proposal - mark final

8/10/2019 Proposal - Mark Final

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Contents1 CHAPTER ONE: INTRODUCTION ............................................................................................................ 8

1.1 BACKGROUND ............................................................................................................................... 8

1.2 STATEMENT OF PROBLEM ............................................................................................................ 9

1.3 THE RESEARCH QUESTIONS ........................................................................................................ 10

1.4 OBJECTIVES OF THE STUDY ......................................................................................................... 10

1.5 SIGNIFICANCE/JUSTIFICATION OF THE STUDY ............................................................................ 11

1.6 SCOPE OF THE STUDY AND ITS LIMITATIONS ............................................................................. 11

2 CHAPTER TWO: LITERATURE REVIEW ................................................................................................. 13

2.1 Introduction ................................................................................................................................ 13

2.1.1 Low compliance and reform challenges ............................................................................. 13

2.2 Tax Design ...................................................................................... Error! Bookmark not defined.

2.2.1 Table 1: Taxes on income, profits and capital gains .............. Error! Bookmark not defined.

2.2.2 Table 2: Central government tax receipts 2005/062009/10 .............Error! Bookmark not

defined.

2.3 Progressive or Regressive ........................................................................................................... 16

2.3.1 Table 3: Comparing the Progressivity of Personal Income Taxes ....................................... 17

2.4 New Measures to Address Tax Avoidance and Evasion .............................................................. 17

2.5 TAX JUSTICE WORK ..................................................................................................................... 18

2.6 WHY TAX JUSTICE? ...................................................................................................................... 19

2.7 WHAT IS TAX JUSTICE? ................................................................................................................ 20

2.8 GLOBAL AND AFRICA LEVEL INTERVENTIONS ............................................................................. 21

2.9 LOCAL AND NATIONAL LEVELS INTERVENTIONS ........................................................................ 22

3 Methodology ....................................................................................................................................... 24

3.1 Sampling ...................................................................................................................................... 24

3.2 Data Collection ............................................................................................................................ 273.3 Response Rate ............................................................................................................................. 28


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IMPACT OF THE NEW TAX LAWS ON THE MIDDLE

AND LOW INCOME EARNERS IN KENYA

A Research Project Submitted in Partial Fulfillment of the Requirement for

the Award of Bachelors degree in ECONOMICS AND STATISTICS.

DECLARATION

This research project is my original work and has never been presented to any other university or

institution of learning for award of a degree, diploma or certificate.

Signature


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Date..

This research project has been submitted with my approval to my university EES300 lecturer

Mrs.

Signature .

Date .


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DEDICATION


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ACKNOWLEDGEMENT

My sincere gratitude goes to my lecturer Dr.Njaramba for her professional guidance, patience

and the time dedicated into guiding me through the research. Thanks to all Economics

department lecturers for their wise advice and help. Gratitude to my university colleagues, who

also offered me encouragement and support in carrying out this study

I thank God for providing me with good health and spirit to enable me to carry out this research.

Thank you all for supporting me and may God bless you abundantly.

ABBREVIATIONS


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AAK Action Aid Kenya

CGD Centre for Governance and Development

CIDA Canadian International Development Agency

CIT Corporate Income Tax

CSOs Civil Society Organizations

FDI Foreign Direct Investments

GFI Global Financial Integrity

IEA Institute of Economic Affairs

KAM Kenya Association of Manufacturers

KARA Kenya Alliance of Resident Association

KNBS Kenya National Bureau of Statistics

MDGs Millennium Development Goals

NTA National Tax Association

PAYE Pay as You Earn

PIT Personal Income Tax

SID Society for International Development

SIDA Swedish International Development Agency

TJN A Tax Justice Network - Africa

TJN Tax Justice Network

ABSTRACT


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The research was aimed at highlighting the plight of the Kenyan citizens who live just above

and below the internationally agreed poverty line with the advent of the new taxation laws set

by the new government in 2013. The new laws mainly affected the Value added tax, which

cannot be evaded by any Kenyan citizen as it is taxed directly on primary consumer products

such as foodstuffs which include sugar, cooking fat etc to non-foodstuffs such as petroleum

products.

