For any economy to attract investments, it must be able to earn and maintain investor trust. Both local and foreign investors gain confidence to trade in a business environment that guarantees a stable and predictable macroeconomic framework for businesses.
Let us think for a minute of the bread baker running her business in the city. She took the risk to go into this business knowing that although there would be elements beyond her control, certain elements would remain steady to enable her run her business. Hence she employed several people in her shop. Ideally, a stable macroeconomic environment should enable her to operate smoothly and to withstand eventualities that are ‘uncontrollable’ such as force majeure. However, if the regulatory and taxation structures for example, are whimsical – changing suddenly every now and again forcing her to make drastic adjustments each time then, her business becomes unsustainable. When this happens, she is forced to let go of some staff and downgrade her spending on technology, which reduces the overall productivity of her business. In this case, there are job losses and she (as the investor) has lost the will and capacity to expand her business.
Predictability and investor confidence are mutually inclusive. Investors derive confidence to invest where they trust policy-makers and the government’s intent to maintain a predictable environment as much as possible in order for their investments to yield returns. Without predictable policies, investors are not only discouraged from scaling up their business, but they begin seeking alternatives more suitable, predictable and secure markets to relocate their businesses.
A practical example of significant sudden changes that destabilize local businesses was the move by government to increase the excise stamp fee by 87% from Ksh 1.50 to Ksh 2.80 for compounded spirits, wines and tobacco products. In the case of tobacco products, this increase means that the tax stamp now represents 60% of the cost of cigarette wrapping material up from 15%. Ultimately, the financial burden for this kind of adjustment weighs heavily on companies in this industry. This is bound to bring additional burden to the already heavily taxed beer and cigarette industry.
Taxation is a key element in cost of doing business so it needs to be predictable. Therefore, taxation policies should be formulated in consultation with all stakeholders for them to be effective in providing shared value. Moreover, should there be an administrative cost incurred due to the implementation of a government directive, then government should ideally bear these costs to avoid increasing the cost of doing business for investors. It would be unfair to ask the industry to cater for a policy that has been issued by government, especially where such a policy is implemented without engaging those affected. It a zero sum game for both government and the investor because it will take a toll on both industry resources and finances making compliance increasingly difficult.
Taxes impact cost of production currently and in the future for many industries. Taxation policy can be useful in predicting output fluctuations throughout the business year, encouraging long-term investments and increasing revenue to the country. Hence, taxes should be designed to optimize growth of industry and increase competitiveness.
According to the EAC Industrialization Strategy (2012-2032), the rate of industrial grown needs to be 11.7% per annum to achieve a GDP contribution of 25% within the next 20 years. In order for us to advance our economy and realize this goal, we must focus on increasing and sustaining four critical facets; job creation, revenue generation, value addition and export earnings. A thriving manufacturing sector is able to deliver all four and much more.
The case for industrializing economies has a proven track record throughout history, only if taxation leans towards the protection and nurturing of local industries. As the sources of productivity and socio-economic stability for our country, it is imperative that the government boosts investor confidence by providing the right policies which motivates the latter to invest or scale up their investments in Kenya.
The writer is the CEO of Kenya Association of Manufacturers and the UN Global Compact Network Representative for Kenya. She can be reached at email@example.com