Why We Need A Stable And Predictable Tax Regime In Kenya

By Anthony Mwangi

The importance of predictable and stable policies in driving the realization of a country’s socio-economic goals cannot be over-emphasized.

One of the key elements on this front is taxation, which is fundamental for any Government to raise revenue. It is through taxation that the Government works toward the efficient provision of public goods and services.

To the investors, a stable tax regime allows businesses to consciously make investment decisions without worrying about the uncertainty and costs associated with reviews of taxation laws.  An unstable and unpredictable tax regime does the opposite – it hinders investors’ progress, thus stagnating a country’s growth.

A look at Kenya’s taxation regime raises three significant concerns – lack of clear tax policy objectives; erratic changes in the tax code; and multiple taxations at the national and county levels of Government. I will share shortly some examples of how unpredictable policies negatively impacts business and the economy.

To start with, an example of unpredictability and instability of our tax regime is the proposed Excise Duty (Excise Goods Management System) (Amendment) Regulations, 2023, that seek to increase the rates of excise stamps for bottled water, juices and any other non-alcoholic drinks, cosmetics, alcoholic beverages, tobacco and nicotine products and export products subject to excise with effect from 1st March 2023. 

The proposal comes barely four months after a 6.3% inflation adjustment on specific excise tax rates that was effected on 1st October 2022, impacting cosmetics, confectionary, alcoholic and non-alcoholic beverages including bottled water, and tobacco and nicotine products, among other products.

Three months before the inflation adjustment, there was an increase in excise taxes from 1st July 2022, by between 10% and 20% through the Finance Act, 2022.  From the onset, our position has been that the government needs to retain the current charges on the excise stamps.

Another example is the limitation of interest deduction to 30% of Earnings Before Interest Tax, Depreciation, and Amortization (EBITDA) in the Finance Act, of 2021. This measure introduced a restriction on the amount of interest and other financing amounts that a company may deduct in computing its profits for Corporation Tax purposes. The EBITDA policy harms capital-intensive industries, such as manufacturing, housing, and transport. Combined, these industries contribute 25% to the country’s GDP.

The limitation of interest deduction to 30% of EBITDA goes against the Government’s commitment to driving industrial growth in the country. Such tax provisions shall hinder investments and hurt Government priorities by slowing down economic growth, generation of tax revenue as well as job creation. Specifically, EBITDA shall impede the realization of the Affordable Housing goal and increase investment costs in the manufacturing, transport, and housing industries. The ideal solution which we are advocating for is to revert to the pre-Finance Act 2021’s basis for interest restriction under thin capitalization rules, whereby the ratio of debt to equity was 3:1.

It is critical to note that Kenya’s tax system is too complex, which leads to losses in revenue collection. Additionally, revenue generated from taxes was 13.8 percent in the financial year 2020/21, which is below the required East African Community’s target of 25 percent. This is despite heavy investments by the government to transform the tax system.

What, then, is an ideal tax system for Kenya? The Oklahoma Institute of Policy describes a good tax system as one that meets five basic conditions: fairness, adequacy, simplicity, transparency, and administrative ease. One of the ways of reaching these basic conditions is by finalizing and implementing the National Tax Policy, with a focus on enhancing certainty and predictability in the tax code. If implemented, it shall drive our competitiveness, enable the creation of stable and predictable tax policies that support long-term planning by businesses; and drive export-led growth.

Sudden changes in fiscal policy and regulations divert the industry’s resource allocation from productivity to meeting the costs associated with changes toward fast compliance. 

As a country, we should aspire to have progressive tax policies that drive innovation, increase investments, and enable us to take advantage of various opportunities for our nation’s prosperity. In doing so, we shall be better positioned to increase the manufacturing sector’s contribution to the GDP to 20% by 2030, as envisioned in our Manufacturing Vision20by30.

The writer is the Chief Executive of the Kenya Association of Manufacturers and can be reached at ceo@kam.co.ke.