Minimum tax to enhance equity, inclusivity in tax payment

In order to expand the tax-base in the country, the government, through the Finance Act 2020, has introduced a raft of new tax measures which took effect on 1st January, 2021. One of the tax measures implemented early this month is the minimum tax.
  • 22 Jan 2021
  • 3 Mins Read
  • 〜 by The Vellum Team
By CPA Maurice Oray

The recent years have seen most countries walk a tight rope as they strive to mobilize adequate domestic revenue to fund their development and growth agenda. The government of Kenya has focused its efforts on reducing poverty and inequality, ensuring adequate health and education, and development of basic infrastructure to support more inclusive growth.

Despite significant progress, the country still faces challenges in domestic resource mobilization characterised by a narrow tax base, limited natural resource endowment and significantly low compliance levels. The need for strategies to revolutionize the tax legislative framework and improve the capacity of the tax administration cannot be overemphasized.

New Strategic Fiscal Measures
These challenges have informed the need for a raft of new strategic fiscal policy measures in every fiscal budget cycle with a key emphasis on tax-base expansion. Similarly, deliberate steps have been taken to improve the tax revenue administration with focus on development of staff capacity to support tax reforms and compliance management.

Robust reforms are those that focus not only on ways to increase revenue collection, but also take into account how to do so in ways that consider the efficiency and equity impact of particular policy choices. It is therefore important to focus on sustained revenue mobilization and consistent institutional development over time as well as attention to basic processes and reforms.

The more a country progresses development wise, the more resources the government requires. The fruition of the Big Four Agenda, for instance, is heavily reliant on the country’s ability to raise requisite domestic resources.

Tax Base Expansion is Key
Tax-base expansion is a key strategy for enhancing revenue mobilisation. Globally as countries look inward for local growth options, the government has to rethink its revenue base to expand it for sustainable domestic resource mobilisation.

This strategy is among key initiatives outlined in the Kenya Revenue Authority’s (KRA) strategic corporate plan. Through exploration of untapped sectors of the economy, expansion of the tax-base ensures more revenue in the government coffers, without necessarily putting additional burden on taxpayers already in the tax net.

As such, tax-base expansion aligns with equity and fairness principle which epitomises an effective tax administration system. In addition, tax-base expansion promotes inclusivity thereby ensuring that the tax burden is evenly shouldered across the board.

In order to expand the tax-base in the country, the government, through the Finance Act 2020, has introduced a raft of new tax measures which took effect on 1st January, 2021. One of the tax measures implemented early this month is the minimum tax.

Implementation of Minimum Tax
The minimum tax is payable by business entities that are carrying out business and have physical presence in Kenya. The tax will be payable at a rate of one per cent of the gross sales.

Contrary to industry concerns, business enterprises registered under the turnover tax (ToT) regime will not be liable to pay the minimum tax. The qualifying threshold for ToT registration is an annual turnover exceeding one million shillings but less than Ksh. 50 million.

Essentially, the minimum tax will be an alternative tax to instalment tax and will only be payable where it exceeds the instalment tax. In cases where the instalment tax is higher than the minimum tax, the former will be due. With this arrangement in place therefore, there will be no case of double taxation as it has been the fear of many industry players.

Levelling the Field for Businesses
Apart from tax-base expansion, the minimum tax is set to level the operating playfield for business enterprises by ensuring that all business ventures contribute towards the government effort to mobilise resources for growth and development. It is unfortunate to note that there have been cases where some entities have been avoiding payment of instalment taxes by perpetually declaring losses.

While loss making is part of the day-to-day journey in an ideal business environment, it is not practical for a business entity to consistently post losses in perpetuity and still remain afloat. It is expected that introduction of minimum tax will not only seal such loopholes which cost the government billions of shillings in revenue every year, but also ensure equity and fairness in the distribution of the tax burden.

Tulipe Ushuru Tujitegemee
As mentioned earlier, due to our limited natural resource base, the only major source of government revenue is the taxes you and I remit through the established tax remittance frameworks. We all therefore have a responsibility as patriotic citizens to contribute a fair share of taxes due on us in support of our country’s development agenda.

The writer is the Deputy Commissioner for Corporate Policy at the Kenya Revenue Authority (KRA)