FOREIGN DEBT

The difference is covered by grants of Sh48.5 billion and a deficit of Sh558.9 billion, to be financed through domestic and foreign debt.

The structure of the taxation shows that income tax is the most important source of tax revenue with a share of 43 per cent for the current fiscal year.

The second significant source of tax is VAT, expected to yield 23.9 per cent of the total revenue. Excise and import duties are expected to yield 11.3 per cent and 6.1 per cent, respectively. The balance would be derived from appropriations in aid and other taxes.

The interpretation of this is that the structure of the tax system is more weighted towards income tax, which is expected to finance a third of the national Budget.

The danger with this type of structure is that income tax is a direct levy on earnings by individuals and firms.

PAYING TAXES

Considering that there are fewer firms and individuals paying taxes than the optimal number, then the tax yield from this category is hostage to taxpayers continuing to earn an income.

If firms’ profits fall and the individual taxpayers earn less or lose their jobs, income tax would plummet and the government would be left struggling to finance the Budget. To that extent, income tax is not a particularly efficient and equitable form of tax.

Indirect taxes are more widely accepted globally as the most efficient and equitable forms of taxes. They are levied on consumption and the cost of administration is lower because they are mostly collected at source or points of sale.

ELIGIBLE GOODS

This makes VAT particularly attractive as it nets majority of consumers each time they buy eligible goods and services.

There’s a good reason why VAT on fuel makes great sense from a tax collector’s point of view. Ideally, higher tax on fuel should force users to buy less, but they don’t. Even as the noise on the VAT increased last week, motorists trooped to petrol stations to fill up their tanks — proving that fuel consumers aren’t particularly responsive to changes in cost.

 Mr Warutere is a director of Mashariki Communications Ltd. [email protected]

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