read from WEF’s article, ‘Why taxes will be central to Africa’s development.’ WEF makes a strong link between good tax systems and citizen participation in governance ultimately leading to the achievement of set economic development goals.
As the business community, we know this to be true. The biggest challenge to widening the tax bracket in this country to include the informal sector has been distrust and the ‘mystery’ that surrounds our overall tax system. For these businesses, the desire to formalize is watered down by a perceived ‘arm-twisting’ to pay taxes, and many unfulfilled promises to better the business environment. Yet in many occasions, it is this link between paying taxes and an enhanced capacity for government institutions to deliver public services effectively, that remains blurry.
Some countries, however, have successfully clarified this connection for their citizens. In last year’s OECD Better Life Index, Denmark for instance, was the best country in terms of providing a good quality of life to its population. The country uses taxes and social spending as a strong avenue to balance existing economic inequalities. It is one of the most highly taxed countries but with a tax system that is spotless and transparent, hence it is able to efficiently supplement its social welfare programme. This also results in a high degree of trust by the citizens on the government’s ability to provide public service.
In Africa, Rwanda has been named by the International Center for Tax and Development (ICTAD) as a good example ‘where tangible services are directed and delivered at national level’. There is a high level of taxation but also the government’s efforts to stamp out corruption has increased people’s will to comply with the taxation policies.
Taxation systems such as VAT refunds, which have been a thorny issue for many countries in Africa including ours, are said to be huge incentives for producers and businesses if paid back in good time. In Mozambique, a study carried out by the African Development Fund in 2006, demonstrated a link between a delayed major road project and the lack of VAT refunds to the contractors involved. This means that the development of good infrastructure was impeded by the uncertainty of when VAT would be refunded to the contracted companies.
I am happy to note that in our case, VAT refunds is one of the trailblazing facets of our taxation that proves that an effective tax system is not out of reach for Kenya. Through constant engagement with the Kenya Revenue Authority, value-add manufacturers are now receiving their VAT refunds as promised by the government. Not only does this incentivize us as a business membership organization to ensure that our members comply with stipulated regulations, but also increases our morale as local investors to want to scale our businesses country wide. Additionally, it motivates us to want to be more involved in the development of taxation policies that will have this kind of effect to attract FDI into the country. Subsequently, it is important to streamline the VAT refund process so that it becomes transparent and predictable. This will enable businesses to plan their resources adequately.
The VAT refund is a trendsetter, for other aspects of our tax system to follow suit in rewarding or showing tangible results that improve business competitiveness and the overall quality of life for all Kenyans. This way, any attempt by government to increase revenue will cease to be viewed suspiciously as a one way street, where government gains and the citizens lose.
The writer is the Chairlady of Kenya Association of Manufacturers.