These are products that are consumed by each and every basic family unit, no matter

which side of the poverty line they lie. The study is aimed at also shading light on the system of

the country, the issue of tax justice and the importance of taxation to both the state, economy

and the individual citizens within the nation.


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CHAPTER ONE: INTRODUCTION

1.1

BACKGROUND

Governments need money. Modern governments need lots of money. How they get this money

and whom they take it from are two of the most difficult political issues faced in any modern

political economy. The recent levying of Valued Added Tax (VAT) on many basic commodities

such as books and food and its roll on effect has understandably created a furor, more so in low

income households in urban centre.

No single person can debate the importance of state revenue and the effect that it has on

the economy and on people that are taxpayers on the ground. However, while taxation is

important for any economy in terms of revenue collection and subsequent running of different

sectors of the economy, the effects of heavy taxation, both positive and negative, cannot be

ignored. The middle and low income earners feel the greatest pinch of the recent move by the

central government to increase the Value added tax, seeing as it impacts directly on them through

the basic commodities that an average family consumes.

Just to mention a few of the problems arising from this move are rise in cost of living, an

increase in crime rates, reduction in the purchasing power of the middle class as well as the

widening of the divide between the rich and the poor. This makes the separation too apparent. If

we Kenyans were to dissect the list of the richest in the country, it would undoubtedly appear

that the economy is controlled by about 50 families with large tracts of land and farms and with

public quoted companies.

In Kenya, taxation has played a key role of defining both its political non-alignment and

national development since independence in 1963. Kenya has also experienced more stable

economic and political development than many other African countries, meaning that tax reform


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salaries have seen no significant increase over the years yet the prices of basic commodities have

skyrocketed over the past few months.

Therefore the average middle income earner in Kenya faces an uphill task to remain

afloat in these harsh economic times in terms of provision for their families and generating

enough revenue for the smooth running of the government business. The proposal looks into the

recent move by the government to increase taxation and the hardship that the middle income

earners who are mainly engaged in subsistence farming and odd jobs to survive.

1.3 THE RESEARCH QUESTIONS

1.

To what extent does increased taxation impact on the middle and low income earners in

Kenya?

2. Do increased taxes improve the living standards of middle income earners or does it

make them worse off?

3. Do the high taxes increase the poverty levels in the country and lead to rising crime rates?

4. Do the high tax rates have a long term chronic recession effect?

1.4 OBJECTIVES OF THE STUDY

1. To establish the effects of increased taxation especially the VAT on middle and low

income earners in Kenya.

2. Impact of increased taxes on living standards of people.

3. Impact of taxation on poverty and crime rates

4.

To establish the effect of high taxation on inflation and recession


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1.5

SIGNIFICANCE/JUSTIFICATION OF THE STUDY

Tax issues have for a long time been viewed as a complex subject that should be left largely to

tax experts. This perception has contributed to the huge information gaps on issues of tax policy,

tax administration and tax performance reaching the public. As a result, very many citizens in the

country do not know the magnitude of the new tax policies involving a rise in the VAT tax and

its effects on them.

This proposal aims at ensuring the Kenya middle class are able to;

a) Understand how the various taxes are designed

b) Differentiate the different types of taxes that are levied on them daily

Understand how these taxes are administered and the changes that have occurred in the tax system

over the years

c) To understand the importance of paying taxes while at the same time be able to know to

what extent the governments levying of the same is legal and beneficial to its citizens.

The significance of payment of taxes cannot be overemphasized. Each and every Kenyan doing

business or living legally within the nations boundaries id bound by the law to pay taxes.

1.6

SCOPE OF THE STUDY AND ITS LIMITATIONS

The study covers the wider area of the Kenyan tax systems, from the types of taxes levied

on Kenyans at different levels (Albeit with greater focus on the Value Added Tax) to the

importance of these taxes. Its attempts to place emphasis on the history of taxation in Kenya, the

use of taxes, their collection methods and their effect on the general strength of the economy.

Besides the use of tax credits and deductions such as a tax relief, this proposal indicates

that to ensure fairness and that income tax is more progressive government reforms towards

income tax should consider widening the tax brackets by applying high marginal tax rate for high


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income earners as well as adjusting income tax bands to ensure that salary increases that are

commensurate to inflation rates do not artificially push income taxpayers to a higher tax rate

In carrying out this research however, a number of challenges were encountered. These

included problems such as respondents refusing to correctly fill out questionnaires on their tax

compliance, overreliance on secondary data from Kenyan reports on taxation that may be

outdated.

