Minimum Tax will hurt the economy

By Mucai Kunyiha & CPA Rose Mwaura

The introduction of a Minimum Alternative Tax at the height of the largest health and economic crises of our generation is simply confounding and has all the hallmarks of a rushed law, with little consideration of its consequences on businesses – large and small, as well as the economy as a whole.

Much ink has been spent in describing the cost and impact of the COVID-19 pandemic on lives and livelihoods, it would not be our wish to re-hash all the details here. Suffice to say, all the indications are fairly negative – re-structuring of loans of Kshs. 1.38 trillionunemployment rate increased to 21% at the beginning of June 2020 from 5% in quarter 4 of 2019, GDP forecast to shrink by 1%, and one of three firms have temporarily closed down per the latest statistics from Central Bank of Kenya (CBK) and the World Bank report released in November 2020. There can be no doubt that our economy is in dire straits.

Globally, governments have taken steps to shield their economies from the economic storms and hurricanes of 2020. Such steps have included tax moratoriums, wage support and even direct cash injections in some cases. These steps have been expensive, but the economic and policy consensus is that the alternative – closure of businesses (especially SMEs) and large-scale loss of jobs – would risk serious economic collapse from which it would take decades to recover. Best practice has, therefore, been to support businesses’ cash flows through these difficult times so they can live to fight another day.

In this context and given our ‘pre-existing conditions’ of narrowing fiscal space and heavy debts, our government started off well with some measures to give some relief to citizens and businesses. A reduction in VAT and change in PAYE bands ensured there was a little more cash in the hands of consumers. Payment of outstanding bills owed to suppliers and VAT refunds was also a welcome boost as were the measures taken by CBK to increase bank liquidity and allow some space for re-scheduling of loans.

However, other changes that more than reversed all the ‘goodies’ the private sector had been handed were tagged on. In particular, the business community considers the Minimum Alternative Tax (MAT) as an egregious over-reach.

MAT was introduced by the Finance Act, 2020 and proposes the introduction of a minimum corporate tax of 1% on gross turnover before taking into account the operating overheads and other costs of doing business for a company. This means that a business must pay corporate taxes above 1% of its turnover, irrespective of its profit position – that’s right, even loss-making companies will be required to pay the tax. The tax was ostensibly introduced to redress the situation where some companies are in perpetual loss making positions and pay no, or minimal corporate tax, but as is sadly the case in many of our laws, a blunt instrument has been applied on the broad economy where only a sharp tool was required to target a few. By failing to distinguish accounting and tax losses it will punish even tax compliant corporates struggling through the current crisis.

By targeting all corporates, the MAT ignores the multitude of business sectors, economic structures and market determined margins. Lumping an insurance company, a manufacturer, airline and FMCG distributor into one tax category requiring a minimum net profit of 4% is a gross failure to appreciate the complex nature of our economy. Fuel stations, distributors and airline ticketing agents all have single digit gross margins on their turnover, sometimes below 4%, and their effective tax rate will now become over 50% of their net income, for those who have the privilege of making a profit in 2020.

Given the challenges of 2020, many businesses are already in loss making positions and will have to access their equity or find additional financing to survive into 2021. A minimum tax of 1% of turnover will be a further raid on the scarce resources they need to keep the business alive and Kenyans in employment, and in effect, a tax on investment. One wonders where even corporate giants like Kenya Airways will find an additional (Kshs. 1 billion) to pay this tax when they are already financially challenged – let alone the thousands of SMEs battered by the effects of the pandemic. The tax is not only economically unsound but also raises deep moral questions on the extent to which the state will extract resources from its citizenry.

As we sail into the aftermath of the storms of 2020, it would have been comforting for the private sector to have an ally and champion in the government. As it stands, the government is crowding out the private sector in its borrowing from the markets, building up debts to the private sector and now attempting to squeeze out the last drops from entities struggling to survive and provide sustained employment to Kenyans. For the good of our country and our ability to recover from the devastation of 2021 we recommend and urge that the application of the MAT be suspended and the tax be permanently removed from our fiscal regime.

The writers are Chairpersons of Kenya Association of Manufacturers (Mucai Kunyiha) and Institute of Certified Public Accountants of Kenya (CPA Rose Mwaura) and can be reached at info@kam.co.ke and icpak@icpak.com, respectively.

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