Domestic Tax policy
By
Bernadette Wanjala
Kenya Institute for Public Policy Research and Analysis (KIPPRA)
Tax Justice Academy
Maanzoni Lodge, Nairobi, Kenya
3rd December 2014
What is tax policy
Identification of levels and methods of taxation
What tax, to whom/on what tax is levied and at
what rate
Specifies exempts and zero rating
Example: if pay as you earn:
who pays the tax individuals in gainful employment
On what income of the individual deducted at
source
At what rate: various tax brackets and rates
Why Tax Policy
Three main goals
Raise revenue
Redistribution
Encourage/discourage some activities
Redistribution by knowing who bears the
burden of a tax, civil society can advocate for
reforms towards fair tax systems.
Principles guiding tax policy
Equity fairness tax liability should be
proportional to income
Simplicity Should be easily understood and
easily administered e.g. too many rates &
exemptions make tax system more complex
Convenience payment of tax should not be
costly (time, money) to the taxpayer
Adequacy should raise enough money
Neutrality should not affect economic decisions
Exportability extent to which taxes are paid by
non residents
Structure of Tax Systems
Comprises of:
Income tax (PAYE & corporate taxes)
Value added Tax
Excise Tax on few commodities (beer,
cigarettes, fuel)
Trade taxes (mainly import duties)
Other taxes such as turnover tax, capital
gains tax, withholding taxes on dividends,
interest, royalties and technical service fee
Composition of tax revenues in Kenya
Income taxes have continued to play a dominant
role in tax revenue about 47% in 2012/13
VAT & excise taxes also increased though at a
slower pace.
VAT under performing lower compliance with
ETR - 65% against target of 90%. Large delays in
refunds.
Excise tax share dropped from 15% in 2007/08
to 11% in 2012/13 change from ad valorem to
specific tax regime.
Trade taxes stagnated at 11% - regional integration
An equitable tax system
Tax burden amount of tax borne by an
individual/entity
Statutory burden legal liability
Ultimate burden final burden
Two measures
Horizontal equity
Persons/entities with similar circumstances should pay
similar taxes e.g. wage earners and other income earners
Vertical equity
Persons/entities with greater ability to pay should pay more
taxes e.g. high income earners vs low income earners
Vertical equity
Two concepts
Progressive Tax Policy Imposition of higher tax rates
on higher taxable amounts (graduated tax rates)
Example of Ugandas income tax structure
Income (UShs)
0 - 1,560,000
1,560,000 - 2,820,000
2,820,000 - 4,920,000
Over 4,920,000
Rate of Tax
Nil
10% of the amount over Shs 1,560,000
Shs 126,000 + 20% of the amount over Shs 2,820,000
Shs 546,000 + 30% of the amount over Shs 4,920,000
Example of Kenyas Tax structure
yearly income (Kshs)
0 to 121,968
121,969 to 236,880
236,881 to 351,792
351,793 to 446,704
Over 446,704
Rate
10%
15%
20%
25%
30%
Pros & cons of progressive taxation
Advantages
Diminishing marginal utility of money
Redistribution
Wealthy benefit more from public services
Disadvantages
Disincentive
Unfair
Evolution of PAYE tax rates in Kenya
Annual Taxable
Rate (%)
Year
Annual Taxable Income
(Kshs.)
1 - 36,000
10
1997
1 - 82,080
10
36,001 - 72,000
15
82,081 - 164,160
15
72,001 - 180,000
25
164,161 - 246,240
20
108,001 - 144,000
35
144,001 - 180,000
45
246,241 - 328,320
25
180,001 - 216,000
50
328,321 - 410,400
30
216,001 - 252,000
60
Over 410,400
35
Over 252,000
65
1 - 42,000
10
1-121,960
10
42,001 - 84,000
15
121,961-236,880
15
84,001 - 126,000
25
236,881-351790
20
126,001 - 168,000
35
351,791-466,700
25
Over 168,000
45
Over 466,700
30
Year
Income (Kshs.)
1986 - 1987
1990 - 1991
20042006
Rate (%)
Income tax and progressivity in Kenya
70
45de
g
60
Tax Burden (%)
50
40
30
20
10
0
25000
75000
150000
300000
1000000
Income Level
1974
1988
1990
1995
2000
Over time, widening of tax
brackets & increasing the
level of tax relief reduces
amount of tax payable and
consequently tax burden.
More people have fallen out
of the tax net as a result of
widening the brackets and
increasing the
relief/threshold over time.
continued rationalization of
tax rates, increase in relief &
widening of tax brackets has
made the income tax system
more progressive and hence
more equitable.
Corporate income tax rates
Evolution of CIT in Kenya
70
60
50
40
30
20
10
0
1974 1988 1990 1993 1995 1996 1998 2000
Year
Top PIT
CIT - foreign
CIT - local
Tax imposed on
companys gross income
less allowable deductions
Kenya: CIT 30% local;
37.5% foreign; 20-27%
for 3-5 years for newly
listed companies
Uganda: CIT 30% for both
domestic & foreign.
