8 September 2018

East Africa: Higher Taxes Across East Africa Will Stifle Economic Growth, Slow Investments

East African families and businesses are feeling the heat of increased taxes as governments look for easier ways of raising money to finance persistent budget shortfalls and fund infrastructure projects.

Uganda is facing an estimated revenue shortfall of Ush16.7 trillion ($4.4 billion), almost half of the entire budget of the current (2018/2019) fiscal year while Kenya, Tanzania and Rwanda are grappling with budget deficits of about $5.62 billion, $46 million and $448 million respectively.

Uganda plans to collect an additional Ush15.9 trillion ($4.2 billion) from new tax measures which came into effect in July.

These include Ush200 ($0.05) daily levy on social media platforms like WhatsApp, Facebook, Viber and Skype, a one (1) per cent excise duty on mobile money transaction, a Ush200 ($0.05) levy on cooking oil and Ush100 ($0.025) on diesel and petrol.

Uganda's Finance minister Matia Kasaija, also increased excise duty on mobile money and bank charges from 10 per cent to 15 per cent.

Fuel tax

In Kenya, the government is under pressure to collect more taxes to fund the operations of the devolved system of governance and fulfil election pledges such as free primary and secondary education.

The country's ballooning public debt has however become a cause of concern to economists and the international multilateral the International Monetary Fund (IMF) and the World Bank.

This year, Kenya's Finance minister Henry Rotich hit taxpayers with a new round of fresh taxes in a an effort to fund the government's ambitious Ksh3 trillion ($30 billion) budget for the 2018/2019 fiscal year.

Apart from imposing 16 per cent VAT on fuel, Kenya's low and middle income groups will have to dig deeper into their pockets to use mobile money transfer after Mr Rotich increased excise duty fees charged on the service to 12 per cent from 10 per cent.

The minister also introduced a tax of 0.05 per cent on cash valued at $5,000 and above being transferred through the banking system and other non-bank financial institutions.

Informal businesses will also be taxed at the rate of 15 per cent on the value of a single business permit or trading licence fee for local businesses whose turnover does not exceed Ksh5 million ($50,000) in a year, commonly referred to as presumptive tax.

Kenya has imposed a 16 per cent VAT on petroleum products despite a vote by the lawmakers postponing it by another two years.

The tax rate which became effective on September 1, has hit households and businesses, attracting wide condemnation.

The knock-on effect of the new levy on fuel includes an increase in transportation costs, cost of production, cost of farming and the overall prices of goods and services.

Debt

On the other hand, Tanzania hopes to generate a total of Tsh18 trillion ($) through taxes in the current fiscal year while Rwanda expect to raise Rwf1.35 trillion ($1.5 billion) from taxes that will include capital gains tax of five (5) per cent on sales or transfer of company shares.

Rwanda will use part of this year's budget to expand the national carrier RwandAir and the construction of the Bugesera airport.

Kenya's public debt is estimated at Ksh5 trillion ($50 billion) while that of Uganda, Tanzania and Rwanda are hovering at over $10.53 billion, Tsh49.65 trillion ($21.68 billion) and $3.9 billion respectively.

In the current fiscal year (2018/2019), Kenya plans to spend 25 per cent of its Ksh3 trillion ($30 billion) budget on debt repayment while in Uganda an estimated Ush10.6 trillion ($2.79 billion), nearly one-third of the budget, will be used on debt repayment.

Tanzanian will spend a total of Tsh10 trillion ($4.36 billion) to service its debt during the 2018/19 financial year. This is equivalent to about 64 per cent of the Tsh1.3 trillion ($567 million) that the country collects every month through taxes.

Funding East Africa's budgets has been a headache for the regional finance ministers largely due to falling domestic revenue collections and the growing fears over the region's level of indebtedness.

The EastAfrican has learnt that the regional economies apparent move to tax individuals and businesses has been informed by concerns over the region's rising public debt.

But economists argue that the new path taken by the governments to balance their books is dangerous as it would stifle economic activities, lead to more job losses, increase poverty levels and make the region uncompetitive in terms of attracting both local and foreign investments.

"The immediate impact of this action is the rise in the cost of living and reduced spending power. We will also lose our competitiveness and become less attractive to investors," said Fred Omondi, a tax leader at the consultancy firm Deloitte East Africa.

"The long term solution is to promote investment and grow the economy at a higher pace to guarantee higher incomes and thereby higher revenue collection," he added.

Ripple effects

Global rating agency Moody's said reliance on a "spontaneous"' increase in revenues from taxes poses a great risk to the implementation of regional budgets and the countries are likely to struggle to narrow their fiscal deficits.

Dr Scholastica Odhiambo, a senior lecture in the School of Business at Maseno University said many households will be plunged into poverty as firms resort to downsizing to reduce the cost of production and try to remain afloat in the difficult operating environment characterised by heavy taxation.

"The ripple effects of these taxes is that the purchasing power of the consumers have been reduced and they are not able to enjoy the quality of life they had before. In addition we expect our exports in the international markets to be very expensive and thereby reduce our export earnings," said Odhiambo.

"The worst consequence is that firms are likely to start laying off workers due to high cost of production," she added.

Economists at the Kenya Institute of Public Policy analysis and research (KIPPRA) said Kenya's high level of public debt has narrowed the window for future borrowing, and increased vulnerability to fiscal risk in the event of any urgent need for borrowing.

According to KIPPRA the increased uptake of commercial loans has also put the country's future borrowing at risk.

East African central banks had earlier warned that the region faces an increase in the prices of goods and services in the second half of this year, due to a jump in the international prices of crude oil and the imposition of taxes on petroleum products and financial services by some countries.

"The rise in excise tax especially on mobile money service M-Pesa among many others can only mean a bleak future for the consumer," said Stephen Mutoro, secretary-general, Consumer Federation of Kenya (Cofek).

Rwanda has taken numerous tax policy and revenue administrative measures to boost domestic revenues such as modernisation of major tax laws such as VAT law, Investment Promotion and facilitation law, mineral tax law, gaming law and income tax law.

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