By Jerameel Kevins Owuor Odhiambo
Kenya stands at a crossroads in its economic journey, with the potential to become a regional powerhouse in Africa. However, the country’s taxation framework, characterized by frequent and unpredictable changes, has created a volatile environment that undermines economic growth and deters foreign investment. A consistent taxation policy is not just a fiscal necessity but a strategic imperative to foster stability, attract investors, and drive sustainable economic development.
The current taxation landscape in Kenya is shaped by annual Finance Bills, which introduce a myriad of tax amendments each fiscal year. While these changes aim to address immediate revenue needs, they often result in uncertainty for businesses and investors. For instance, the introduction of the Digital Services Tax (DST) and the minimum tax regime in 2023 sparked controversy due to their abrupt implementation and lack of a structured policy framework. Such unpredictability discourages long-term planning and investment, as companies struggle to anticipate future tax obligations. This volatility is counterproductive in a global economy where investors seek stability and predictability.
Kenya’s tax-to-GDP ratio, stagnating at approximately 14%, is significantly lower than the African average of 16.5% and the OECD average of 34%. This disparity highlights inefficiencies in tax collection and compliance, partly due to the absence of a stable and well-structured tax policy. A comprehensive tax policy would provide a long-term framework, ensuring consistency, predictability, and fairness in taxation. This, in turn, would enhance compliance, broaden the tax base, and improve revenue collection, ultimately fostering economic growth.
The benefits of a consistent tax policy extend beyond revenue collection. Stability in taxation enables businesses to plan their investments and operations with greater certainty, fostering a conducive environment for economic growth. Predictability in taxation encourages long-term investment and reduces the risk perception associated with inconsistent fiscal policies. Countries with structured tax policies, such as South Africa and Rwanda, have experienced greater investor confidence and economic growth due to their stable taxation frameworks.
Moreover, a comprehensive tax policy can enhance Kenya’s attractiveness to foreign investors. Investors prefer economies with stable and transparent tax regimes. Frequent tax law changes deter foreign direct investment (FDI) as businesses face unpredictable costs and compliance challenges. A structured tax policy can provide certainty on tax obligations and incentives for long-term investment in key economic sectors. According to the World Bank, countries with predictable tax policies see up to 25% higher FDI inflows compared to those with frequent tax amendments.
The implementation of a consistent tax policy would also streamline the operations of the Kenya Revenue Authority (KRA). With fewer annual changes to implement, the KRA can allocate resources more effectively, focusing on improving compliance and enforcement. This shift would reduce operational inefficiencies and the costs associated with constant policy adjustments. A stable policy would also allow the KRA to plan and implement more robust technological advancements for tax administration, further enhancing efficiency in tax collection mechanisms.
Kenya can draw valuable lessons from countries that have successfully implemented comprehensive tax policies. Rwanda, for instance, has consistently increased tax collection as a proportion of GDP over two decades, attributed to a stable tax policy framework and the digitization of tax operations. Similarly, Georgia’s streamlined VAT system and reduced rates have boosted compliance and revenue, providing a more predictable tax environment. These examples underscore the potential for Kenya to achieve similar success through a well-structured tax policy.
In conclusion, the adoption of a consistent taxation policy is crucial for Kenya’s economic stability and growth. By providing a clear and predictable framework, such a policy would enhance compliance, attract foreign investment, and improve revenue collection. The lessons from countries like Rwanda and Georgia demonstrate the transformative potential of a stable tax environment. For Kenya, transitioning from annual Finance Bills to a comprehensive tax policy is not just a fiscal reform but a strategic move towards sustainable economic development and global competitiveness.
The writer is a legal scrivener
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