Treasury Cabinet Secretary (CS) Njuguna Ndung’u has recommended two reforms that he says need to be implemented in taxation to ensure tenfold returns.
Speaking during a media interview, the treasury boss indicated that the currently implemented tax systems were not able to generate the required revenue even if taxes were increased.
Further, he noted that the current administration was increasing taxes but failed to broaden revenue incomes therefore leading to even more financial constraints.
“With the current tax system, we cannot raise adequate revenues beyond 14.1% GDP even if we get a vibrant economy.
“If every year you are raising the tax rates and not looking at how you actually broaden to bring in more products, things become a little bit more uncomfortable,” said Ndung’u.
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Additionally, the CS said that when taxes are increased, revenue decreases because people then look for ways to evade paying taxes.
The best solution, he noted, was to understand the market and make decision based on their purchasing patterns.
“You have to be conscious about the market you are dealing with and how the market behavior is. So, we have realized that actually, the high tax rates cannot generate high revenue.
High tax rates will always create an incentive to escape taxes. High tax rate goes hand in hand with a lower compliance,” he said.
At the same time, CS Ndung’u indicated that high taxation also prompted tax refunds to companies considered to sell products that are consumed by the poor.
“The political consequences is that once you have high tax rates the political move is to refund taxes for some of the companies that are dealing with products that are being considered to be consumed by the poor,” he added.
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According to the CS, the best move to make is to have personalized tax returns instead of companies.
“We can decide that we are not going to have tax refunds, we can have personalized tax refunds. When you buy things in the supermarket, we refund you directly after you produce your receipt and not the companies,” Ndung’u said.
For instance, he said that although bread and milk get 95 percent of tax returns because they were considered to be consumed by the poor, they were actually a middle-class meal.
“The total VAT collected in Kenya comprises of about 40 percent of the total tax, 18 percent of it goes to tax refunds on items that are considered to be consumed by the poor.
“But when you look at it, you realize that 95 percent goes to bread and milk. Then the next question is that who goes to the supermarket to buy bread and milk? So, we were not compensating the poor, we were compensating the middle class,’ he explained.
At the same time, he indicated that the other solution would be to increase property taxation.
Property taxation refers to the imposition of taxes on real estate or tangible personal property by a governing authority. The amount of property tax owed is usually calculated as a percentage of the property’s assessed value.
He argued that property tax had not been increased since the 90s yet it was a great revenue source.
“We can also increase property taxation in urban areas or even in semi urban areas. Those taxes have not changed since 1970,” added the CS.