Mining companies 2545%
Tanzania: CIT 30%; 25%
for 3years for newly listed
Value Added Tax
Imposed on
supply of
taxable goods
and services
(both domestic
and foreign)
VAT rates across selected
countries
Botswana
12% Tanzania
18%
Burundi
18% Uganda
18%
Ethiopia
15% Zambia
16%
Kenya
16% Zimbabwe
15%
Malawi
16.5% Rwanda
20%,
7%,
10%,
14% South Africa
5%
18%
Morocco
Nigeria
14%
Evolution of The Value Added Tax (VAT)
in Kenya
16
19
15
14
18
18
18
18
18
18
18
18
18
12
17
17
17
9
8
6
4
16 16
16
6
15
4
15
4
3
15
15
4
4
3
2
0
14
13
Number of Rates
Standard Rate (%)
Percent
10
Efficiency of VAT revenue collections
Benin
Burkina Faso
Central African Republic
Chad
Ethiopia
Ghana
Guinea
Kenya
Madagascar
Malawi
Mali
Mozambique
Niger
Nigeria
Rwanda
Tanzania
Togo
Uganda
Zambia
VAT standard rate
18
18
18
18
15
12.5
18
16
20
17.5
15
17
19
5
18
18
18
18
17.5
VAT revenue (% of GDP)
7.4
6.3
3.7
0.7
6.1
9.7
3.3
8.5
6.2
8.1
7.3
7.1
4
1.5
5.9
6.5
3.2
7.3
7.4
Efficiency
44.7
36.6
20.6
5.1
42.9
80.4
22.6
57.2
34.5
44.1
52.4
44.7
22.9
47.9
35.7
38.6
19.5
45.9
54.6
Regressive Tax policy
Persons/entities with lower income pay a
greater proportion of their income
Classic example is the consumption tax e.g.
VAT
Can be made more progressive by exempting
or zero rating certain commodities, especially
basic necessities
Regressive/Progressive VAT
VAT burden without zero rating and
exemptions
VAT burden with exemptions and zero
rating
17.0
17.0
8.0
16.8
7.0
16.6
6.0
16.2
16.0
16.0
15.9
16.0
15.8
15.8
Percent
16.4
Percent
7.3
4.8
4.5
5.0
4.0
3.0
2.4
2.7
2.0
15.6
1.0
15.4
15.2
1st Quint
2nd Quint
3rd Quint
4th Quint
5th Quint
1st Quint 2nd Quint 3rd Quint 4th Quint 5th Quint
Tax gap
Difference between actual tax collection and potential
tax revenue non-compliance
Mainly caused by:
Tax evasion
Tax avoidance
Results in higher tax burdens and less government
revenue
Example: Kenyas revenue potential and gap in 2001/2
Income tax 66.9%
VAT 64%
Import duty 49%
Corporate tax - 35%
Excise tax on cigarettes 52%
Excise tax on beer 85%
Penalties for non-compliance
Kenya: 20% penalty for late payments plus 2%
interest per month; 5% penalty (minimum of
KShs 5,000 for individuals and Kshs 10,000 for
companies) for late filling.
Uganda: 20% penalty on any tax liability that is
less than 90% of the actual; 2% penalty per
month on late payments.
Tax to GDP ratios in selected African
countries
2011
2012
2011
2012
Angola
19.9
18.8
Mali
15.3
15.6
Benin
15.9
15.6
Nigeria
1.8
1.6
Burkina Faso
14.2
16.3
Rwanda
13.1
13.8
Botswana
23.8
27.1
SSA
14.8
14.3
Cote d'Ivoire
11.5
15.6
Togo
16.4
16.4
Egypt
14.0
13.2
Tunisia
21.1
21.0
Ethiopia
9.4
Tanzania
17.3
16.1
Ghana
14.9
Uganda
16.1
13.0
Kenya
19.5
19.9
South Africa
26.0
26.5
Morocco
23.8
24.5
Zambia
19.7
Tax potential for selected countries
Zambia
92.4
17.0
Uganda
67.6
12.9
Togo
80.3
14.6
Sierra Leone
64.8
11.0
Mali
74.9
15.5
Madagascar
52.2
10.7
Kenya
80.6
18.3
Ghana
86.4
22.4
Gambia
85.7
17.1
Ethiopia
81.0
13.2
Burkina Faso
62.0
11.3
0.0
10.0
20.0
30.0
Tax effort
40.0
50.0
60.0
70.0
Tax to GDP
80.0
90.0
100.0
Challenges facing African tax
systems
Narrow tax bases a large informal sector; too few
workers in formal wage employment
Inability to tax agriculture, capital gains, rental income
etc
Tax evasion and avoidance
Complex tax systems with many exemptions that lower
revenue
Limited capacity for tax administration
Poor quality databases
Politics
Influence from international community, sometimes
with growth-equity tradeoff
Increasing revenue generation
Tax reforms (broadening VAT base; excise tax regimes)
Enhance compliance: for Kenya; through use of PIN as
a common identifier and also enhanced audit;
voluntary compliance thro better service delivery.
Capital gains tax: being introduced in Kenya on
transfer of shares and property @ 10% for resident
entities and 20% for non resident; applicable in Uganda
on disposal of assets at 30% and Tanzania at 30%:
Kenya has room to raise capital gains tax revenue
Taxation of the informal sector and SMEs turnover
tax?
Property income e.g. rental income
Taxation of natural resources
Thank You
Asante
