Review tax incentives policy to address revenue shortfalls

Magdalene Kariuki   

Revenue collected through tax payment is the engine power behind every sovereign state in the world. 

That notwithstanding, tax collection, since time immemorial, has never been the easiest of disciplines.

It calls for striking a balance between ensuring taxpayers pay up accordingly, and making the environment within which tax revenues are generated as conducive as possible. 

With this in view, it has been incumbent on tax administrations to explore possible ways to make tax payment a more appealing experience and at the same time recruit additional taxpayers.

One way through which this has worked well is provision of tax incentives and exemptions.

Kenya, for instance, has a tax incentive and exemptions framework whose objective is not only to promote taxpayers, but also woo investors.               

Such an incentive is the capital investment deduction where an investor who incurs capital expenditure on building and/or machinery used for manufacture is entitled to an investment deduction equal to 100 per cent of the cost.

Value Added Tax (VAT) exemptions granted to local manufacturers on specified products and donor-funded projects also constitute part of tax incentives provided by the government.

Despite the vibrant economic activities on the ground spurred by these incentives and exemptions, which correspond to the growth of the gross domestic product, the same does not reflect in the revenues collected.

The place that tax revenues could have taken ends up being taken by the exemptions or incentives.

Within the economic and tax realms, such incentives are known as tax expenditures. 

There are five classes of tax expenditures. The first class is known as tax exemptions.

As the word suggests, this means there is no tax due for the taxman’s collection.

Another class of tax expenditure is allowances, which involves allowing certain deductions on the base revenue before allowing the standard tax rate to apply.

A classic example is industrial building deductions and mining deductions. The third class is credits, which entails deductions from tax liabilities such as income tax relief granted to individual taxpayers every year. 

Fourth, there is rate relief, which translates to reduced tax rate. In light of the prevailing Covid-19 global pandemic, the government has granted a number of tax reliefs to cushion citizens during the crisis.

For instance, a 100 per cent tax relief has been granted to employees who take home less than Sh24,000 per month.

The VAT rate has also been reduced from 16 per cent to 14 per cent further exemplifying instances of tax relief. 

The fifth category of tax expenditures is tax deferral where there is a legal delay in payment of tax liabilities.

For instance, the 10-year tax holiday enjoyed by the Special Economic Zones (SEZs). 

As noted earlier, the rationale behind granting of tax incentives and exemptions is to primarily spur investment growth. 

On the cost-benefit analysis of tax incentives vis-à-vis investment, a study by KRA shows that the manufacturing sector accounted for the highest level of capital-related deductions.

Yet, the foregone revenue outweighed the accrued benefits from the tax incentives. 

In light of the above, there is a dire need to review our tax incentives and exemptions framework with a view to ensuring the accruing benefits outweigh the foregone revenue.

This could go a long way in bridging revenue deficit in the country.   —The writer is a development policy analyst