The Budget Statement for the Financial Year 2019/20 was read on 13th of June 2019 by the Cabinet Secretary for the National Treasury, Hon. Henry Rotich.
The theme for this year’s Budget Statement is: Creating Jobs, Transforming Lives – Harnessing the “Big Four” Plan. This theme is probably befitting an economy that faces a paradox of high unemployment among the youth, low income and high economic growth.
Over and above that, The Government of Kenya has been on a relentless drive to rein the runaway recurrent expenditure, embezzle and fleece of public resources. The International Monetary Fund and The World Bank have been piling pressure on the government to institute reforms that require a reduction on the recurrent expenditure which have translated to government audits that have recommended a reduced size of government, recurrent expenditure on wages and salaries as well recommended monitoring of public resources to reduce misuse.
This year’s budget chose a route to achieving this uphill quest of taking expenditure to endurable limits which will in turn reduce the government borrowing. Kenya’s economy grew by 6.3% in 2018 compared with 4.9% growth in 2017 with a forecasted growth of 5.8% in 2019/2020 when the Big 4 Agenda gains momentum.
The 2019/2020 budget then in a nutshell seeks to address the following;
To review the budget, we shall briefly delve into the raft of proposed tax measures and emerging challenges to achieving the goals envisioned in the budget statement.
A Highlight Of The Tax Measures
Capital Gains Tax
Personal Income Tax
Value Added Tax (VAT)
Miscellaneous Fees and Levies
Enhanced investigative capacity
Emerging challenges: The Realities of Playing the Balancing Act
Deficit and Resource Mobilization: One of Kenya’s recurring challenge is the growing budget deficit which forces the country to borrow internationally. In 2018 for example, Kenya recorded a Government Budget deficit equal to 6.70 percent of the country's Gross Domestic Product. This has been noted to be very alarming.
Currently, there is an estimated deficit of Sh607.8 billion, an increase from Sh562 billion. The government is likely to borrow more in the next fiscal year to bridge the deficit as Kenya Revenue Authority (KRA) is expected to miss this year’s revenue collection target by Sh118 billion, a move likely to plunge the country into further debt. Treasury Cabinet Secretary Henry Rotich has set a revenue target of Sh2.2 trillion while KRA is expected to collect approximately Sh1.9 trillion. The government might also heighten the tax regime to fill this budget deficit.
Tax Efficiency and Public Participation
Kenya’s tax efficiency and universal suffrage in the tax policy making process has been routinely tested and shows that not much is being achieved. An example can be drawn on the presumptive tax issue.
Finance Act 2018 replaced turnover tax with presumptive tax to persons who are issued with a single business permit by a County Government applicable at 15% of the single business permit fee in a move to widen revenue collection in the informal sector.
The Finance Bill 2019 however, proposes to reintroduce turnover tax for businesses whose turnover does not exceed KES 5 million citing, the revenue collection will not be commensurate to the revenue earned by the business. It is however worthy to note that, presumptive tax will still be maintained as minimum tax. The lack of coordination between the local governments and national governments in tax collection and administration as well as failed tax measures shows that there is need for a policy on public participation in the tax policy making and administrative process.
New Frontiers: Taxing the Digital Space (e-commerce)
Kenya has experienced a surging growth in e-commerce. This is not only evident from the major e-commerce trading platforms, but the number of individuals selling goods and their services on social media platforms such as Instagram, Twitter and Facebook.
In a public notice, the taxman said it had noted that some taxpayers carry on online business but they do not file returns or pay taxes on the transactions. It is however important to note that the Kenya Revenue Authority has not developed rules to guide the taxation of e-commerce.
The rules will be interesting to watch due to the challenges the digital space offer in terms of jurisdiction. e-commerce makes it easier for businesses to be conducted without having to create an entity which would otherwise be subject to tax. Thus, will the taxman tax the entities based on the presence of their servers to determine tax residence or place of actual sale? The rules will be interesting to watch.
Conclusion: Most Kenyans felt a disconnect between their experience and the growth in the economy in 2018. This is mainly because a significant portion of growth arose from government spending and initiatives and capital intensive sectors including large scale agriculture, forestry and fishing, transport and storage and wholesale trade. This led to a disproportionate change in employment. Further, constrained access to credit experienced by the private sector led to SMEs borrowing at very high rates outside the banking system and poor performance by firms led to thousands of job cuts, resulting in a reduction in consumer spending.
This informed the theme of the budget. It will be interesting to see the effects of the budget on common citizens as well as Medium and Small enterprises. A judgment as to whether the taxman’s obligations and the entrepreneurs rights to associate in business can only be properly arrived after the end of the financial year. Taxation has to have a cause and its consequences may be far from the cause.
By Edwin N. Kimani
*The writer is a Lawyer and the managing partner at Avikele Services, a professional services firm offering legal, tax, accounting, business development and consulting services to enterprises of all sizes and industries.