How can Africa’s continental free trade agreement be moved forward from talk to action? An eventful week in Ghana ended with new promises from ... African governments and state parties to speed up processes towards the full realisation of the world’s largest free trade area – AfCFTA.
In his inaugural speech in parliament on 29 September, Ruto endorsed the introduction of higher taxes for the East African country’s richest citizens as his administration targets more tax revenues, while simultaneously lessening the burden on poorer citizens, traders, and employees during tough economic ties.
“The economic principles of equitable taxation require that the tax burden reflects ability to pay. This is best achieved by a hierarchy that taxes wealth, consumption, income and trade, in that order of preference,” Ruto told the House.
“Our tax regime currently falls far short of this. We are over-taxing trade and under-taxing wealth. We will be proposing tax measures that begin to move us in the right direction,” he said.
Ruto, the latest pro-poor economic proponent, says Kenya’s tax system must be pegged on equity, efficiency, and be customer friendly. If finally designed and implemented, Kenya will join European countries like France and Spain, who currently charge a wealth tax.
The rates of the wealth tax, usually on a progressive system, are yet to be established. The new directive is, however, posed to face stiff opposition from those affected, with some experts arguing that this is not a direction an emerging economy like Kenya can sustain, citing possibility of wealth flight and tax evasion triggers.
In the detail
The impact of taxes on consumption of excisable goods like alcohol, cigarettes, and other luxuries – like cars and jewellery made of precious metals – are mainly felt by rich and middle-class citizens, the largest consumers of these goods.
However, different from many other kinds of taxes – for instance income tax or capital gains tax – the new wealth tax will apply to all property, such as investment, cash, business ownership, real estate, and investors would owe the tax yearly, based on current market valuations of the assets.
Is the country really ready for taxing wealth, which could mean taxing idle land, for instance, or inheritance?
This means even wealth inheritors would owe wealth tax each year unless designed to be payable once in a lifetime.
“Is the country really ready for taxing wealth, which could mean taxing idle land, for instance, or inheritance?” says Sandeep Main, Associate Tax Director at international advisory firm KPMG.
“Wealth taxes could harm risk taking and entrepreneurship, harming innovation and impacting long term growth,” says Sandeep. “The real discussion should be around taxing the informal sector, not necessarily taxing wealth.”
The belief is that exemptions can, however, be included to promote investment in certain sectors.
Boost to revenue
Ruto’s administration is seeking to raise more revenue to seal budget gaps while channelling resources to the informal sectors, such as farming and small businesses, to boost employment.
“It [wealth tax] is one of the few options that the government has to shore up tax revenues. There is a global move to be more equitable in taxation,” says Robert Waweru, tax expert at Ichiban Consultant.
Oxfam International estimates that a wealth tax on Kenya’s super-rich and high-income earners has the potential to earn the country up to KSh125bn ($1bn) in additional revenue.
Plans to introduce wealth tax were first mooted in 2018: They included imposing a higher maximum employment income tax rate of 35% on high income earners with more than KSh9m per year or KSh750,000 per month. It however flopped on political undertones and criticism that it would not be fairly executed.
In November 2021, the Kenya Revenue Authority said it would start trailing Kenyans displaying lavish lifestyles on social media, but paying little or no taxes, seemingly a move targeting high net-worth citizens.
KRA eyes rich Kenyans displaying lavish lifestyles on social media but paying little to no taxes to ensure their taxes are in tandem with their image.
— NTV Kenya (@ntvkenya) November 8, 2021
Last year, the Treasury increased capital gains tax from 5% to 15% in the Finance Act 2022 that will take effect from January next year. This, plus discussion around introduction of wealth tax, was part of fiscal reforms aimed at boosting the country’s revenues.
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