Pain of new taxes being felt across East Africa

Kenyans_streetRegional governments have moved to squeeze every penny possible from their citizens by introducing new taxes on consumer goods and other essential commodities to fund their ballooning budgets and to service development loans.

From kerosene to toothpaste, toilet paper, toothbrushes, sweets, chocolates, books, mattresses and even Internet access, governments are imposing taxes, measures that are hurting the poor further.

This is coming at a time when the region’s governments are finding it increasingly hard to secure external funding to reduce their budget deficits. The governments have thus resorted to painful taxation measures, even as they institute austerity in their spending, in the face of missed revenue targets.

In June, as finance ministers presented their annual budgets, East Africa’s three top three economies announced plans to borrow more than $12 billion to finance their budget deficits, even as their public debts rose amid concerns over sustainability.

Kenya had the highest borrowing plans of $5.58 billion, followed by Tanzania at $4.6 billion and Uganda at $2.4 billion, with a huge chunk of this being sourced from external financiers. However, this seems to have slowed down, as the reality that they needed to cut down their spending sank in.

Now, they are raiding their citizens’ pockets to plug the expected shortfall and deliver on their promises.

Government expenditure

Kenya is already finding it difficult to fund the operations of its expanded government, amid falling revenue collections, rising public debt and an underperforming economy.

On Tuesday, Kenyan legislators voted to reduce this year’s $30 billion budget by $376 million after it emerged that the country will not collect enough revenues in an economy that grew only 4.9 per cent in 2017, the slowest in five years. This cut, however, fell short of the $546 million that National Treasury Cabinet Secretary Henry Rotich had recommended.

On Thursday, legislators voted to introduce 8 per cent VAT on all oil products, and President Uhuru Kenyatta signed it into law a few hours later.

The country’s total expenditure has been rising over the past 10 years, from 22.3 per cent of GDP in the 2008/2009 fiscal year to 27.5 per cent of GDP in 2016/2017.

The situation worsened after it adopted a devolved system of government in the 2013/2014 fiscal year. The devolved system ushered in county governments and increased the number of Members of Parliament to 418 from 222, among other constitutional office holders.

It is argued that with Kenya’s current revenue levels, and the increased spending pressures as a result of the devolved system of government, Treasury is financially constrained and has to survive on borrowing.

Parliament has in the meantime voted to cut spending on infrastructure projects such as roads to ensure the government survives this rough patch.

An attempt by the government to curb revenue leakages by abolishing and merging poorly performing state corporations was met with resistance, largely due to institutional wrangles, lack of political will and the National Treasury’s unwillingness to take the lead in pushing through the reforms.

Weak economy

Kenya’s 2018/2019 budget is 29 per cent more than the revised budget of the 2017/18 fiscal year but a huge chunk of it — estimated at 25 per cent — is going towards repayments of the national debt, which is currently estimated at Ksh5 trillion ($50 billion), while nearly 50 per cent of this budget is expected to go towards salaries for public officers.

According to economists at the Nairobi-based think tank Institute of Economic Affairs, Kenya’s overall revenue mobilisation in relation to target has continued to underperform largely due to a weak economy.

They said the government should enforce austerity measures to stem the increasing expenditure bill especially the rise in recurrent expenditure, including cutting non-core expenditure items such as travel and conferences.

“The government should be wary of a subdued economy. Revenue performance is strongly linked to economic growth and despite some positive signs of economic rebound there are a number of policy concerns that may affect economic growth and hence undermine revenue collection,” says the think-tank.

It is feared that the subdued credit to the private sector, especially to the small- and medium-enterprises, which is blamed on interest rate capping, could stifle economic growth this year.

Kenya’s economic growth also remains unpredictable and may further be dampened by external factors such as rising international oil prices.

Taxes

Mr Rotich introduced new taxes in an effort to fund his $30 billion budget for the 2018/2019 fiscal year, as the country faced budget financing challenges, compounded by last week’s expiry of an International Monetary Fund’s $1.5 billion stand-by loan facility for balance of payments support.

The fiscal deficit reduction targets were set by the IMF when it granted a precautionary credit deal two years ago.

Treasury had budgeted for $347.74 million to be collected through a 16 per cent value added tax on all oil products, but President Uhuru Kenyatta recommended that it be halved to 8 per cent to allow Treasury to collect $175 million.

Other new taxes include an increase in the price of kerosene by $0.18 per litre to stop adulteration; excise duty of $0.2 per kilogramme of confectionery, and a 20 per cent levy on the charges banks levy on customers for money transfers.

More taxes

In Uganda, the taxation regime for select food and non-food items of between 25 per cent and 60 per cent in this year’s budget rattled taxpayers. But it was the introduction of the social media tax in July, through which the Kampala administration aims to raise $103 million annually, that sent the clearest indication that the government was desperate for money.

“We are so far pleased with the impact of the tax measures introduced in the 2018/19 financial year budget. The increase in taxes is working. We are absolutely okay with what we did. After missing its tax collection targets by $160.2 million for the financial year 2017/18, the Ugandan Revenue Authority is now back to doing well,” Uganda’s Finance Permanent Secretary Keith Muhakanizi said.

Kampala has also pushed for the introduction of a 30 per cent income tax on takeover deals by private and listed companies, targeting major acquisition deals.

This move comes after years of generous income tax relief that helped investors pull off big ticket acquisitions on the stock exchange without suffering the burden of huge income tax bills.

“It is also obvious that the government is desperate to collect more taxes to finance its budget. Some investors will be affected by this tax measure but those who are very aggressive on investment exit plans may not be affected,” Plaxeda Namirimu, a tax director at PwC Uganda, told The EastAfrican in an earlier interview.

Tanzania, which is also staring at a budget shortfall of 5.3 per cent of GDP, introduced new taxation measures as it sought to fund its $14.21 billion budget.

Finance Minister Dr Philip Mpango did not change the fixed tariffs on locally produced non-petroleum excisable products including alcohol, soft drinks and tobacco but increased the excise duty rates of imported non-petroleum products by 5 per cent.

Dar es Salaam also replaced the Paper Tax Stamp from September this year with the Electronic Tax Stamp, which it said will enable the government to obtain production data from manufacturers in real time.

Dr Mpango is also pushing to widen the tax base by formalisation of the informal sector.