When starting her cereal milling business, Mwathi had great aspirations to offer her customers a great product and transform her community through job creation. To meet demand and sustain production, she organized the supply of raw materials from upcountry to her factory in Nairobi.
What she did not expect is the unforeseen and new tax requirements that abruptly increase the cost of production. This is in addition to the many other levies she is expected to pay.
A Regulatory Audit Report by the Kenya Association of Manufacturers (KAM) estimates an average of 33 levies paid by players in the Food and Beverage sector. As a compliant SME, she has no option but to bring on board an expert to break down the new taxes and payment schedules.
The unpredictable tax regime is not unique to Mwathi. It is a challenge that continues to face many businesses in the country as both national and county governments continue to introduce new fees, levies, and charges. For instance, Nairobi County Government recently introduced a new market cess for cereal products brought to Nairobi from other counties. The National Assembly’s Committee on Delegated Legislation approved the Public Finance Management (National Road Toll Fund) Regulations 2021, which seek to introduce user fees on major roads, bridges, and tunnels.
Whereas the government relies on the various forms of taxes as a major source of revenue, unfriendly fiscal and taxation policies harm businesses. Kenya’s tax code is complex and bulky, requiring firms to employ tax planners, tariff engineers, lawyers, and specific accountants to render professional advice. Whereas large firms can often afford the cost of compliance, small-scale manufacturing firms often comply, at great costs and loss of efficiency.
The Manufacturing Manifesto, 2022 – 2027, has outlined three key concerns regarding Kenya’s tax regime. One is the lack of clear tax policy objectives in legislative proposals informing changes in taxation. This has resulted in fundamental tax policy issues that are inconsistent with Kenya’s stated economic policy objectives where proposed changes have been implemented. Two, erratic changes in the tax codes. Kenya’s tax code changes annually and in very significant ways.
Additionally, these changes are accompanied by significant requirements for compliance that are brought forward by regulations which create additional complexities. More so, if the regulations were not published through a consultative process and in advance of the effective date. Third, multiple taxations at county and national government levels.
The ability to accurately identify future incomes and expenses is a key component for businesses to thrive as it allows them to plan and determine whether to increase investments. Finding a middle ground between a conducive business environment for business to thrive and increasing government revenue is paramount.
This is only possible if the government institutes efficient and fair tax systems. Consequently, lead to a good tax system that meets the basic conditions of fairness, adequacy, simplicity, transparency, and administrative ease, as outlined by Oklahoma Policy Organization. Fairness speaks to everyone paying an equitable share of taxes. Adequacy means that taxes collected provide enough revenue to meet society’s basic needs.
Simplicity focuses on tax systems that help taxpayers better understand the system whilst reducing the cost of compliance. Transparency ensures that citizens and their leaders can easily access information on tax systems and how the taxes are used. Administrative ease means that the tax system is not too complicated nor costly to taxpayers or collectors.
We urge the government to develop and implement the proposed National Tax Policy, with a focus on enhancing certainty and predictability, reducing the number of taxes, reducing levels of taxation, reducing reliance on direct taxes, broadening the tax base, automating tax collection, and introducing transitional clauses for new taxes. Additionally, the country must ensure that there are no erratic changes to the Tax Code.
The manufacturing sector is poised to transform the country. By creating a conducive fiscal environment, we present Mwathi and others like her with an opportunity to grow and expand their business, create jobs, and eventually expand the government’s revenue base.
Ms Phyllis Wakiaga is the Chief Executive of Kenya Association of Manufacturers and can be reached at email@example.com.