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World Bank warns high taxes will hurt economy

Steve Umidha @steveumidha

The government is running out of headroom to generate more revenues usimg a higher tax regime, the World Bank (WB) has warned, saying this is likely to slow down economic growth.

Instead, the global lender is recommending that the country comes up with cutting-edge reforms to draw incomes from local consumers and companies, without hurting them.

Some of those measures, according to the bank, should include expanding the tax base, improve duty, and cut tax exemptions.

This way, WB said, Kenya’s 2018 economic growth target of 5.7 per cent, would be realised sooner rather than later. The institution had previously forecast 5.5 per cent growth.

“Given the continuous revenue decline at a time when nominal Gross Domestic Product is growing, the ability to raise more revenue could have plateaued and significant structural reforms may be needed to reverse this worrying trend,” said WB in its latest report released yesterday.

Failure to put in place progressive reforms, WB warns,  may make it hard for the country to realise its Big Four agenda anchored on affordable housing, universal healthcare, food security and manufacturing.

“Macroeconomic policy and structural reforms are needed to boost inclusive growth and advance the government’s Big Four agenda,” said WB.

The lender estimates that total tax revenue as a ratio of the country’s GDP fell to its lowest in a decade from 17.1 per cent of GDP in 2016/17 to 15.4 per cent of GDP in 2017/18, which was attributed to underperformance in both income tax and value added tax (VAT) – which accounts for more than 70 per cent of tax revenue.

The below-par performance in income tax collection could also be associated with lower profitability in the corporate and the banking sector owing to the introduction of high interest rates two years ago, as well as inefficiencies in remitting income tax by state-run corporations presently experiencing cash flow difficulties.

Through recently hewed administrative measures such as iTax and IFMIS, the roll out of integrated customs management among others to support domestic revenue collection, the exchequer has struggled to raise enough monies to run its activities and frequently missed its revenue collection target.

Draft legislation

The National Treasury has proposed an overhaul of income tax law to improve revenue collection with a draft legislation yet to reach the Parliament for debate and possible endorsement.

Parliament had in September laid out the groundwork for a higher-than-expected taxation regime, with the initial passage of 16 per cent Value Added Tax on fuel products, much to the public outcry, which had opposed such moves, that was thought would hurt the economy and tighten living standards for most Kenyans.

President Kenyatta, owing to the unpopularity of the 16 per cent VAT of fuel, returned the Finance Bill back to parliament before later signing it into law in September 21, allowing taxation of fuel at the rate of eight per cent.

Despite such a move, life continues to be tough for ordinary Kenyans presently struggling to afford basic necessities, because of escalated costs and prices of day-to-day commodities as well as reduced currency in circulation.

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