Should Kenya reduce tax incentives to minimise revenue loss?

Kenya's current tax expenditure, amounting to up to 6% of the GDP, has raised concerns about its sustainability. The treasury is pondering the reduction of tax incentives to minimize revenue loss. Edna Gitachu, Tax Policy Lead at PwC Kenya, sheds light on the intricate balance between attracting investments and enhancing taxation in a conversation with CNBC Africa. As the government grapples with declining tax revenues, the debate on the removal of tax incentives has taken center stage. This move is fueled by the desire to cushion the country against significant drops in revenue collections, exacerbated by the ongoing economic challenges, particularly the adverse impacts of the COVID-19 pandemic. The reduction in various tax rates earlier this year, including corporate income tax, VAT, and PSU rates, was accompanied by a corresponding decrease in tax incentives and exemptions. While the rationale behind this decision was to protect the economy from revenue shocks, the limited number of remaining incentives is a concern for stakeholders. Gitachu highlights the need for a comprehensive approach to address the revenue shortfall, focusing not only on tax expenditure but also on the wider economic landscape. Strategies to enhance tax collection efficiency and holistic evaluation of tax-to-GDP ratios are essential in identifying tax leakage points and fostering sustainable revenue growth. The informal sector, in particular, stands out as a sector with significant untapped tax potential. The pressure on revenue collection in Kenya is further compounded by the substantial debt obligations, with over 58% of tax revenues allocated to debt repayment. While the COVID-19 pandemic has led to expected shortfalls in revenue, Gitachu emphasizes that the revenue challenge is also rooted in overall expenditure patterns. The demand for increased government spending, both recurrent and development expenditure, adds to the strain on revenue generation, necessitating a reevaluation of fiscal policies. Gitachu addresses the issue of tax incentives from a cost-benefit perspective, emphasizing the need to assess the tangible benefits derived from these incentives. Highlighting examples like incentives in the power and tourism sectors, she argues that while these incentives may result in immediate revenue loss, they also stimulate economic growth, job creation, and potentially higher tax revenue in the long term. Gitachu cautions against viewing tax incentives solely as an expenditure item, stressing the importance of recognizing their positive impact on economic development. The delicate balance between attracting investments and optimizing taxation strategies requires a nuanced approach, especially in nurturing nascent industries. Gitachu advocates for targeted incentives tailored to the growth stages of various sectors to foster economic development and ensure sustainable revenue generation. In conclusion, the debate on tax incentives in Kenya underscores the need for a balanced approach that considers both short-term revenue challenges and long-term economic growth objectives. As the government deliberates on potential changes to tax policies, the focus on fostering a conducive business environment, stimulating investment, and ensuring efficient tax collection mechanisms is imperative for Kenya's economic trajectory.