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Kenya’s economy is estimated to have lost more than Sh 560B in 2020 due to Covid-19.
-Real Gross Domestic Product (GDP) contracted by 0.4 percent in H1 2020 year-on-year(y/y), compared to growth of 5.4 percent in a similar period a year earlier. This reflected the worst seen Q2 GDP outturn, mainly due to a sharp reduction of services sector output.
-Kenya’s economic growth for 2020 declined to 0.6 percent from 5.4 percent in 2019 and is expected to rebound to 6.6 percent in 2021.
By Steve Umidha
The government has been urged to do away with ineffective tax incentives and exemptions if it is to make up for revenue lost to the impact of the coronavirus crisis.
In its latest report, Health Financing & Taxation for Sustainable Healthcare, the Tax Justice Network Africa (TJNA) wants Kenya to review its tax incentives framework by phasing out profit-based inducements and insure that tax exemptions are subjected to parliamentary process and the cost of tax expenditures published annually.
This way, TJNA says the country stands to boost key economies such as the healthcare sector – one of the key sectors that was worst hit by Covid-19 pandemic.
“This is largely attributable to a weak taxation framework due to illicit financial flows, the granting of frivolous and ineffective tax incentives, an inefficient budgeting system with poor allocation and actual disbursement,” noted the report released yesterday.
The agency argued that tax incentives and double taxation agreements were creating an avenue for leakages of potential tax revenue.
It is estimated that Kenya loses about US$ 1.1 billion or Sh100 Billion a year from tax incentives and exemptions. Of these, trade-related tax incentives were at least Sh 12 billion in 2007/08 and may have been as high as US$ 566.9 million. That figure is believed to have more than tripped to date.
In 2010/11 for instance, the government spent more than twice the amount on providing tax incentives (using the figure of Sh 100 billion) than on the country’s health budget. And while the sector’s allocation was recently increased in the 2021/22 financial budget, the report has urged at least 15 percent of the country’s GDP to be allocated to the sector, if it is to sufficiently prepare for another pandemic.
“African governments including Kenya, need to increase their investment in public health and meet commitments such as the African Union’s (AU) Abuja Declaration of 15 per cent annual budget allocation to health,” adds the report, which noted fair macro-economic fiscal policies including equitable and progressive taxation by tackling harmful tax practices such as tax evasion and avoidance were more prudent.
In his budget speech read on June 10, Treasury Cabinet Secretary Ukur Yatani, allocated Sh 111.7billion – the highest ever received in the sector. This was made up of Sh 50.3 billion to enhance Universal Health Coverage, Sh 19.2 Billion to deal with Malaria, HIV and Tuberculosis and Sh 6.2 Billion for providing specialized equipment to public hospitals.
There was a further Sh 4.1 Billion for Free Maternity services, Sh 15 Billion to Kenyatta National Hospital, Sh 7.2 Billion to Kenya Medical Training Centres, Sh 2.5 Billion to Kenya Medical Research Centres and Sh 4.3 Billion to level 5 hospital facilities across the country and Sh 1.5 Billion for Mathare Mental Hospital.
Further, the study found that all the five countries (Kenya, Malawi, Burundi, Nigeria and South Sudan) offered one form of tax incentive or the other including tax holidays and special economic zones, with tax breaks offering no tangible impact on Foreign Direct Investments (FDIs).
Indeed, Kenya for instance cut the corporate and personal income tax rates in April last year to boost demand and help firms keep workers on their payrolls.
The tax exemptions amounted to Sh535 billion – equivalent to 6 per cent of the country’s GDP in 2018, which is considered one of the highest levels in the world
The report has now recommended the country to embrace an open budget initiative which ensures budget participation, an inclusive budget process, and publication of adequate budget information for transparency purposes.