A review of the report on the National Tax Policy: Taxing tomorrow towards economic resilience?
A review of the report on the National Tax Policy: Taxing tomorrow towards economic resilience?
The draft National Tax Policy (Policy) was presented in Parliament on 27 April 2023 and is aimed at facilitating revenue mobilisation, income distribution, regulation of goods and services with negative externalities, employment creation, price stability, economic development through investment promotion, and local value addition.
At a glance
- The draft National Tax Policy (Policy) was presented in Parliament on 27 April 2023 and has several aims to support economic development and revenue mobilisation.
- The Departmental Committee on Finance and National Planning (Committee) held stakeholder meetings and considered the Policy and the submissions by members of the public and stakeholders. The Committee then made recommendations through its Report on the Consideration of the National Tax Policy, dated 23 November 2023.
- The Committee's recommendations are thoughtful, emphasising alignment with government standards, risk management integration, and harmonization with the 2023 Medium-Term Revenue Strategy.
The Departmental Committee on Finance and National Planning (Committee) consequently held stakeholder meetings and considered the Policy and the submissions by members of the public and stakeholders. The Committee then made recommendations through its Report on the Consideration of the National Tax Policy, dated 23 November 2023.
The Policy's general structure
The Committee noted that the Policy should be aligned to the standard government format by providing for policy concerns, policy objectives, policy actions and policy outcomes. Further, it was recommended that a risk management framework be integrated into the Policy to outline procedures for identifying, assessing, mitigating and managing risks associated with the Policy's implementation.
To reconcile disparities and conflicts, the Committee recommended that the Policy be harmonised with the draft 2023 Medium-Term Revenue Strategy, and conscious of the need to respond to climate change, the Committee also recommended that the Policy be aligned to ensure that taxation supports the country's strategies in climate change mitigation.
The Committee recommended that the Policy's scope be expanded to incorporate the digital sector among the hard-to-tax sectors, which originally included the informal and agricultural sectors. Finding alternative tax strategies such as the use of withholding taxes at source when making payments was also recommended. To further expand the tax base, the Committee recommended the use of digital/electronic payments that leave a digital trail. Perhaps this explains the Government's push for invoices to be issued through the electronic Tax Invoice Management System (eTIMS).
The expansion of the Policy's scope to include the digital sector and the proposal of alternative tax strategies for hard-to-tax sectors demonstrate a forward-thinking approach to address the evolving economic landscape.
Management of tax administration
Another significant recommendation was the provision for an efficient funding structure to ensure that settlement of approved tax refunds is done within six months. Further, on tax administration management, the Committee recommended that there should be an objective criterion to determine tax incentives’ eligibility, to guard against political and private interests, and that the tax sector players who enjoy such incentives should submit statistical data on the impact of the incentives on their business growth and the national economy to the National Treasury.
As a measure to improve budget transparency, it was recommended that tax expenditure estimates should be explicitly provided in the annual budget estimates presented before the National Assembly, and the National Treasury should publicise annual tax expenditures reports.
The Committee further recommended that there is a need to ensure that income taxes are always at an optimal level so that salaried employees' disposable income and purchasing power are not eroded, and that there should be a progressive tax band structure that ensures the marginal rate is not higher than the corporate income tax rate.
In relation to inflation and its effects, the Committee recommended that there should be inflation adjustments in pensions, and to allow for five-year reviews to accommodate inflation, the rising cost of living and increasing tax burden. It also recommended that capital gains tax be made applicable to only actual gains by adjusting change in property value through the elimination of inflation’s effect, as opposed to the current computation that does not accommodate losses occasioned by inflation.
The Committee recommended that there should be multiple value-added tax (VAT) rates to allow an alternative rate to cushion the economy against shocks caused by global trends and adverse effects of increases in the prices of products. This would seem to reverse the intentions of the Government to remove the 8% VAT rate which was applicable to petroleum products before the change to the current 16% VAT rate.
Further, it was recommended that the granting of VAT exemptions should base on incentivising investment and cushioning Kenyans from economic shocks.
On the definition of “other goods” as part of the list of products to be subjected to excise duty, the Committee recommended that this category should not include essential goods, basic necessities goods, food items, medicaments, or agricultural-related products.
The Committee also recommended that the excise duty on the prevention of consumption of harmful products should be aimed at tackling the products' effects in society.
Public participation and National Assembly's approval
The Committee recommended that amendments to the East Africa Customs Management Act and general customs administration should first undergo public participation, followed by National Assembly's approval, before the Government makes any proposals to the East African Community, the regulations should be approved by the National Assembly.
The Committee further recommended that the National Assembly's approval should be applicable in double taxation agreements before execution.
In conclusion, the Committee's recommendations are thoughtful, emphasising alignment with government standards, risk management integration, and harmonization with the 2023 Medium-Term Revenue Strategy. The expansion of the policy's scope to include the digital sector, coupled with proposals for alternative tax strategies, reflect a proactive stance in adapting to economic shifts.
The Committee's focus on efficient funding structures, objective criteria for tax incentives, and increased transparency in tax expenditures demonstrate a commitment to fiscal responsibility, while the recommendations regarding income tax, VAT rates and excise duty reveal a nuanced approach to balancing economic growth with the well-being of citizens. This includes the recommendation to consider the effect of inflation on a property's value while computing capital gains tax. This will cushion investors and property owners, ensuring they only pay capital gains taxes on the actual gains in the event that they transfer their property.
Further, the recommendation to process tax refunds within six months is a welcome one in light of the current long timelines, for instance, refund of non-VAT related refunds is done within two years after application. Lastly, the emphasis on public participation and National Assembly approval underscores a dedication to democratic processes in shaping the nation's tax framework.
Together, these recommendations provide a comprehensive roadmap for optimising the National Tax Policy to foster economic development and safeguard public welfare.
The Policy, together with the Committee's recommended revisions, once approved, shall be instrumental in guiding any future revisions of tax-related laws.
The next step on the National Tax Policy is a comprehensive review of the policy by the National Treasury so as to incorporate the recommendations of the Committee and resubmission to the National Assembly by 8 January 2024.
We will wait to see if the National Tax Policy will be a driver of Kenya's economic resilience considering the rapid and uncertain tax changes that taxpayers have had to deal with in the recent past. Taxpayers, and particularly investors, prefer a predictable and certain tax environment so that they can make long-term investments into the country. The investments will generate much-needed revenue for the Government.
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