The study also mainly focuses on VAT and its effects on the middle and low income

earners while there are very many other types of taxes that have great effect on the living

standards of this group of people such as the Pay as You Earn tax, Property tax, sales tax and

Income tax. The bias on Value Added Tax therefore does not give the complete picture of the

situation on the ground.

The study was largely a scoping study and did not thoroughly or in a technical sense look

at the tax systems and administration in Kenya. Therefore there will be a need for a technical

study that will critically look at the Kenya tax system with the view of identifying the gaps,

loopholes and challenges and with aim of identifying issues such as the level of tax gap losses

due to transfer pricing, non compliance, etc.

The purposive sampling used also implied that only a select number of CSOs currently engaged

in tax justice work and those that are likely to engage in tax justice work (base on their current

program work), were sampled. This implies that their views may not be generalized to all CSOs,

but they provide a significant voice in the area of governance and tax justice.

The study may provide a significant feedback on the policy agenda that the CSOs may

pursue, but due the limitations cited a fore hand, there is still others issues that may require


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further investigation before clear policy advocacy agendas are identified. Some of these will be

alluded to in the conclusion and recommendations.

2

CHAPTER TWO: LITERATURE REVIEW

2.1

Introduction

2.1.1

Low compliance and reform challenges

Kenya is ranked among low-income or low compliance countries and has a hard task of

ensuring efficient and effective tax administration in order to ensure tax compliance and to raise

more revenue. A recently carried out research on Taxpayers Attitudes and Tax Compliance

Behavior in Kenya1 revealed that in general there a various reasons given to low compliance

rate which include: taxpayers perceptions of the tax system and revenue authority; taxpayers

understanding of a tax system and tax laws; image of the government based on whether it is

achieving the tax objectives under prescribed; motivation such as rewards and punishment e.g.

penalties; cost of compliance; enforcement efforts such as audit; probability of detection; ethics

or morality of the taxpayer and tax collector; equity of the tax systems; and also demographic

factors such as sex, age, education and size of income.

Kenya introduced the Tax Modernization Programme in 1986 with the hope that this

would, among other things, enhance revenue collection, improve tax administration and reduce

compliance and collection costs. As in most African countries, the tax reforms became part of

the larger Structural Adjustment Programmes that were incorporated in the economic

restructuring agreement between the Government of Kenya and the International Financial

Institutions.

1Marti, L O, et al(2010), Taxpayers Attitudes and Tax Compliance Behaviour In Kenya, African Journal of Business &

Management (AJBUMA), http://www.aibuma.org/journal/index.htmVol. 1 (2010), AIBUMA Publishing
http://www.aibuma.org/journal/index.htmhttp://www.aibuma.org/journal/index.htmhttp://www.aibuma.org/journal/index.htmhttp://www.aibuma.org/journal/index.htm


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Administration of tax in Kenya is by Kenya Revenue Authority established through the

Act of Parliament on July 1 1995 (Cap 469). The purpose of Kenya Revenue Authority is

assessment, collection, administration and enforcement of tax laws with professionalism

governed by integrity and fairness. To achieve this purpose, KRA is divided into regions such as

North Region, Rift Valley Region, Western Region, Southern Region and Central Region and

departments such as Customs Services Department, Domestic Services Department, Road

Transport Department and Support Services Department.

Even though there have been many tax reforms, Kenyas tax code is still complex and

cumbersome, characterized by uneven and unfair taxes, a narrow tax base with very high tax

rates and rates dispersions with respect to trade, and low compliance. Additional challenges

include tax systems with rates and structures that (1) are difficult to administer and comply with;

(2) are unresponsive to growth and discretionary policy hence low productivity; (3) raise little

revenue but introduce serious economic distortions; (4) treat labor and capital in similar

circumstances differently; and (5) are selective and skewed in favor of those with the ability to

defeat the tax administration and enforcement system2.

