There’s a simple reason why the top 30 countries in ease of doing business index have remained in the same position for years, and why Singapore has been labelled as the ‘easiest place to do business for a decade. This reason was best described by Kaushik Basu, chief economist at the World Bank, as follows; ‘The best performers are not those with little regulation but those with good rules that allow efficient and transparent functioning of businesses and markets while protecting the public interest’.
Last year Kenya’s position in the Index moved up 21 places to position 108, but at the rate with which the difficulties in the business environment keep resurfacing, we may find ourselves backtracking on this progress. It would seem, that wherever new regulations are introduced they leave in their wake confusion and cumbersome processes, which create new problems on top of the existing ones for local businesses.
For instance, in January, when the Tax procedures Act did away with the provision in Section 25 of the 2013 VAT ACT on the appointment of withholding VAT Agents, it created a conundrum in the business community on the legality of the act and whether businesses should withhold or not.
Then came the Legal Notice 117 published on 21 June 2016, which was an admission of the fact that the collection of withholding tax from 18th of January when the Tax procedures Act came into force, to 9th June stipulated in the notice, was without any legal basis.
In other words, if you withheld VAT, it appears that you collected it against the law. Thankfully, all you have to do is to forward any monies withheld to KRA. If however, you did not collect it, no penalties accrue to you.
The Legal notice also provides a provisional allowance to withhold VAT until the 2016 Finance Bill, is passed into law either in August or September.
One the one hand it certainly provides clarity on the legal question, but in doing so provides a rather chaotic structure in which the withholding tax can be collected – to have the businesses themselves be agents.
For Manufacturers for example this would mean, diverting crucial resources, from their core business which is creating, invention and making things towards the tedious administrative work of collecting this tax.
If new software has to be installed and staff trained on how to reconcile these documents who would set up in to shoulder these costs as incentive or relief for businesses? What about the complexity of reconciliation – what would happen if one business pays VAT, but the organisation withholding the VAT does not forward it to KRA? How much time and human resource would it take to rectify this situation?
Some of the justifications that I have heard for appointing withholding tax agents is that the system of withholding VAT was introduced as a source of information for KRA to tap into large companies’ supplier networks and monitor compliance. And as industry we are very much in favour of KRA increasing their tax bracket in order to streamline the business environment and acquire revenue with which we can build our nation.
However, new regulations and procedures have to demonstrate an awareness of the current business environment as it is, and even further, look to easing the current burden on businesses in the long run. These structures must be progressive in terms of increasing efficiency, transparency and turn-around time simultaneously dealing with issues of compliance.
Singapore was ranked number 5 on the paying taxes indicator in the Ease of Doing Business index this year compared to Kenya’s ranking at 101. Their Distance to Frontier Score (shows the distance to the best performance in the Doing Business index with 0 being the worst and 100 the frontier) on paying taxes was a whopping 96.56%.
These kinds of regulatory structures are possible for us too, and can be formulated through stakeholder consultations with the business community. Regulating the business environment is a necessity for all, however, for this to be a win-win situation, it has to be a collaborative process with all stakeholders from the start.
The writer is the CEO of the Kenya Association of Manufacturers and the local representative for Global Compact Network in Kenya. She can be reached on firstname.lastname@example.org.