Why new tax plan will hurt economic recovery

Wednesday, June 5th, 2024 09:37 | By
Players in various sectors of the economy say unchecked tax increases will lead to high retail prices and ultimately overburden Kenyans. PHOTO/Print
Players in various sectors of the economy say unchecked tax increases will lead to high retail prices and ultimately overburden Kenyans. PHOTO/Print

Players in various sectors have poked holes in the Finance Bill 2024, saying if implemented will negatively impact economic recovery.

The players among them realtors and insurance sector stated that unless many of the tax proposals are amended, the Bill will increase the cost of production thereby destroying industry’s competitiveness, and subsequently, dent local and export markets, increase retail prices and ultimately overburden Kenyans.

Among other things, the bill introduces Motor-Vehicle Tax, Minimum Top-Up Tax and Significant Economic Presence tax and amendments aimed at enhancing revenue collection and tax compliance.

President William Ruto’s administration seeks to enhance tax collection systems to fund his Sh3.9 trillion budget, a move that has elicited mixed reactions from economists and entrepreneurs who have warned that overburdening Kenyans with taxes could slide the country into even more economic difficulties. Among the disgruntled taxpayers are players in the insurance sector who now want Members of Parliament to dismiss tax proposals contained in the Finance Bill, 2024 over fears that it will increase the cost of insurance triggering massive job losses.

Shooting down

Appearing before the National Assembly Finance and National Planning Committee, the Association of Kenya Insurers (AKI) particularly sought the shooting down of Value Added Tax (VAT) on insurance services and motor vehicle tax saying penetration of the industry is still low.

From the insurance sector alone, Ruto seeks to collect an additional revenue of Sh58 billion, a move that players in the struggling sector claim will kill the industry that employs thousands of Kenyans.

The association warned that introduction of VAT on other insurance services will see an increase in the cost of accessing insurance services due to the increased VAT passed on to the final consumer through an increase in premiums charged.

“The increase in cost will negatively affect the ability of low-income earners and small and medium enterprises (SMEs) to access essential insurance services such as medical and life insurance,” a section of their written submissions to the committee reads. “In addition, the “other services” for which VAT is imposed leaves room for ambiguity in interpretation in the tax system.”

Imposing VAT on other insurance services such as commissions, the players said, will increase the insurance companies’ management expenses which will consequently increase insurance premiums as businesses seek to recover the increasing management costs. “For instance, where one takes up a motor vehicle insurance policy, for Sh200,000 premium, the premium already includes a 10 per cent commission payable which is the maximum commission payable in the case of a motor vehicle insurance policy,” AKI said.

The insurers noted that Kenya’s insurance penetration rate is generally low compared to the global average penetration rate and introduction of VAT on insurance services such as commission is likely to reduce the insurance penetration rate further due to increased premiums.

Further, the players decried that the increased insurance costs are likely to affect mobilisation of savings from the public who preferred the use of insurance products as an easier savings mechanism.

Government services

According to Ken Wamburu, the CEO in charge of Imara Lands Limited, collection of taxes is a good thing as the economy and delivery of government services can only be sustained through taxes but the collection should strike a balance so as not to kill the economy.

He noted with concern that when taxes are high, there are fewer entrepreneurs, and fewer businesses are created, which results in creation of less wealth.He regretted that tax increments risk exacerbating financial burdens on both citizens and businesses, possibly leading to a deeper economic recession.

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