A predictable tax system essential for business planning

The importance of taxes in an economy cannot be overemphasised. Governments all over the world rely on taxes to raise revenue. In reality, governments would be unable to provide public goods to their citizens if they fail to collect sufficient taxes.

Therefore, it is the responsibility of both citizens and businesses to pay taxes promptly in order to support economic expansion.

Over the past 10-years, the Kenya Revenue Authority (KRA) achieved annual growth rate in tax revenue of 15 per cent. Last year, KRA collected a record KSh1.001 trillion in taxes, 3.86 per cent more than 2013/2014 financial year’s KSh963.8 billion.

This growth cannot be downplayed, but only celebrated. In fact, this year KRA’s online tax filings platform known as iTax managed to register approximately 2 million users, heralding a new dawn in the use of information technology systems for tax administration.

Indeed, this is an indication that the taxman’s efforts to include more citizens and businesses into the tax system are yielding results. It is also a great move in relation to realising Vision 2030 goals.

However, there is a lot to be done to ensure the Gross Domestic Product (GDP) achieves double digit growth by 2030 as is targeted.

We need to sustainably expand our tax revenue collection by widening the tax bracket rather than overburdening certain sectors such as alcohol.

A study by Kenyatta University two years ago revealed that Value Added Tax (VAT) and income tax had negative impact on private investment while excise tax, import tax and tax amnesty impacted positively on private investment.

In fact, the study suggested that an appropriate tax system and progressive tax reforms are necessary to ensure that private investors are given an enabling environment to flourish. Therefore, good tax governance is good for the economy.

PLAN COSTS

In his book, The Wealth of Nations, Adam Smith argued that a good tax system has to factor in the four tax principles, which are proportionality/equity/progressivity, predictability/certainty, convenience and simplicity.

Smith argued that “the tax which each individual and businesses are bound to pay ought to be certain, and not arbitrary.”

Therefore, a predictable tax system is essential for business planning. Business entities prefer to plan costs well in advance and this includes tax liabilities.

In this regard, a predictable tax system makes business planning easy. A predictable tax system is an important ingredient in enticing investment in an economy.

Although a tax system changes overtime due to alterations in the local economy, changes in the tax system should be timely and inclusive.

For instance, the government support of a tax remission on keg beer made from locally sourced raw material has boosted the business prospects of over 30,000 small scale farmers, 100 distributors and over 12,000 retailers.

This is one solid example of a progressive tax system that works to promote a nation’s advancement. In order to raise sufficient revenue to support national socio-economic development, there is need to have an effective tax system that compliments and accelerates already accrued gains across value chains as well as create more possibilities for sustainable business growth.

Inevitably, this contributes further to increase Kenya’s favourability in terms of ease of doing business.

On Wednesday, KRA announced plans to establish a national tax policy framework that will stabilise the volatile tax environment. KRA Commissioner-General John Njiraini said the framework will be aligned to government five-year strategy and sectors will be provided with tax incentives for a stipulated period.

As a stakeholder to KRA, I acknowledge that this move is the right direction, because this will contribute greatly to the ease of doing business, thus companies will invest, knowing that they will recover their cost within a period of time.

The author is Kenya Breweries Limited (KBL) Managing Director. Philip Ochieng column resumes next week