Big Four Spending Splurge Pushes Kenya to Bet on Tax Hikes

(Bloomberg) -- Kenya’s government is betting that a raft of proposed tax increases somehow won’t scare off investors in East Africa’s biggest economy.

A draft bill released this month would introduce a new top bracket for income tax. It would also lift the rate for companies with an annual income of more than 500 million shillings ($4.9 million) to 35 percent, the highest in the region, and boost the levy on capital gains to 20 percent from 5 percent.

The government in the $77.3 billion economy needs to fund unprecedented spending of 2.53 trillion shillings for the next fiscal year, while also reducing borrowing and narrowing the budget deficit. The expenditure will help finance President Uhuru Kenyatta’s so-called Big Four agenda, which seeks to boost agriculture, manufacturing, healthcare and home building to drive economic growth.

Big Four Spending Splurge Pushes Kenya to Bet on Tax Hikes

The proposed tax bill, if passed into law, could have the opposite result, according to Vimal Shah, chairman of Bidco Africa Ltd., a manufacturer of edible oils and other consumer goods. The measures may negatively affect the investment the government hopes to attract for its economic plan, he said

“We are in competition with the world for investments,” Shah said by phone. “We are not an island. Some proposals will make Kenya the least attractive.”

Broader Base

Kenyan authorities have said they’ll broaden the tax base as they seek to increase revenue to help fund the 2018-19 budget and reduce a deficit that was at 8.9 percent of gross domestic product last year. Treasury Secretary Henry Rotich will present spending plans to lawmakers on June. 14.

While the nation’s ratio of tax to GDP of 19.1 percent exceeds the average for sub-Saharan Africa, according to International Monetary Fund data, it lags countries such as South Africa and Mauritius.

“Should the government decide to consolidate its fiscal deficit via this avenue, it needs to ensure that the savings it makes and additional revenue it earns are channeled toward enhancing the productive capacity of the economy,” said Jibran Qureishi, an economist at Nairobi-based Stanbic Holdings Ltd. “Only then perhaps one could justify this increase in corporate and income taxes in this current environment.”

The bill abolishes tax holidays for investors in special economic zones and export-processing zones and proposes foreign companies pay demurrage charges for delays. Shippers are likely to pass on this cost to importers, which will increase the cost of doing business in Kenya, according to Fred Omondi, a tax partner at Deloitte.

Graft Leakage

Even if the new legislation succeeds in increasing revenue, leakage of government funds due to graft remain a concern. The state prosecutor last week ordered dozens of civil servants to be prosecuted for alleged corruption after funds went missing from state entities such as the National Youth Service.

Accounting for public funds is still wanting, the Auditor-General’s office said in its 2016 report on the government’s financial statements. Only 27 percent of ministries and departments received clean audit opinions that year. The Treasury has appointed a private company to probe how the proceeds of the nation’s first Eurobond were spent in 2014 and 2015.

“Without being financially accountable, government can expect significant push-back from the private sector because the latter will get no benefits for taxes imposed by the former,” Anzetse Were, an independent economist, said by email.

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