Kenya has narrow options for sourcing funds to finance the Sh2.62 trillion budget, with fingers now pointing at a rise in the price of goods under an increase in Value Added Tax (VAT).
Economists and tax experts who spoke to the Nation say the National Treasury will find itself between two hard options of borrowing more or adding the tax burden to the citizens – options that may prove counter-productive months before a General Election.
The Budget, which analysts term a “pro-appeal, pro-election”, is expected to be presented in April amidst concerns of how the country will source the extra Sh188.5 billion increase in tax revenues.
Audit and tax advisory firm Grant Thorton Kenya’s Director Samuel Mwaura said Kenya may choose to adjust VAT by 2 per cent to 18 per cent, which is the East African Average since Treasury Cabinet Secretary (CS) Henry Rotich has the legal backing to do so.
“I don’t think there is any other option as easily implementable as increasing VAT. The VAT Act allows the CS to do it and we are still below our neighbours in East Africa. Otherwise pay as you earn is hard to touch at a time when job losses are being recorded. It may not even yield much. Either way, the citizens will have to bear it all through taxes and levies,” Mr Mwaura said.
The expenditure plan, which was made public on Wednesday, points to the rising cost of ongoing infrastructure projects and the need to woo voters in allocations targeting the grassroots.
The infrastructure and energy sector will receive the largest share of Sh289 billion as the Jubilee administration seeks to cement its commitment to focus on mega infrastructure projects such as the construction of the standard gauge railway (SGR) as well as improvement of road networks in many parts of the country.
Mr Rotich had already signalled tax measures – that means Kenya will have to collect more tax.
“This performance will be underpinned by on-going reforms in tax policy and revenue administration, through automation and inter-agency collaboration and connectivity. The government will also complete the review of the Income Tax Law so as to modernise it and align it to international practice,” Mr Rotich wrote in the estimates.
Nairobi-based economic analyst Aly-Khan Satchu said Kenya was punching above her weight in the big Budget to please the electorate in disregard of the economic realities the country was facing.
“I feel we are really pushing the fiscal envelope at a time when it would pay to be asserting a more cautious and conservative Budget. I appreciate it is an election year and that the government might be seeking to stoke up a “feel-good” factor and certainly the mood at the ground level is subdued. However, we have now hit a level where money is tighter. This budget does not emit the right signal to the Bond Vigilantes of whom there are now plenty since we unloaded our EuroBond,” Mr Satchu stated.
He said the Kenya Revenue Authority (KRA), which missed its 2015/2016 target by Sh6.5 billion, registering a total tax collection of Sh1.21 trillion against a target of Sh1.217 trillion, would suffer under unnecessary pressure in the quest to raise more funds to finance the bloated Budget.
“The Kenya Revenue Authority has done a remarkable job of growing tax collection by double digits for a number of years … I think we need to look more aggressively at the cost configuration of the Budget,” he said.
Last year, the taxman drove up tax collection by 13.2 per cent from Sh1.182 trillion collected in the 2014/2015 period.
Analysts also took issue with the contrasting rise in the wage bill, a fall in development spending while the government proposes to spend Sh100 billion to raise wages for civil servants.
Deloitte East Africa Tax expert Fredrick Omondi said Kenyans must brace for hard times since the National Treasury would be relying on the reforms implemented by the KRA to increase revenue collection although higher income earners may be the key targets in trying to generate additional revenue.
“Measures will include enhancing collection of excise taxes whose reach has been lately expanded and which are to be revised annually based on inflation. There is also the ongoing review of the Income Tax Act even though the overall aim is to “modernise it and align it to international best practice,” Mr Omondi said.
“One should not be surprised to see additional/higher taxes coming out of the new Act. However, being an election year, the National Treasury will likely be cautious not to appear to overburden the voters with additional taxes. So it will call for some creativity with measures likely to target high income earners, and what are considered luxury goods and services,” Mr Omondi wrote in an email response.
Key government pet projects like the SGR, the laptop for school programme and power distribution have got huge allocations in the estimates with the new railway alone proposed to take Sh75 billion with Sh9.7 billion set aside to finance the Last Mile Connectivity Project.
There is also Sh3 billion for buying transformers in constituencies, Sh1.53 billion to buy solar lanterns as well as Sh1.3 billion connectivity subsidy in the bid to deepen electricity connection in homes and public places.
Also targeted in a big way is the education sector with the lap top programme taking Sh13.4 billion in the estimates where Kenya will be forced to borrow so as to bridge a Sh582.5 billion deficit between the estimated revenues and the expenditures.
Apart from Parliament getting Sh38 billion for modernisation plans, the MPs will also be happy with the return of CDF through the National Government Constituency Fund which has received Sh30.9 billion.
The Woman Representatives have also been allocated Sh2.1 billion for affirmative action and social development in what is expected to excite the legislators, a move that may be meant to minimise friction in the House for the Budget to smoothly sail through.