PKF Proposes Tough Measure for Kenya’s Economic Stimulus and Sustainability

Photo I David Jones @Cropnuts_agron

PKF Kenya, an accountants and business advisers firm,  is calling for tougher measures to control rising corruption cases and public debt in order to stimulate economic growth.

In its pre-budget briefing, PKF is proposing that the Government rebuilds its capacity to fight corruption by focusing on long term projects.

“There is a need to urgently rebuild the capacity of the Government to implement projects and prevent corruption and to do this it will be necessary to stop all projects, take stock and close the taps,” said David Kabeberi.

Among the proposed capacity building measures include data warehousing technology to curb corruption; modernising court management systems and strengthening internal oversight within the judiciary and reducing the size of government. PKF applauds the very recent currency demonetisation actions which will address graft in money deals and lockout the cash that is unaccounted for.

“Endemic corruption has led to weakened and incapacitated institutions, controls, checks and balances; Inefficient and ineffective planning and execution of projects and can be seen in a large number of stalled and dead projects contributing to the loss in GDP,” said Kabeberi.

PKF is also calling for the establishment of an Independent Public Debt Review and Management Mechanism to examine current debt and possible restructuring.  It will also provide oversight over future borrowings.

According to PKF, there is insufficient information to establish if the public debt, which stands at a high of 51% of GDP, is well planned.

“There is insufficient information to assess sovereign risk and risk of loss of control of infrastructure as a result of the high debt ratio,” said Kabeberi.

PKF raised concerns on significant amounts of the debt being sunk in stalled or dead projects and use of short-term debt to fund long-term projects and parliamentary approvals for taking on debt.

PKF is proposing that the government should focus on tax measures aimed at stimulating businesses in the country.

Among the measures being proposed include a reduction of corporate tax rate to 20% for a three-year stimulus period; simplified importation rules and pre-shipment verification for small traders and modernisation of tax laws.

 “The government should put in place tax measures to improve compliance, efficiency and tax administration, while at the same time creating a conducive environment for businesses to grow,” said PKF’s Michael Mburugu.

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Summary of proposed Taxation Measures

Local tax amnesty: Following the recently announced currency demonetisation, a local tax amnesty would be a golden opportunity for the government to collect tax and also widen the tax net since many persons would be attracted to take this up. The on-going foreign income tax amnesty that is expiring on 30 June 2019 has been very successful, an indication that a local amnesty would also be very successful. We recommend such an amnesty be at a preferential rate of principal tax providing a win-win situation for both the government and the taxpayer.

20% corporate tax rate for a three-year stimulus period: It is obvious that many middle and large sized companies are struggling to keep afloat due to the sustained adverse economic climate in the last three years. In order to stimulate growth and put these companies back on track, the government should consider reducing the income tax rate to 20% for businesses for a period of three years to enable companies re-invest in their businesses. This will help to create employment.

Revamp and strengthen Kenya Revenue Authority: Over the last few years, the KRA has faced operational challenges as a result of long-term systemic failure of processes, structures and technology. The revenue authority has in the last few years changed tax management systems three times (the Legacy System, the Integrated Tax Management System (ITMS) and now the iTAX system). The implementation of the excise tax management system (EGMS) has stalled due to poor sensitization and lack of stakeholder involvement and this has led to potential leakage of tax revenues. It is time to give a very serious thought on structures and systems at KRA to strengthen governance, motivate staff and build an efficient result oriented tax authority. A strong tax authority akin to the Internal Revenue Services of the US and Her Majesty Revenue and Customs Services of the UK is necessary to ensure Kenya remains on course in implementing key projects towards achieving Vision 2030 goals.

Simplified importation rules and pre-shipment verification for small traders: In the recent past we have witnessed unjustified and wasteful destruction of merchandise largely belonging to small scale traders who import through consolidators. These traders form a big part of the middle class and small entrepreneurs who contribute greatly to self-employment. Whereas we appreciate the government’s efforts to fight counterfeits, such efforts should not be a basis to punish honest traders. To deal with this problem, the government should enact regulations to guide consolidation and emphasize on pre-shipment verification in order to fast track clearance of containers at our ports. Additionally, the KRA post clearance department should be revamped to reduce congestion at the ports. The green channel import platform for big importers should be encouraged to avoid port congestion.

Capital Gains Tax: The prices of property in Kenya are soaring on a daily basis and taxpayers are faced with a huge tax burden when it comes to Capital Gains Tax (CGT), since the current tax provisions do not allow for indexation. It is high time that the government considered introducing adjustments to cater for inflation and time value of money when computing CGT since the high taxes resulting from CGT affect the pricing of property.

Taxation of digital economy/e-commerce: The world has truly become a village. Significant business deals are happening on a continuous basis between or among people who are in various parts of the world for which value is created and monumental sums of money are made. The taxation of such trade is complicated and requires modern tax laws and tools such as the common reporting standards to create fair and equitable taxation across various territorial jurisdictional taxation. The Kenyan tax laws, bilateral agreements, as well as multilateral tax treaties, need to be enhanced with a view to ensure Kenya does not lose its rightful taxes to other tax jurisdictions. 

Modernisation of tax laws: We currently operate on an income tax law of 1974. This surely should be overhauled. The recent tax laws enacted by the national assembly have failed to provide for clear methodologies of taxing e-commerce.