Excerpt : Tax frenzy can end if State slashes expenses
As you read this piece, various business organizations and professional bodies are in court, seeking an injunction against the 1% Minimum Tax on turnover introduced by the Government, effective 1stJanuary 2021. One of the several desperate tax measures to raise revenues for its empty coffers, the Minimum Tax is unprecedented as it seeks to tax capital, rather than profits, and if effected may lead to closure of some businesses already reeling under Covid 19 impact. Taxes are paid on net income, which is revenue less expenditure. Loss making corporations ought not to pay taxes according to letter and spirit of Income Tax Act.
Minimum Tax implies all businesses must pay tax regardless of their financial performance. Its proponents argue it is about equity and fairness in tax administration, an anti-tax avoidance measure and an expansion of the tax base. Most businesses in the manufacturing, distribution and retail sectors have huge turnover but very small margins even before applying production and operating costs. There is no equity or fairness in levying taxes on a business that is struggling to pay its suppliers and financiers, or worse still making losses that are eroding its capital. Government should not disregard the health of an enterprise, when the global economy today is about providing better business environment and enhancing ease of doing business.
KRA routinely audits companies to assess whether their taxable profits declared in their returns have been computed in accordance with the law, essentially to assess the accuracy of its declared income. If there are companies evading taxes, it has mechanisms for dealing with it. Minimum Tax will hurt businesses that suffer genuine operational losses. Furthermore, raising taxes without considering its adverse impact on the economy is disastrous. All business affected by this tax will pass it on to their customers ultimately. For instance, importers of raw materials are factoring the 1% in their prices to manufacturers; the latter will do the same to their distributors /wholesalers, and similarly these will pass it on to the retailers and outlets.
To make it worse, the most affected enterprises are those engaged in manufacture and/or trade of consumer goods, including basic essential goods such as foodstuff. In a country where the citizens are already burdened by the harmful effects of Covid 19 lockdowns, job losses and erosion of livelihoods, this tax will likely translate to increases in prices of basic goods for the Mwanachi. Ironically, ‘elite’ sectors of the economy such as the financial sector including banks and insurance companies, petroleum businesses, mining sector, real estate, etc are exempted from this tax. If its about perennial loss makers, none would match losses made by Kenya Airways which has also been expressly exempted from the tax.
Minimum Tax is like the GPT of the colonial era when residents were forced to pay tax as citizens whether or not you earned an income.
But this is not the only tax measure introduced last year that will hurt businesses and raise the cost of living for Kenyans. Capital allowances, where businesses deduct the cost of investment in buildings, plant and machinery from their earnings in order to recoup their capital outlay before paying taxes, were reduced significantly in 2020/21 Budget. Similarly, various tax reliefs, remissions and other tax incentives were removed. All these tax measures create uncertainty for business with potential suspension of investments, reduced operations, loss of jobs and in some cases encourage relocation to other countries in the region. With most businesses in dire situation due to low demand, high cost of raw materials and eroded consumer purchasing power, the timing of these measures are most inappropriate, if at all.
One of the Big 4 agenda of this government is manufacturing which is intended to create jobs and enhance our competitiveness. Yet, most of the tax measures are inimical to this objective. For instance, removal of rebates on electricity to manufacturers just a year after it came in to effect would mean high cost of production leading to loss of market because they will not be competitive. Already, Kenya has lost much ground to Uganda, Tanzania, Ethiopia and Rwanda in terms of our exports because our products cannot compete in those countries on price. We are seeing that even in basic agricultural products.
Most Kenyans are not aware that the high price of goods could be due to tax. For instance, when fuel prices were raised recently, it became apparent to most Kenyans that for every litre of petrol that you buy at Kshs 122 in Nairobi, sh 59 is for the Government. Fuel prices attract a number of Government taxes and levies including Road Maintenance Levy (RML), Petroleum Development Levy (PDL), Petroleum Regulatory Levy (PRL), Railway Development Levy (RDL), Anti-adulteration levy for kerosene, Merchant Shipping Levy, Import Declaration Fee (IDF) and of course the Value Added Tax (VAT) at 8%. Why would a motorist pay for petroleum development when the Government sells oil blocks to exploration companies?
The 2% RDL fee is charged on every import you can imagine, including your favourite cooking oil, pasta or pair of shoes. Never mind that RDL is used to pay for the SGR operations that make huge losses every year which will be shielded from the Minimum Tax too. With the introduction of VAT on fuel, it makes no sense to have all these levies.
Next time you buy your favourite bottle of water, you will have paid the Government sh 5 excise duty on it. If you enjoy your music from your local online DJ, they will have parted with 1.5% tax to make you happy. Our rural folks using kerosene pay sh18 levy to prevent adulteration of diesel that they does not use, a function some Government folk earning salary should be doing.
Our PAYE rates, which kick in at salaries above sh 24,000 per month, are relatively higher than those in the region, and unnecessarily high for an economy with a small formal wage sector. Companies pay Corporation Tax on their profits at 30% annually which is pretty high and act as a disincentive to investments, and Withholding Tax on dividends they pay to their shareholders. Nearly everything you buy in your favourite store, except unga, has 16% Value Added Tax (VAT). If you take your car to a garage, or get someone to paint your house, their charge will include VAT, as do the cost of all services. Importers have to pay Customs Duty and VAT on imports of raw materials and finished goods.
We have Excise Duty on many other products and services, including your simple bank and mobile money transactions. Then there are property taxes, catering levy in the hospitality sector, capital gains, you name it! Even our small businesses are not spared. They pay Turnover tax at 1%. Whether you run a truck, a matatu or rent your apartment, the Government earns revenue. It matters little to Government that you may have defaulted in your mortgage payment for the apartment, or the matatu. Indeed, according to CBK report last week, loan defaults on property mortgage and transport sector was sh 100 billion last year, due to the massive job losses and business failures occasioned by Covid 19 lockdowns in the country.
The next time you book your flight to Mombasa after the lockdown, please look keenly at your air ticket. The air passenger service tax levied by KRA may be the highest component. Besides airlines also pay air navigation service charge, making air travel generally very expensive in the country.
Businesses are not spared by other taxes and charges by county governments. If you are a manufacturer in Nairobi and you dispatch your truck to Meru to deliver goods, you have pay for a distributor’s license in Meru. If you distribute goods in several other counties, you have to pay hefty distribution license fees in each of the counties. If the truck is branded, you will have to pay for branding license fees in all the counties it stops in! It’s pure madness. Under Article 209 of the Constitution, counties cannot charge any tax other than property and entertainment taxes unless authorized by an act of Parliament. A county may impose charges for the services they provide. You may wonder what services they charge for in the above instances.
In a recent CBK survey carried in the local media, a majority of the CEOs of businesses interviewed expressed concern that the new tax measures, VAT /Withholding Tax refund backlog, excise duty on fast-moving consumer goods among others represent the biggest threat to their operations than Covid 19. According to the Labour ministry, nearly 2 million Kenyans lost jobs last year due to the lockdowns. The situation is not getting better with even stricter Covid 19 measures this year. The Government’s reversal of tax reliefs to employees and companies just when the pandemic effects are being felt was a bad decision.
The Government is obsessed with maximizing tax revenues rather than rationalizing its expenditures, making the cost of living very high for the citizens. We can’t breathe because of a tax obsession by an administration content with living beyond its means.