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PKF calls for reforms in public debt, tax policies

Accountancy body PKF has called on the government to restructure its public debt management and to reconsider some of its recent tax policies if it is remain competitive in the region.

In a media briefing yesterday PKF warned of a possible debt trap by the State if alternative sources of financing such as the public private partnerships are not considered – and further urging for adoption of long- term and convincing tax policies.

“Kenya’s debt has ballooned over the last few years with 50 per cent of the debt being foreign, and therefore the stability of exchange rates will play a big role in sustainability of these debts going forward. Most of this debt has been expended towards big infrastructural projects whose benefits will be realized in the long term,” reads in part PKF’s Kenya Budget 2021 report.

According to a debt management strategy published by Kenya’s national treasury in February 2021, the country will spend Sh458. 2-billion servicing debt for the current 2020/21 financial year, against expected revenue of Sh815. 9-billion.

An estimated Sh24. 4 billion will be paid to China alone and will be in the form of interest payments to the Exim Bank of China and China Development Bank, even as interest charge on the external debt jumps to Sh138 billion in the 2021/2022 financial year, up from Sh118 billion last year.

Estimates by Kenya Annual Public Debt Management Reports (KAPDMR) show that in the last decade, Kenya’s external debt has been approximately half of its total debt stock.

As of September 2020, Kenya’s external public debt stood at 51.4 percent of its total debt stock of 7.1 trillion Kenya Shillings, a slight increase from 48.6 percent in 2011.

In 2020, the external debt composition was 39.3 percent for multilateral debt, 29.7 percent for bilateral debt, and 30.5 percent for commercial debt. This is a shift from 2019 when commercial debt 35.6 percent surpassed multilateral debt or 31.8 percent and 2015 when bilateral debt or 54.3 percent exceeded both commercial at 20.1 percent and multilateral debt which stood at 29.4 percent.

Besides creating room for additional tax collection, PKF is recommending a complete overhaul of the country’s tax regime.

“Most of these changes in tax lack a philosophical orientation. In some instances, taxes such as betting tax which was scrapped in 2020 is now proposed to be re-introduced just one year down the line,” it acknowledged in its Monday report.

The Kenya Revenue Authority (KRA) is January introduced a host of tax laws in Finance Bill 2020 including minimum tax and value added tax on essential goods – a move that was met with apprehension and subsequently suspended by the High Court pending full hearing on its constitutionality.

The Minimum tax for instance, PKF feels was ill-advised as it “has the impact of crippling both small and large businesses, especially those businesses with high turnover but low margins, large capital outlay and those that have huge capital allowances. The Government should re-think the practicality of this tax besides its constitutionality.”

Further, the accountants’ body also wants the 2021 Finance Bill which proposes to change the classification for exported services from zero-rate to exempt to be relooked.

The new tax is feared will threaten the livelihoods of suppliers of exported services who will now not be allowed to claim their input VAT thus making such supplies a lot more expensive.

“This is against international best practice as recommended by the OECD and practiced by almost all countries in the world. The proposed change contradicts government’s effort of implementing the Konza city dream- a dream that seeks to make Kenya Africa’s Silicon Valley,” it said.

Treasury Cabinet Secretary Ukur Yattani is expected to issue Budget Statement for the Fiscal year 2021/22 on Thursday 10th June at 3.00 pm, following the closure of general proposals for the budget statement to the Treasury in May 26 May.

Kenya’s 2021/22 budget is expected to top Sh3.5 trillion according to the Treasury’s spending plans in the 2021 Budget Policy Statement (BPS) published in February.

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