Nairobi
Thursday, 6 June, 2024
By Felix Mogaka
The World Bank has issued a warning to the administration of President William Ruto, cautioning that the current tax strategies could disrupt business operations in Kenya.
According to the World Bank’s latest Kenya Economic Update, the government has struggled to meet its revenue collection targets, complicating efforts toward fiscal consolidation.
The report highlights that unrealistic revenue forecasting and overly optimistic projections have led to impractical spending plans.
“The fiscal outturn in the first nine months of FY2023/24 shows the government’s continued efforts to remain on a fiscal consolidation path. Steady revenue growth driven by the implementation of tax administration and policy measures in the Finance Act 2023 and government’s efforts to contain growth in primary expenditures resulted in an increased primary surplus,” said Treasury.
The World Bank emphasized that unpredictable tax changes create uncertainty for businesses, hindering their ability to plan for the future and assess potential returns on investment.
This lack of predictability is particularly troubling for foreign investors who seek stable and reliable economic conditions.
The report noted, “Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust and hinder strategic planning.”
Businesses, particularly those involved in import and export, are significantly impacted by these abrupt tax changes.
The World Bank pointed out that such unpredictability complicates tax compliance and increases operational costs, thereby discouraging investment and potentially decreasing government revenue.
“The low predictability of tax rates, affecting the import and export sector, seems to be challenging FDI inflows.
Frequent and unanticipated tax policy shifts create a volatile business climate, erode investor trust and hinder strategic planning,” says the World Bank.
“Such unpredictability, exemplified by abrupt tax rate changes or the introduction of new taxes, directly impacts the cost structures of businesses, especially those in the import-export sector. This instability not only discourages investment but also complicates tax compliance, which could lead to decreased government revenue.”
Amidst these concerns, the Kenyan government is planning tax increases to address its budget deficit, as outlined in the Finance Bill, 2024.
However, this approach has sparked debate. Proponents within the Kenya Kwanza regime argue that higher taxes are essential for funding critical government services such as infrastructure and social programs.
Critics, on the other hand, warn that excessive taxation could stifle struggling businesses and push more economic activity into the informal sector, thereby undermining the economy.
As tax rates rise, businesses and individuals are reportedly seeking ways to evade taxes, with some abandoning formal payment systems.
This trend threatens to deplete government revenues and distort the economic landscape the administration aims to regulate, experts have warned.
The World Bank’s report underscores the need for a stable tax environment to foster sound investment decisions and long-term economic stability. Without such stability, the Kenyan government risks eroding investor confidence and complicating its fiscal consolidation efforts.