By Jerameel Kevins Owuor Odhiambo
Adam Smith, the renowned Scottish philosopher and economist, once posited in his seminal work “The Wealth of Nations” that “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” This principle of equity in taxation, though articulated centuries ago, remains a cornerstone of modern fiscal policy and serves as a poignant starting point for our examination of Kenya’s taxation and budgetary landscape. The Kenyan fiscal system, despite its aspirations towards fairness and efficiency, has long been plagued by inconsistencies and incoherencies that not only undermine its effectiveness but also cast a shadow over the entire budget-making process. These inconsistencies manifest in various forms, from regressive tax structures that disproportionately burden the poor to frequent policy reversals that create an atmosphere of uncertainty for businesses and investors. The root of this problem can be traced to a complex interplay of factors, including political expediency, inadequate stakeholder engagement, and a lack of long-term fiscal planning. As we delve deeper into this issue, it becomes evident that the repercussions of an incoherent taxation policy extend far beyond mere economic inefficiencies, touching upon fundamental questions of governance, social justice, and national development.
The Constitution of Kenya, promulgated in 2010, enshrines the principles of public finance management in Chapter 12, with Article 201(b)(i) explicitly stating that “the public finance system shall promote an equitable society, and in particular the burden of taxation shall be shared fairly.” This constitutional mandate sets a high bar for the country’s taxation policy, demanding a system that is not only efficient in revenue collection but also equitable in its distribution of the tax burden across society. However, the reality on the ground often falls short of these lofty ideals. The current tax regime in Kenya is characterized by a heavy reliance on indirect taxes, such as Value Added Tax (VAT) and excise duties, which tend to be regressive in nature, affecting low-income earners more severely than their wealthier counterparts. This stands in stark contrast to the progressive taxation principles advocated by economists and enshrined in the constitution. The Kenya Revenue Authority (KRA) has made efforts to broaden the tax base and improve compliance, but these efforts are often undermined by policy inconsistencies and frequent amendments to tax laws, creating a complex and unpredictable fiscal environment. The Finance Act, enacted annually to implement the budget proposals, has become a symbol of this policy volatility, with each iteration introducing new taxes or modifying existing ones, often with little regard for the long-term implications or coherence with the broader economic strategy.
The incoherence in Kenya’s taxation policy is further exemplified by the frequent introduction and subsequent reversal of tax measures, a phenomenon that has become all too common in recent years. A case in point is the contentious 16% VAT on petroleum products, which was introduced in 2018, suspended, reintroduced, and then modified again in the face of public outcry and economic pressures. This back-and-forth approach to taxation not only creates uncertainty for businesses and consumers but also undermines the credibility of the government’s fiscal policy. As noted by Dr. Njuguna, “Consistency and predictability in tax policy are crucial for creating an environment conducive to investment and economic growth.” The lack of these qualities in Kenya’s taxation approach has led to a situation where businesses struggle to plan for the long term, potentially hampering investment and economic development. Moreover, this policy inconsistency reflects a deeper problem in the budget-making process itself, suggesting that decisions are often made without adequate consideration of their long-term implications or their coherence with the overall economic strategy.
The budget-making process in Kenya, as outlined in the Public Finance Management Act of 2012, is designed to be participatory and transparent, involving multiple stakeholders from government, civil society, and the private sector. Section 35 of the Act mandates public participation in the budget process, stating that “The Cabinet Secretary shall develop and implement programmes for public education on the budget process.” However, the reality often falls short of these legal provisions. Critics argue that public participation is often superficial, with insufficient time allocated for meaningful engagement and limited incorporation of public input into the final budget documents. This disconnect between the legal framework and its implementation contributes to the development of taxation policies that may be out of touch with economic realities and public needs. As observed by Professor Karuti Kanyinga of the University of Nairobi’s Institute for Development Studies, “The budget-making process in Kenya remains largely a technocratic exercise, with limited space for genuine public input, leading to policies that often lack popular legitimacy and fail to address the real needs of citizens.”
The judiciary has played a crucial role in highlighting and addressing some of the inconsistencies in Kenya’s taxation policy. In the landmark case of Okiya Omtatah Okoiti & 2 others v Cabinet Secretary, National Treasury & 3 others [2018] eKLR, the High Court ruled that the imposition of VAT on petroleum products without adequate public participation was unconstitutional. Justice Chacha Mwita, in his ruling, emphasized that “public participation is not a mere formality but a constitutional imperative that must be adhered to in the process of enacting legislation, including tax measures.” This judicial intervention underscores the importance of adhering to constitutional principles in the formulation of tax policy and highlights the role of the courts in ensuring that the budget-making process remains accountable and transparent. However, while such rulings provide important checks and balances, they also point to a systemic failure in the executive and legislative branches to develop coherent and constitutionally sound taxation policies in the first place.
The incoherence in Kenya’s taxation policy is further exacerbated by the tension between short-term revenue needs and long-term economic development goals. The government’s focus on meeting immediate revenue targets often leads to the introduction of ad hoc taxes that may provide a quick fiscal boost but can have detrimental effects on economic growth and investment in the long run. This short-termism is evident in measures such as the introduction of the turnover tax for small businesses, which, while aimed at broadening the tax base, has been criticized for potentially stifling entrepreneurship and the growth of small and medium enterprises (SMEs). As noted by Dr. Rose Ngugi, Executive Director of the Kenya Institute for Public Policy Research and Analysis (KIPPRA), “A coherent taxation policy must strike a balance between revenue generation and creating an enabling environment for business growth and job creation.” The failure to achieve this balance is a clear indictment of the budget-making process, suggesting a lack of comprehensive long-term planning and insufficient consideration of the broader economic implications of tax measures.
