The government is considering reviewing the list of products currently enjoying tax waivers as a new report shows that taxpayers shouldered Sh316 billion on behalf of players in the financial, transport, manufacturing and communication sectors in 2021.
In the move that could see traders of an array of products that have in the past enjoyed tax benefits now taxed, Treasury says it will continue to “rationalise and harmonise” tax expenditures to ensure value for money.
“To ensure sustainability and value for money from the resources foregone through tax expenditure, the government will continue to upscale efforts to rationalise and harmonise the tax expenditure with the aim of removing redundant tax expenditure and enhancing those intended to promote investments and for social protection,” Treasury Cabinet Secretary Njuguna Ndung’u said.
Treasury expressed a need for a framework to evaluate the impact of tax expenditure on the economy, citing a past World Bank finding that many tax incentives had not delivered the expected impact such as lower prices for consumers or increased supply of specific products.
The proposed move comes as the 2022 tax expenditure report showed that while the financial and insurance, information and communication, and manufacturing enjoyed the highest tax exemptions by the government in 2020 and 2021, the transport and energy sectors were also largely zero-rated.
The government zero-rates or exempts products from paying some taxes to cushion consumers from high prices or to incentivise investment in a sector.
The report, however, shows that between 2017 and 2021, the government reduced the rate of waivers, with tax foregone reducing from Sh357.8 billion to Sh316 billion.
“In 2020, total tax expenditure amounted to Sh267.1 billion compared to Sh357.8 billion in 2017, Sh356.5 billion in 2018, and Sh299.5 billion in 2019. However, in 2021, it was Sh316 billion which translates to an increase of Sh48.9 billion from 2020,” the report observes.
It further shows that in the five years to 2021, Value Added Tax (VAT) on products consumed in the country enjoyed the highest rates of tax expenditure (zero-rating and tax exemptions) of between Sh172 billion and Sh272 billion annually.
Excise duty
This is followed by excise duty on domestic products, whose tax expenditure ranged between Sh30 billion and Sh49 billion, while that on corporation income tax ranged between Sh17 billion and Sh22 billion.
VAT on fuel imports also enjoyed between Sh9 billion and Sh28 billion waivers annually between 2019 when tax expenditures on the product were introduced and 2021.
“VAT expenditure as a percentage of GDP has been on a downward trend from 2017 to 2020, however, the expenditure marginally increased in 2021. The tax expenditure increased from 1.61 per cent of GDP in 2020 to 1.74 per cent of GDP in 2021,” the report states.
Tax expenditure as a percentage of GDP, the report shows, reduced from 4.42 per cent in 2017 to 2.61 per cent in 2021.
Financial and insurance activities contributed 33.8 per cent to the total tax expenditure, while information and communication and manufacturing sectors contributed 15.5 per cent and 10.3 per cent, respectively, to the total VAT expenditure. BY DAILY NATION