Minimum Tax will promote Equity, Inclusivity in Tax Administration

BLOG 29/12/2020

By CPA Maurice Oray

The recent years have seen most countries walk a tight rope as they strive to mobilize adequate domestic revenue to fund their development and growth agenda. The government of Kenya has focused its efforts on reducing poverty and inequality, ensuring adequate health and education, and development of basic infrastructure to support more inclusive growth.  

Despite significant progress, the country still faces challenges in domestic resource mobilization characterised by a narrow tax base, limited natural resource endowment and significantly low compliance levels. The need for strategies to revolutionize the tax legislative framework and improve the capacity of the tax administration cannot be overemphasized. 

This has informed the need for a raft of new strategic fiscal policy measures in every fiscal budget cycle with a key emphasis on tax-base expansion. Similarly, deliberate steps have been taken to improve the tax revenue administration with focus on development of staff capacity to support tax reforms and compliance management.  I recognize the fact that robust reforms are those that focus not only on ways to increase revenue collection, but also take into account how to do so in ways that consider the efficiency and equity impact of particular policy choices.  It is therefore important to focus on sustained revenue mobilization and consistent institutional development over time as well as attention to basic processes and reforms.

The more a country progresses development wise, the more resources the government requires. The fruition of the Big Four Agenda, for instance, is heavily reliant on the country’s ability to raise requisite domestic resources.

Tax-base expansion is a key strategy for enhancing revenue mobilisation. Globally as countries look inward for local growth options, the government has to rethink its revenue base to expand it for sustainable domestic resource mobilisation.

This strategy is among key initiatives outlined in the Kenya Revenue Authority’s (KRA) strategic corporate plan. Through exploration of untapped sectors of the economy, expansion of the tax-base ensures more revenue in the government coffers, without necessarily putting additional burden on taxpayers already in the tax net. As such, tax-base expansion aligns with equity and fairness principle which epitomises an effective tax administration system. In addition, tax-base expansion promotes inclusivity thereby ensuring that the tax burden is evenly shouldered across board.

In order to expand the tax-base in the country, the government, through the Finance Act 2020, has introduced a raft of new tax measures which take effect next year in January. Among the taxes lined up for implementation on January 1, 2021 is the minimum tax.

The minimum tax will be payable by business entities that are carrying out business and have physical presence in Kenya. The tax will be payable at a rate of one per cent of the gross sales.

Contrary to industry concerns, business enterprises registered under the turnover tax (ToT) regime will not be liable to pay the minimum tax. The qualifying threshold for ToT registration is an annual turnover exceeding one million shillings but less than Ksh. 50 million. Just like minimum tax, ToT is currently charged at the rate of one per cent of the gross sales. 

Essentially, the minimum tax will be an alternative tax to instalment tax and will only be payable where it exceeds the instalment tax. In cases where the instalment tax is higher than the minimum tax, the former will be due. With this arrangement in place therefore, there will be no case of double taxation as it has been the fear of many industry players.

Although this is the first time Kenya is introducing the minimum tax, Kenya’s rate is arguably one of the lowest in the African region if not in the whole world. In some other countries, the rate of minimum tax is way higher than the highest tax rate in the Kenyan jurisdiction. In India, for instance, according to the Financial Express (2020), the alternative minimum tax is charged at a rate of 18.5 per cent.

Apart from tax-base expansion, the minimum tax is set to level the operating playfield for business enterprises by ensuring that all contribute towards the government effort to mobilise resources for growth and development. It is unfortunate to note that there have been cases where some entities have been avoiding payment of instalment taxes by perpetually declaring losses.

While loss making is part of the day-to-day journey in an ideal business environment, it is not practical for a business entity to consistently post losses in perpetuity and still remain afloat. It is expected that introduction of minimum tax will not only seal such loopholes which cost the government billions of shillings in revenue every year, but also ensure equity and fairness in the distribution of tax burden.

As mentioned earlier, due to our limited natural resource base, the only major source of government revenue is the taxes you and I remit through the established tax remittance frameworks. We all therefore have a responsibility as patriotic citizens to contribute a fair share of taxes due on us in support of our country’s development agenda.

The writer is the Deputy Commissioner for Corporate Policy at the Kenya Revenue Authority (KRA)

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