Does the Taxation System in Kenya Abide by the Taxation Principles? Kenyan Tax Law

Does the Tax system in Kenya abide by the Taxation Principles?

Taxes are what we pay for a civilized society[1]. It is therefore every citizen’s duty to pay tax. In fact in life two things are certain; the first is tax and the second death. As such it is mandatory to pay tax. However the tax system must follow some set down principles that enable it to be viable to the government and the citizens.

Joseph Stilgitz was of the view that a good tax system must follow the following principles;

1.      Efficiency

2.      Administrative simplicity

3.      Fairness

4.      Transparency

5.      Flexibility[2]

6.      Equity

7.      Certainty

8.      Convenience

9.      Productivity

10.  Diversity

Simplicity

Under this principle taxpayers should be able to understand taxation. It should be very easy and simple for people to understand it and know what they owe the government. Complexity makes it easier for people to evade tax or come up with laws to exempt certain people from tax. For example the 1^st schedule to the Income Tax Act[3] has a number of institutions that are exempt from tax. Further section 7 and many other sections of the Income Tax Act is unclear and hard to understand and comprehend. To that extent the objective of simplicity has been broken.

Certainty

A tax regime must be clear and certain. Any ambiguity in tax law will always be interpreted in favor of the taxpayer. For this reason tax laws should be clear and simple. For example in 2015 Part 2 of the eight schedule of the Income Tax Act states that capital gains tax is to be charged at the rate of 5% whereas the Finance Act stated that the rate should be 7.5% this brought about confusion that led to a suit but the petitioners failed[4]. For this principle to be met every Finance Act should be extensively and adequately publicized in simple language, clearly visible and nothing should be hidden from the taxpayer.

Flexibility

Transactions are not always carried out the same way every time. Things change and methods advance. A good tax system must follow the changes that take place. There should be no rigidity in the tax system. For example in Kenya many people are now considering e-commerce as compared to the traditional physical trading. As such the tax regime in Kenya must be able to tax e-commerce. However, it is pegged by setbacks such as lack of proper resources to monitor the e-commerce industry[5].  

Elasticity

The government must be able to raise rates of taxes when it needs more revenue. This is so as to maintain a standard of service provision from the government. In Kenya taxes go up every year as the government always needs more revenue as such this principle is applied in Kenya. However such increments should be carefully adopted such that they do not cripple the economy.

Efficiency

A good tax system should attain economy in various ways; it can achieve economic efficiency in collection of taxes. The collection costs must not outweigh the tax collected. Further the tax levied must be economically efficient to the taxpayer. The taxpayer should afford to pay all the taxes and have sufficient cash left with him.

In Kenya there have been attempts to enhance efficiency by coming up with an online portal for electronic revenue collection, instead of having to physically go to the Kenya Revenue authority offices. To this extent economic efficiency is being enhanced[6].

Convenience

Adam Smith opined that ‘every tax ought to be designed so as to be levied at the time or in the manner as is most convenient for the taxpayer to pay’. A good example of this in Kenya is the Value added tax. It is only paid when one person is about to spend or wants to spend. Pay As You Earn is paid when an employee has earned income at the end of the month.

Productivity

Under this principle it should be productive in that it should bring more revenue. However this revenue must not be excess so as to overburden the citizens as this would be counter-productive. One tax than brings in more revenue is better than a multiplicity of taxes that are expensive to operate. In Kenya withholding tax was introduced to casinos but there has been no meaningful collection as there are too many loopholes[7].

Equity

Adam Smith posited that’ every subject of a state ought to contribute with their respective abilities in proportion to the revenue for the services that they are respectively enjoying under the protection of the state. This meant that every citizen of a country should pay taxes according to their ability but not necessarily in the same amount. It also implies equality of sacrifice that is the higher the income the more the sacrifice. The income tax rates are subdivided into different levels of income as such it tries to achieve this principle. It also equally fails as people who earn 35,000 and above are taxed the same as people who earn 500,000.

There are two types of equity. Horizontal equity, it implies equal treatment of taxpayer of similar circumstances.  Vertical equity, it implies unequal treatment of unequal circumstances. People of dissimilar circumstances should be treated fairly in terms of the taxable capacity.

Neutrality

Under the principle of Neutrality, the market economy should not be interfered with. There should be no practical interference with the market economy. Taxes should not interfere with the business community. They are supposed to bear the most minimum burden. The lower the tax the better for the businesses. In Kenya, this principle is not applied strictly as the tax system constantly interferes with the business community. VAT is not a neutral tax because it interferes with the business community.

Bibliography

1.      Oliver Wendell Holmes, http://www.quotegarden.com/taxes.html

2.      http://iss2.etax.com.my/vld/ctaxvld.nsf/0/e63dba2969b172ed48256a6300116cd3?OpenDocument  

3.      Income Tax Act

4.      Kenya Association of Stock Brokers and Investment Banks v Attorney General & another [2015] eKLR

5.      S. Patel, Challenges of Value Added Tax on International E-Commerce in Electronic Goods and Services in Kenya, RJFA, Vol.5, No.7, 2014; See also file:///C:/Users/Creative%20Labs/Downloads/12326-14718-1-PB.pdf  

6.      G. Maisiba, Effects of Electronic- Tax System on the Revenue Collection Efficiency of Kenya Revenue Authority: A Case of Uasin Gishu County. IJIR, Vol-2, Issue-4, 2016

L. Ochieng, Why The Taxman is Yet to Hit Jackpot in Gambling, http://www.nation.co.ke/lifestyle/smartcompany/Why-KRA-cant-bet-on-gambling-tax-yet/1226-3030548-c173aqz/index.html

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[1] Oliver Wendell Holmes, http://www.quotegarden.com/taxes.html

[2] Former chief economist of the World Bank http://iss2.etax.com.my/vld/ctaxvld.nsf/0/e63dba2969b172ed48256a6300116cd3?OpenDocument

[3] Cap 470

[4] Kenya Association of Stock Brokers and Investment Banks v Attorney General & another [2015] eKLR

[5] S. Patel, Challenges of Value Added Tax on International E-Commerce in Electronic Goods and Services in Kenya, RJFA, Vol.5, No.7, 2014; See also file:///C:/Users/Creative%20Labs/Downloads/12326-14718-1-PB.pdf

[6] G. Maisiba, Effects of Electronic- Tax System on the Revenue Collection Efficiency of Kenya Revenue Authority: A Case of Uasin Gishu County. IJIR, Vol-2, Issue-4, 2016

[7] L. Ochieng, Why The Taxman is Yet to Hit Jackpot in Gambling, http://www.nation.co.ke/lifestyle/smartcompany/Why-KRA-cant-bet-on-gambling-tax-yet/1226-3030548-c173aqz/index.html