Our tax policies need an overhaul

By Phyllis Wakiaga,

The only way a nation 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.

Good tax systems and citizen participation in governance ultimately lead to the achievement of economic development goals. A good tax system promotes a country’s competitiveness and productivity, by creating an enabling environment for doing business.

Understandably, taxes are a major source of government revenue. However, sudden fiscal and taxation policy changes harm businesses and become a stumbling block to business continuity.  The COVID-19 pandemic has forced businesses to re-evaluate their operations by focusing on building their resilience. It is, therefore, paramount that the Government of Kenya also adjusts to the changing economic environment, including its tax policies.

A Kenya Association of Manufacturers (KAM), KPMG Survey on the Impact of COVID-19 on the Manufacturing Sector, found that local industry saw a significant reduction in output, increased liquidity and logistics challenges, and a reduction of their workforce. The impact was felt more among Micro, Small and Medium Enterprises (MSMEs).

These effects were felt heavily in Quarter 2, 2020 as the country put in place measures to contain the spread of the virus. Local industry’s output shrank by 3.9% in the second quarter and 3.2% in quarter 3, compared to a 2.9% growth in the first quarter of 2020.

As the country faces the third wave of the pandemic, the economy continues to suffer from the effects of the pandemic. A KAM Manufacturing Barometer survey (January-March 2021) found that 49% of local manufacturers expect a negative performance of the sector, between April and June 2021. This is attributed to persistent uncertainty among investors, which has led to the postponement of investment activities, and the high amount of taxes, which continues to worsen the ease of doing business in the country. Additionally, the measures to contain the spread of the virus substantially slowed down economic activities.

A key feature of tax policies in Kenya is that they are highly unpredictable. This leads to business uncertainty, which is detrimental to a conducive business environment. Unpredictable policies from the Government, particularly on taxation, are seen in the Tax Laws Amendment Act 2020, the Finance Act 2020 and some of the proposals provided in Finance Bill, 2021.

Taxation policy and measures ought to be stable and predictable to sustain and encourage investment in a country. Predictability allows investors to make projections on long-term investment decisions. Reliability gives them confidence in the stability of the economic policy regime and, that commitments made by government are both binding and lasting.

To recover from the effects of the pandemic, it is crucial that government creates a conducive business environment, that drives the competitiveness and productivity of local industry. One way of doing this is through tax reforms, which shall build value chains and drive economic growth. The Association of Manufacturers’ Manufacturing Priority Agenda (MPA) 2021 identifies Kenya’s sometimes capricious tax regime as one of the hinderances to the manufacturing sector’s competitiveness. Unfortunately, the cost associated with high taxes is passed on to the final product, thereby hindering our competitiveness.

A country’s economic growth comes from four main sources – human resources (labour), natural resources, accumulation of capital (investment), and technology and innovation. Whereas the first two are more naturally endowed on countries based on their location and cultures, investment, technology and innovation are driven by the existing economic policies. Successful countries have put in place measures to encourage and grow investment. 

The manufacturing sector in Kenya contributed 7.2% of the GDP and 17.5% of tax revenues in the Financial Year 2019/20. This demonstrates a more than proportionate contribution of the manufacturing sector to taxes, relative to its GDP ratio. Evidently, industry’s growth and performance are instrumental in increasing tax revenues for government. Increasing the tax base shall bring down the growing fiscal deficit, stock of public debt and domestic borrowing, thus reducing the crowding-out of the private sector in the domestic credit market.

Carrying out tax reforms shall create a conducive business environment, encourage investments and eventually, expand government’s revenue base.

Overarching interventions are needed to bolster economic recovery and drive the resilience and sustainability of local industry. This entails the adoption of a “do-no-harm” principle while intervening in the market and increasing the resilience of the manufacturing sector and ease of doing business by ensuring long-term policy stability, particularly on taxation.

The writer is the CEO of Kenya Association of Manufacturers and the Global Compact Network Kenya Board Chair. She can be reached at ceo@kam.co.ke.