IMF says tax incentives subject to abuse

March 21, 2011

, NAIROBI, Kenya, Mar 21- The International Monetary Fund (IMF) has challenged the Treasury to work on eliminating a number of tax privileges and incentives as a way of boosting revenue collection.

Speaking during the opening of a conference for improving tax revenue collection, IMF Director of Fiscal Affairs Carlo Cottareli said fair and efficient revenue systems are essential for the long-term sustainability of public finances.

"I would underscore the importance of reducing tax expenditure such as special treatment of certain activities in various sectors. Very often these exemptions don\’t actually achieve what they are meant to achieve," Mr Cottareli said.

Mr Cottareli said the Treasury should identify and reduce tax privileges that have not had the desired effect towards revenue collection.

"Efficient revenue collection can unlock vital resources to tackle the root cause of poverty and promote long term development in an equitable manner," Mr Cottareli said.

The IMF has, together with the Ministry of Finance, put tax reforms as a priority as the country looks to boost its revenue collection.

The list of incentives currently in place and are likely to be targeted include tax breaks and rebates accorded to the Export Processing Zones and the locally manufactured goods for export under the Africa Growth and Opportunity Act (AGOA).

The IMF believes a number of tax exemptions have been subject to abuse.

The tax exemptions in question include duty-free cars for university lecturers and military personnel, salaries of constitutional office holders and Members of Parliament.

Speaking at the conference, Finance Minister Uhuru Kenyatta said as part of ongoing tax reforms, the Treasury is already working on measures to simplify the tax system with a view of implementing them before the next budget.

"That is something that we are currently undertaking. As a result of many amendments over the years it has become a very complex structure and we are working towards simplifying that," Mr Kenyatta said.

The Minister said that they were also working on the tax laws to enhance compliance by taxpayers.

The ongoing reforms will also look at expanding the country\’s tax base with the government targeting the informal sector as an area from which to grow its revenue collection.

"Expanding the tax net to include the informal sector is necessary to improve compliance and increase revenue yield in the country," he said.

The Minister said efficient revenue mobilisation is critical in creating fiscal space for financing priority development in the country.

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