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The taxman must not kill investor confidence and jobs chasing money

Tuesday November 6 2012



A recent case in which a court ordered four Coca Cola bottling plants to pay the Kenya Revenue Authority a whopping Sh5.6 billion in a dispute where the taxman claimed the bottlers were in arrears of unpaid excise duty and value-added tax raises broad policy issues.

KRA’s case is that during an audit conducted in 2010, it belatedly discovered that the four bottlers had not paid excise duty on returnable bottles and crates between 2004 and 2009.

Although the law stipulating that excise duty on returnable bottles had been repealed, KRA insists that the four bottlers must pay what should have been paid before the law was done away with.

I will not comment on the merits and demerits of the dispute and will only restrict myself to what I consider to be the broader economic and social issues that the dispute brings to the fore.

Two policy questions arise. What is the primary purpose of taxation — merely to collect more revenues for the State or to enable the achievement of good for society?

And, what if, by stubbornly insisting on collecting more revenues, the taxman unwittingly finds himself hurting citizens, companies, and the broader society?

These questions are especially pertinent in this case because the amounts involved are so large as to bankrupt the bottling plants.

I fished out the audited accounts of the four bottlers from the documents that were filed in court to briefly examine their financial status and health.

Without doubt, they have been operating profitably. However, the audited accounts also show that they don’t have the capacity to raise the huge amounts demanded. If they are forced to pay, they will be forced to close operations and send employees to the streets.

At risk are all those entities involved in the supply chain of the Coca Cola business: Distributors, shops and kiosks.

The question that arises is the following: In the context of crippling unemployment, will the taxman have served the broader national interest if this dispute ends up precipitating job losses?

Mark you, the argument here is about unpaid excise duty and VAT – the types of duties that are passed on to the consumer and where the bottler is a mere collecting agent. Indeed, it is not as if the bottlers collected the money from the consumer and kept it under the pillow.

Thus, in the event that KRA insists on collecting the billions in arrears, the bottlers will have to cough it all up from profits and capital.

There are other issues at play here. At the end of the day, this dispute is about the capricious and whimsical manner in which successive ministers of Finance have treated the issue of excise duty on returnable bottles.

Since 1991, there have been a total of eight amendments either bringing in or taking out returnable bottles and crates in the computation of excise duty.

Indeed, these numerous and erratic amendment, introduced in the Finance Bill by ministers at the behest of vested interests — and  without looking at their effect on the macro-economy — is what has put us in this ghastly mess.
I once read in a textbook that the health of an economy of a country cannot improve until it puts the “S” factor into its fiscal laws — sane, simple, and stable.

Taxation laws must be framed with the convenience of the taxpayer in mind. If you don’t do so, you undermine taxpayer morale, which is a delicate national asset.

Is the KRA becoming too greedy? It has just put out an advert asking all tenants to snitch on their landlords.
It is vigorously tracking and chasing our international athletes to force them to pay tax. It is reviewing the VAT regime to do away with most of the tax exemptions.

Two last points. First, the taxman must always realise that tax avoidance — unlike evasion — is not an offence and that citizens and businesses are at liberty to organise their operations in such a manner as to attract the least tax.

Secondly, unless wasteful ostentation in government spending is brought down significantly, no number of moral sermons will change the citizens’ attitude towards tax avoidance.