There are many challenges that hamper the setting up of an efficient and effective tax

system in Kenya. The structure of the economy such as the ratio of the formal verses informal

economy; and the size of the agriculture sector pose challenges in the tax design and

administration. Other impediments include: repeal of tax holidays, high effective protection,

high dispersion of tariff rates, detailed and rigid custom rules, poor response of VAT to reforms,

weak capacity to process large volumes of returns and refunds for zero-rated transactions. In

2Karingi S, et al (December 2005), Tax Reform Experience in Kenya, Kenya Institute for Public Policy Research andAnalysis, KIPPRA Working Paper No. 13


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addition, Kenyas tax system is burdensome in terms of time taken to prepare and submit tax

returns3.

Other challenges include poor quality of basic data (to estimate optimal taxation, forecast

revenues adequately, and undertake micro-simulations and tax modeling) and politics. Politics

have been a major impediment in the recent past, and as an IEA report stated an unfriendly

political economy that is not amenable to rational tax policy may prevent significant tax reforms.

The political elite, who possess high personal income, wealth and property, may use their

political influence to oppose the imposition of wealth and property taxes.4 This precisely

explains the current situation in which twice the legislatures have collectively ensured that the

legislations that were to initiate taxation on benefits/allowances to MPs and other constitutional

offices were not enacted.

In 2008 the Finance Bill submitted by the then Ministry of Finance had included

proposals for taxation on benefits/allowances to the MPs, but the MPs threatened not to pass the

finance bill if the clauses on taxes were not expunged. This would have paralyzed the

governments operations and so the finance minister acceded to their demands. A similar attempt

in 2010 by the government and through the proposed constitution has led to parliamentarians

demanding for a pay increases that would cover the new taxation requirement, again defeating

the purpose for which the taxation is being introduced which is to increase domestic revenue.

An additional pay would result in a zero sum game since the intended increase in domestic

revenues will be used up as salaries to the MPs.

3Moyi E. & Ronge E (2006), Taxation and Tax Modernization in Kenya: A Diagnosis of Performance and Options for

Further Reform, Institute of Economic Affairs, IEA, Kenya4Ibid


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2.2

Progressive or Regressive

Institute of Economic Affairs (IEA) using an alternative measurement that provides a

more accurate analysis and comparison of the progressivity of taxes, compared the minimum

income at which a taxpayer enters the highest tax bracket. Using this measurement which

provides the monthly income level at which every Kenyan worker enters the same highest

income tax bracket compared to the highest earner in the country they were able to provide the

level of progressivity of taxes in a number of countries in sub-Saharan Africa.

The findings of their analysis is covered in the table 5 below which shows that majority

of African countries with the exception of the Republic of South Africa and Botswana have

incredibly regressive tax rates on income. For instance, at a monthly income of only US$ 523, a

Kenyan taxpayer pays tax at the highest rate of 30%. Compare this to USA where one enters the

35% bracket at a monthly income of US$ 31,0005.

5IEA (2010), Alternative Budget 2010/11: submissions for Budget 2010/11 made by different interest groups on 9th and10th February 2010, IEA,http://www.ieakenya.or.ke/viewdocument.asp?ID=191accessed on June 30th2010
http://www.ieakenya.or.ke/viewdocument.asp?ID=191http://www.ieakenya.or.ke/viewdocument.asp?ID=191http://www.ieakenya.or.ke/viewdocument.asp?ID=191http://www.ieakenya.or.ke/viewdocument.asp?ID=191


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2.2.1

Table 3: Comparing the Progressivity of Personal Income Taxes

From Citizen Alternative Budget 2010 by IEA

This is an indicator that the tax system does not effectively promote equity and redistribution.

