Implementing the National Tax Policy will help solve Kenya's tax problems

Treasury Cabinet Secretary John Mbadi aims to manage the growing public debt to more sustainable levels. Yet, annual anxiety from the finance bills, a complex and ever-changing tax system stands as a significant roadblock. In the last two years, the government has tabled tax proposals that have confused, surprised, and even annoyed many, leading to lawsuits, showdowns at public participation events and unprecedent riots and protests.

Experts argue that these complexities have dimmed hopes of economic recovery, let alone takeoff. For the economy to thrive, the tax system ought to be simple. Just recently, the World Bank warned Kenya that its unpredictable tax regime risked undermining foreign direct investments. It argued that frequent changes in regulation and policy shifts discourage investment and stifle growth. 

In alignment with its Bottom-up Economic agenda (BETA), the government launched the National Tax Policy in 2023. In an attempt to ensure predictability and simplicity of taxes, the policy proposed that a comprehensive review of tax laws would happen every five years. However, this has not been the case. On the contrary, the amendments to the tax laws in the last three financial years have provided everything but predictability. This has led to investor apathy in several ways.

Firstly, good investment decisions are made based on forecasts and proper budget planning. To achieve this, investors seek stability and predictability. A tax code that keeps changing creates uncertainty and makes it difficult to plan for the future. Businesses tend to shy away from an environment where tax rules are constantly in flux. As a result, there will be reduced investments, and the country will struggle with job creation and economic growth.

Secondly, Kenya's vibrant entrepreneurial spirit has been a key driver of progress for decades. Small and medium-sized enterprises (SMEs) have made Kenya an economic giant in Africa. However, a convoluted tax system disproportionately burdens them. Large corporations can navigate the murky waters of tax complexities through consultancies and expert advisory. SMEs on the other hand struggle to comply. This leads to diversion of resources and energy away from core activities like innovation and expansion. A simpler system would free up valuable resources for SMEs to focus on growth. This would then grow other service sectors like banking and insurance.

Thirdly, when taxes are easy to understand, they are more often than not complied with. The result of which is a reduction of the administrative burden on both businesses and the tax authorities, leading to increased tax revenue collection. Additionally, a transparent and straightforward system fosters trust between taxpayers and the government, encouraging voluntary compliance and reducing the need for costly enforcement measures.

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To achieve its objectives, the government should simply implement the National Tax Policy. Not only does it push for tax predictability and simplicity, it identifies measures that would achieve objectives of its BETA.

Specifically, it highlights measures that would widen the tax bracket, review the tax dispute resolution processes and commits to develop rules in line with international best practice. By simply implementing this policy, the government will be halfway towards achieving its revenue objectives.

Mr Omanga is a certified member of the Institute of Certified Public Accountants of Kenya