Why Kenyans feel overtaxed despite Rotich’s claim

“Let’s look at Ghana, Zambia, and others at that level. What is their tax rates? Are they zero? Are they taxing people at 15? No. They are in 30s and some are in 32. So why, in Kenya, do we complain while our neighbours here are at 30s? VAT in Uganda is at 18 percent, VAT in Tanzania is 18 percent, we are at 16 percent. Why are we complaining?”

That, laid out in staccato, was a question from Treasury Cabinet Secretary Henry Rotich to the Kenyan taxpayer, while he was speaking to NTV journalist Julians Amboko on June 12, a day before the Finance boss read the 2019/2020 budget.
A Nation Newsplex analysis of taxation data of selected countries shows that Mr Rotich had his facts right, but the context wrong.

It is indeed true that, at 16 percent, Kenya’s standard VAT rate is the lowest in the East African Community (EAC), where all other countries tax at 18 percent except South Sudan (20 percent). But Kenyans probably know that fellow Africans in some countries pay much less. Botswana’s standard VAT is 12 percent and Nigeria’s is five percent. The government also taxes individual income at a maximum 30 percent for earnings that fall within the topmost income bracket (Sh47,059 and above monthly), the same as in other EAC countries apart from South Sudan and Uganda, which hive off 15 percent and 40 percent of such incomes, respectively. Kenya’s lowest income bracket is taxed at 10 percent, only higher than Tanzania’s nine percent in the EAC.

Moreover, the Sh1,408 personal tax relief that all Kenyan taxpayers enjoy cushion those that fall within this tax band from parting with even a shilling in taxation.

However, comparing personal income tax among countries can be problematic, as countries have different numbers of tax bands that in turn have varying income limits. Kenya taxes individual income at five different rates, the highest in the region, Uganda and Tanzania at four each, and the rest at just two.

On income taxation bands, more is better, say tax experts, as it helps spread the tax burden equitably among the working population. An intention by the government to introduce a sixth taxation band to be taxed at 35 percent was opposed by tax experts. The World Bank recommends that governments “balance goals such as increased revenue mobilisation, growth, and reduced compliance costs with ensuring that the tax system is fair and equitable”.

All EAC countries have a standard corporate income tax of 30 percent, except South Sudan (25 percent). Taxation gobbles up two in five shillings (37 percent) of the profit made by Kenyan businesses, according to the World Bank’s Doing Business 2019 report. The country comes third after Tanzania (44 percent) and Burundi (41 percent).

Little appears peculiar about the country’s taxation regime when restricting comparison to taxes commonly used to compare the tax burden between countries – value added tax (VAT), individual income tax and corporate income tax.
And it is likely that the government’s knowledge of how these rates compare with those of its peers has over the years provided the taxman with the confidence or even the legitimacy to pinch harder.

Why complain?

But the taxpayers probably care less about taxation rates in other countries relative to their situation, only knowing too well that they bear a very heavy tax burden which keeps pressing harder on their shoulders.

According to Consumers Federation of Kenya (Cofek) Secretary-General Stephen Mutoro, the minister’s comparison of Kenya’s taxation rates with those of other countries is neither accurate nor important to Kenyans and lacks context. “I think he is wrong. In Kenya nobody ever talks about the extra taxes imposed by regulatory agencies who seem to have a blank cheque to levy charges. Some of those countries he is citing, like Tanzania, do not have so many parallel taxation,” he says.

Mr Mutoro also points out that county governments too have lined up a myriad of taxes and levies that eat up the little income left after national government taxation and other mandatory deductions. All the 47 counties have laws that allow them to impose different forms of taxation on commercial enterprises. These are some of the factors Mr Rotich does not highlight in his comparison.

Budget deficit

In the six years of the Jubilee administration, Kenya’s budget deficit has shot up four-fold from Sh197.4 billion in the 2013/2014 financial year to Sh607.8 billion in 2019/2020. Such grand intentions of spending have perennially presented the government with only one way out – borrowing while increasing taxation. Consequently, the public debt burden has grown commensurately, settling at Sh5.4 trillion in March 2019 from Sh1.8 trillion in March 2013 even as the government has taken to collecting taxes more aggressively.

Not even Parliament has managed to help disrupt the borrowing and taxation trajectories, giving the government the carte blanche to borrow and tax. “How realistic is our budget? We are always given rosy pictures of how we are going to raise revenue so that Parliament can approve the beyond-our-means kind of budgets. Nobody ever examines the ability of government to raise the amount it intends to spend,” says Mr Mutoro.

Last month, Cofek, in an email to journalists, claimed to have got wind of the Kenya Revenue Authority’s intention to impose an additional five percent excise duty on petroleum fuel on top of the current eight percent.
Treasury did not respond to the request by Newsplex for comment on Cofek’s allegation.

Even in going all out to generate revenue, the government has consistently failed to achieve its target by as much as seven percent (in the 2016/2017 and 2017/2018 financial years), according to the Economic Survey 2019.

Value for money

Earlier this year, the Organization for Economic Cooperation and Development (OECD) released the results of the Risks that Matter Survey, conducted in 2018 in 21 OECD countries, that showed citizens were willing to pay higher taxes (by two percent) as long as the government showed value for money.

For instance, while Denmark’s highest income tax rate of 52 percent is one of the highest in the world, it is sustainable and acceptable because the Danish public service and welfare system remain global models.

Public wastage amplifies the tax burden, as it makes each shilling collected count for much less because the taxpayer is left to pay for many services that are supposed to be delivered using public funds. The World Economic Forum estimated that last year’s corruption cost the world $2.6 trillion (Sh260 trillion), or five per cent of the global Gross Domestic Product.

In the same year, global corruption watchdog Transparency International placed Kenya 144th out of 180 countries with a corruption perception index of 27 out of 100. Being in the bottom quarter of the list means that it is perceived that corruption is very high in the country. Rwanda was first in the EAC at position 48 and South Sudan last at number 178.

In January this year, the country held the Multi-Sectoral National Anti-Corruption Conference to, in President Uhuru Kenyatta’s words, “conduct a full and frank self-examination of the extent to which each one of us has either helped or hindered the fight against all forms of corruption in Kenya”.

According to the World Bank, higher levels of corruption translate to more suffering by the poor and most vulnerable, by increasing costs and reducing access to services, including health, education and justice.

The bank adds that empirical studies have shown that when institutions fail because of corruption, the poor pay the highest percentage of their income in bribes because every stolen shilling robs the poor of an equal opportunity in life and prevents governments from investing in their human capital.