2.3

New Measures to Address Tax Avoidance and Evasion

The treasury indicated a number of measures that have been put in place to minimize

opportunities for tax planning include, limiting the period available to carry forward tax losses to

four years and the introduction of tax on deemed interest, which will be levied on local entities

that receive interest free loans from their foreign related companies. The latter may be intended

to discourage foreign entities from excessively funding their Kenyan subsidiaries or associates

by way of debt. This measure may be targeting entities that extract profits from their local


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companies through tax avoidance or evasion measures, and use loans to support the local "non-

profitable" operations

According to treasury, another measure that will target tax planning and avoidance is the

increased enforcement of transfer pricing rules. To accomplish this, the capacity of Kenya

Revenue Authority (KRA) is being enhanced in the areas of transfer pricing and other emerging

tax planning trends. To this end, many local companies that are members of multinational

groups have been targeted for transfer pricing audits. The main objective of the transfer

pricing audits is to ensure that Kenyan companies get a fair share of their profits, through the so-

called arms length consideration, and therefore pay their fair share of taxes to the KRA. As

Fred Omondi stated in the East Africa Standard Newspaper article, All indications are that this

[transfer pricing] will be a major area of focus for tax audits going forward.6

However, these good measures may not be smoothly implemented because of the three

key problems that George Soros refers to as asymmetric information, asymmetric bargaining

power and asymmetric agency. For instance, there will be challenges of verifying which

companies have genuine losses that can be carried-forward. The other challenge is on having

clear rules that will be used to differentiate legitimate tax planning measures as opposed to the

tax evasion and overly aggressive tax avoidance. If these and other issues are not addressed, the

multinationals will take advantage of the capacity and information gap among the enforcers

(KRA) and also use their bargaining power as a source of the FDI.

2.4

TAX JUSTICE WORK

6 Omondi F. (June 2010), Budget Blur Lines between Tax Avoidance and Tax Evasion,http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1 accessed on November 7th2013
http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1


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This chapter seeks to provide a conceptual clarification on tax justice work presenting insights on

CSOs persuasions, works and visions; what has been achieved, by whom and how; their outputs;

and identifies potential areas of further engagement. It also explores what tax justice work is in

the context of all the realities and issues identified at the global and national level.

2.5

WHY TAX JUSTICE?

Tax is the link between state and citizen, and tax revenues are the lifeblood of the social

contract. Taxation has profoundly beneficial effects in fostering better and more accountable

government. Furthermore, it is a more sustainable way for governments to promote development

as it essentially gives countries the freedom to pay for their own development by raising their

own revenues. This fundamentally shifts focus of development financing from the aid

effectiveness agenda to domestic resources mobilization.

One way of achieving increased domestic revenues, is to fight against tax havens, which

suck-out financial capital out of countries (and the poorest countries are the most vulnerable) by

offering secrecy and other corrupting services. Banks and accountants based in tax havens

encourage lites to send their wealth offshore, depriving growing economies of investment and

depriving governments of tax revenues to finance the infrastructure and other public goods

necessary for development.7As a result of the tax haven scandal, poor countries too often have to

rely on aid to replace the lost taxes.

As the Tax Justice Network puts it, we want to see the restoration of a culture of tax

compliance among individuals, corporations, tax professionals, and governments; and an ethical

approach to tax. They should follow not only the letter of the law, but the spirit of the law, with

respect to their tax af

7Tax Havens Cause Poverty,http://www.taxjustice.net/cms/front_content.php?idcatart=2accessed on June 22nd2010
http://www.taxjustice.net/cms/front_content.php?idcatart=2http://www.taxjustice.net/cms/front_content.php?idcatart=2http://www.taxjustice.net/cms/front_content.php?idcatart=2http://www.taxjustice.net/cms/front_content.php?idcatart=2


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In an era of globalization, the CSOs doing tax justice work are committed to a socially just,

democratic and progressive system of taxation; they campaign from an internationalist

perspective for a tax system which is favorable for poor people in developing and developed

countries, and finances public goods and taxes public bads such as pollution and unacceptable

inequality.

2.6

WHAT IS TAX JUSTICE?

For the individual taxpayer, tax justice is about tax compliance. This happens when the

individual seeks to pay the right amount of tax. But tax justice is much more than the individual

compliance; it is also about the existence of tax systems that promote social well being within

and between societies. It is about the creation of environments in which all people can prosper.

That also means that the state institutions and businesses that meet the needs of people can also

prosperbut not at the expense of people or citizens.

