Kenya has recently instituted some changes aimed at standardizing the Value Added Tax rate ( and in so doing, triggered off price increments from unscrupulous traders; with prices raised even on items that have no additional VAT). The country is also reviewing the excise and personal income taxes (read as “We are about to chop off some more folks!) Don’t forget that the taxman started levying excise duty on bank charges, which the banks promptly passed on to their customers.
The argument, especially on the VAT, is that the tax code needed to be standardized. It had become a mess to figure out, with zero-rated, VAT exempt, special and standard VAT rates across different industries.
Studies have shown that tax increases actually reduce a country’s GDP. People and business will begin to legally relocate, as is currently happening in the US, and this is happening even sooner than we would expect. I got a call from a friend asking me if I could put him in touch with a lawyer to help him understand how to relocate his business to Mauritius.
Kenya’s current economic ‘boom’ started just 10 years ago, and in that period of time, there have been no significant changes in the tax code. As such, businesses that started or opened offices in Kenya had factored in the existing tax structure into their set-up and were ready and willing to pay it as it was. These new changes, all coming at the same time, have brought taxes into sharp focus, and tax avoidance has become a key concern. Any gains that KRA may have attained in efficiency in tax collection are about to go down the drain as businesses move to reduce the tax load on them, and on their employees and customers.
I get the feeling that the government is probably pegging the increased taxes on growth, assuming that the economy will continue to grow at such a rate as to make increases in taxes negligible, but this may not be the case. We are in a time of very fluid information and capital movements; it will not greatly affect one’s business to research and move the legal form to a country that has a favourable tax system, and deny the government not just the additional tax it is looking to collect, but what one may have been paying.