BY DAVID WANYOIKE
The 2013-14 budget is expected to be an inspirational one largely moulded to conform to the new government’s ambitious development agenda. According to estimates presented to the National Assembly by the Treasury, the total budget for the fiscal year 2013-14 is anticipated to be over Sh1.6 trillion.
The projected increased spending was expected based on immense funding requirements both at the national and county levels. However, in spite of the expected ambitious spending plan by the government, the budget is likely to offer plenty of troubling questions. The budget financing prospects remain a major concern.
Majority of Kenyans are hoping for a comprehensive budget statement that could tackle the widening deficit and offer stability on policy volatility. The big question is what are the financing options available to the new occupant of the Treasury portfolio?
The readily available option that could easily address the budget financing headache would be raising of the taxes. However, it would be heinous move for the new administration to even think of increasing taxes on the citizens who already feel overburdened by the existing tax regime. It is thus pretty clear that increasing of taxes, particularly the income taxes, may not be an option. Indeed, taxpayers will more likely be keen to watch how the available taxes are applied on policies likely to improve their welfare.
Tax morality is set to become a major issue where people get disgruntled with what they get for their tax money. Concerns are likely to be directed at the efficiency in spending tax money, the ability to broaden the tax base and the avoidance of falling too deeply into debt.
The government anticipates the tax revenue to grow by more than 20 percent in the fiscal year 2013-14. The question begging for an answer is how this would be possible without radical tax policies coming into play. The tax structure is expected to remain almost intact, yet tax revenues are estimated to rise by 20 percent.
The budget estimates for tax revenues for fiscal year 2012-13 are expected to fall short of the budgeted estimates. It is also very possible that other revenue sources such as non-tax revenue, grants and loans could be patently overstated. What then are the financing options available to the current administration?
The obvious solution to the anticipated tax revenue impediment is raising the sin taxes. The government has always found it easy to reign on the sin taxes, a move that has become synonymous with every budget. The increase of sin taxes may however not be adequate to cover the expected ambitious tax revenue growth. This being the case, the government is expected to become more creative through invention of viable solutions to the challenges posed by limited revenue sources.
Firstly, excise duty on financial services is expected to give a significant boost to the realisation of the tax revenue levels. Excise duty on financial services was introduced in January 2013 through Finance Act 2012 although its implementation is still on hold due to technical and implementation challenges.
The Finance Act amendment sought to impose 10pc excise duty on money transfer services fees charged by cellular phone service providers, banks, money transfer agencies and other financial service providers. The cellular phone service providers are already complying with this legislation. The amendment also sought to impose 10pc excise duty on other fees charged by financial institutions. The National Treasury Secretary is expected to urgently address the noted challenges to ensure speedy implementation.
VAT presents yet another straightforward opportunity to boost attainability of the tax revenue target. VAT has become a prevalent source of revenue for governments world over due to its ease of administration. Kenya has had a keen interest in VAT as a key source of revenue, a fact largely affirmed by the ambitious, albeit stalled, overhauling process of the VAT law.
The government has been working tirelessly in developing a new VAT strategy that harmonizes and simplifies VAT rules to address the bottlenecks witnessed in the current regime. The VAT Bill 2012 offers the requisite solutions to the VAT woes experienced over the years. The Treasury Secretary will earnestly be keen to have the Bill enacted into law.
The thorny issue regarding taxation of capital gains could also feature to wade off the financing headache facing the new administration. Taxation of capital gains was suspended in Kenya in 1980s to boost investments in real estate sector as well as the deepening of the financial sector through marketable securities. However, since then the real estate and securities market have experienced tremendous growth. Indeed, capital gains arising from real estate transactions have made many multi-millionaires than any other sector in the country.
Notably, it can be argued that the sector has not made its share of contribution to the consolidated fund. Capital gains tax is present in many Africa countries including some of the EAC member states such as Uganda and Tanzania.
The likelihood of reintroduction of capital gains tax is eminent judging by the tax amendment recently introduced on the oil and mineral sector transactions. The Finance Act 2012 introduced an amendment to bring to taxation the consideration relating to sale of property or shares in respect of oil companies, mining companies or mineral prospecting companies.
Sale of property or shares broadly includes such transactions as the assignment of rights, sale of companies and businesses, and takeovers or other non inventory assets. The Treasury Secretary is likely to take this amendment a notch higher by reigning on the real estate business transactions.
The government is facing the challenge of addressing poverty and inequality while also having to build a productive relationship with business. While the financing of the ambitious budget is a daunting task, the government will ultimately be judged by voters on how well they craft suitable policies to meet financing targets without hurting their welfare.
(The writer is a tax expert with Ernst & Young. Email: firstname.lastname@example.org. The views expressed are not necessarily those of Ernst & Young).