The impact of incoherent taxation policy extends beyond economic inefficiencies, touching on issues of social equity and national development. Kenya’s Vision 2030, the country’s long-term development blueprint, aspires to create “a globally competitive and prosperous nation with a high quality of life by 2030.” However, the current approach to taxation often undermines these aspirations by creating barriers to economic participation and growth. The heavy reliance on consumption taxes, for instance, disproportionately affects the poor and middle class, potentially exacerbating income inequality and hindering social mobility. Professor Germano Mwabu, an economist at the University of Nairobi, argues that “A progressive and coherent taxation system is essential for achieving the goals of Vision 2030, as it not only generates the necessary revenue for development projects but also plays a crucial role in redistributing wealth and reducing inequality.” The failure to align taxation policy with these broader national development goals represents a significant shortcoming in the budget-making process and calls into question the government’s commitment to inclusive growth and social equity.
The incoherence in Kenya’s taxation policy is further reflected in the country’s struggle to balance domestic revenue mobilization with the need to maintain a competitive business environment. Kenya’s tax-to-GDP ratio, which stood at 16.1% in the 2019/20 fiscal year according to the Kenya National Bureau of Statistics, is lower than the average for lower-middle-income countries, suggesting room for improvement in revenue collection. However, attempts to increase this ratio through new taxes or higher rates often face resistance from businesses and investors who argue that such measures make Kenya less competitive in the region. This dilemma is exemplified by the ongoing debate over the Digital Service Tax (DST), introduced in the Finance Act 2020, which aims to tax the digital economy but has raised concerns about its potential impact on Kenya’s burgeoning tech sector. As noted by Dr. Joy Kiiru, an economist at the University of Nairobi, “The challenge for policymakers is to design a tax system that raises sufficient revenue without stifling economic activity or deterring investment.” The current approach, characterized by frequent policy changes and a lack of clear long-term strategy, fails to meet this challenge and underscores the need for a more coherent and carefully considered approach to taxation.
The role of international financial institutions and development partners in shaping Kenya’s taxation policy adds another layer of complexity to the issue. While organizations such as the International Monetary Fund (IMF) and the World Bank provide valuable technical assistance and policy advice, their influence can sometimes lead to the adoption of tax measures that may not be fully aligned with local economic realities or development priorities. The push for fiscal consolidation and debt reduction, for instance, has sometimes resulted in the implementation of austerity measures and tax increases that, while aimed at improving fiscal sustainability, can have negative impacts on economic growth and social welfare in the short to medium term. As argued by Professor Attiya Waris, a tax law expert at the University of Nairobi, “While international best practices in taxation are important, they must be carefully adapted to the Kenyan context, taking into account our unique economic structure, development needs, and social dynamics.” The failure to strike this balance in the budget-making process often results in taxation policies that appear incoherent or disconnected from national priorities.
The incoherence in Kenya’s taxation policy is also evident in the treatment of different economic sectors, with some industries enjoying preferential tax treatment while others face a heavier burden. This sectoral inconsistency not only distorts economic incentives but also raises questions about equity and fairness in the tax system. For instance, the agricultural sector, which is crucial for food security and rural livelihoods, has long benefited from various tax exemptions and incentives. In contrast, the manufacturing sector, identified as a key driver of economic transformation in the government’s Big Four Agenda, often complains of a high tax burden that hampers its competitiveness. As observed by Dr. Bitange Ndemo, former Permanent Secretary in the Ministry of Information and Communication, “A coherent taxation policy should provide a level playing field for all sectors while strategically incentivizing those areas crucial for national development.” The current approach, which often seems to reflect ad hoc decision-making rather than a comprehensive economic strategy, fails to achieve this balance and undermines the overall effectiveness of the tax system in supporting economic growth and structural transformation.
The technological challenges and opportunities in tax administration represent another area where the incoherence of Kenya’s taxation policy is apparent. While the Kenya Revenue Authority has made significant strides in digitizing tax collection processes, such as the implementation of the iTax system and the rollout of Electronic Tax Registers (ETRs), these technological advancements have not always been accompanied by corresponding policy and legislative frameworks. The result is a disconnect between the capabilities of modern tax administration systems and the outdated or inconsistent policies that govern their use. This misalignment is particularly evident in the taxation of the digital economy, where existing laws struggle to keep pace with rapidly evolving business models and transnational transactions. As noted by Maurice Oray, Deputy Commissioner for Strategy, Innovation, and Risk Management at the KRA, “The digitization of the economy presents both challenges and opportunities for tax administration. Our policies and laws must evolve to ensure that we can effectively tax new forms of economic activity while fostering innovation and growth.” The failure to develop a coherent and forward-looking approach to tax policy in the face of technological change is a clear indictment of the budget-making process, suggesting a lack of strategic foresight and adaptability.
In conclusion, the incoherence of Kenya’s taxation policy stands as a stark indictment of the country’s budget-making process, reflecting deeper issues of governance, economic planning, and public participation. The frequent policy reversals, regressive tax structures, and lack of alignment with broader development goals not only undermine the effectiveness of the tax system but also erode public trust in government institutions. As we have seen, this incoherence touches on multiple aspects of the fiscal landscape, from constitutional principles and legal frameworks to sectoral policies and technological challenges. Addressing these issues will require a fundamental rethinking of the budget-making process, with a focus on long-term planning, genuine stakeholder engagement, and a commitment to evidence-based policymaking. As aptly stated by a prominent Kenyan economist, “A coherent taxation policy is not just about collecting revenue; it’s about creating a fiscal framework that supports economic growth, social equity, and national development.” Only by embracing this holistic view of taxation and budgeting can Kenya hope to create a fiscal system that truly serves the needs of its citizens and supports the country’s aspirations for sustainable and inclusive development.
The writer is a legal researcher
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