Therefore, tax justice is about four things above and beyond the duty of the individual to

be tax compliant. First it is about understanding why we tax. Second it is about defining the

attributes of a good tax system. Third it is about defining the process that delivers tax justice and

finally it is about understanding transparencywithout which tax justice is not possible.8

It is against this backdrop that civil society organizations have began to put time and

resources in the work of tax justices. This has led to the formation of the Tax Justice Network

(TJN), a global network that brings together organizations, social movements and individuals

working for international tax co-operation and against tax evasion and tax competition. Other

regional organizations and networks have also been formed in Africa (and in Kenya) to deepen

and contextualize the work, are Tax Justice Network Africa (TJN-A) and the East Africa Tax

and Governance Network (EATGN).


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2.7

GLOBAL AND AFRICA LEVEL INTERVENTIONS

At the global level, several advocacy and campaign initiatives have been initiated by

various CSOs. TJN has provided the platform for many CSOs to operate and has also been aleader in providing the conceptual clarification and research. GFI based in USA has been a

leader in providing research evidence with the most current researches on illicit flows from

Africa and absorption of illicit funds reports having been published in 2010. In addition to these,

leading agencies in TJ work such as, Christian Aid, Action Aid and Eurodad (members of TJN)

have also had other streams of work.

According to Action Aid, the outcome of the London G20 summit in April 2009 was the

renewal of more than a decades work by rich nations to tackle the problem of international taxcooperation, with a welcome recognition that developing countries need to benefit from this

work too. The summits most high profile outcome in this area was the creation of black, grey

and white lists of states, assessed in terms of their level of tax cooperation. As criteria, the lists

(backed by the threat of sanctions) use the number of bilateral information exchange agreements

(based on Organization for Economic Cooperation and Development [OECD] standards) that

states have signed. Nevertheless, this will not in itself help developing countries since in most

cases they do not have bilateral agreements with tax havens, and OECD information exchange

standards set the burden of proof required to make a successful information request too high.

The G20 also committed to developing proposals, by the end of 2009, which could benefit

developing countries. Action Aid believes that these proposals should include a system of tax

information exchange that is: (1) automatic, not on demand (2) based on multilateral, not

bilateral, arrangements (3) global in scope, including all jurisdictions (4) enforced, by

progressively raising the white and blacklisting standards with a view to making participation in

the system an eventual criterion9.

European Network on Debt and Development (Eurodad) on the other hand, believes that a

global binding framework on tax avoidance and evasion is needed and is working with members

and other allies across Europe and in other regions to improve development outcomes by

9 Action Aid (April 2009), What next? Tax cooperation after the London G20 summit, Action Aid UK,www.actionaid.org.uk


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promoting policies and practices that will: return stolen wealth; remove harmful tax and secrecy

practices of tax havens; increase regulation of special purpose investment vehicles such as hedge

funds, and private equity funds and vulture funds. To this end, Eurodad has launched a Fight

Capital Flight Campaign10.

2.8 LOCAL AND NATIONAL LEVELS INTERVENTIONS

Civil society organizations in developing countries almost exclusively focus on domestic

tax policytax incentives and holidaysrather than tax evasion and avoidance. This is because

the former is closer to local realities and understood. Its also possible to pursue the domestic tax

policies because of the accessibility to information and the actors that need to be influenced.

The domestic tax policies in Kenya that are of keen interest to the tax justice members

relate to levels of corporate tax, policies on taxation and how they facilitate redistribution, the taxincentives and holidays provided to the multinationals at the EPZs.

Furthermore, the tax justice work has evolved at the national and local levels to incorporate

a broader notion that was viewed from governance, budget monitoring and expenditure tracking

(BMET) lenses. Organizations such as National Tax Payers Association have extensive work

and experience in BMET, and their main mandate has been to tack how government spends taxes

and other revenues to provide services particularly through their BMET of the Constituency

Development Funds (CDF). Similarly, Action Aid International Kenya, has been conducting

social audits on various devolved funds and they consider this a part of tax justice work.

However, for this stream of local tax justice work to integrate well with the concept and

issues surrounding tax justice, the CSOs have to link the community monitoring tools and the

BMET, with a strong component of tax content. This could be done through clear conceptual

clarification, improved modular component in the training and empowerment process and

improved research on tax issues in addition to what is being done.

The East Africa Tax and Governance Network (EATGN) was established following the

Tax and Governance workshop held in Naivasha in November 2009. To facilitate the work,

EATGN established a steering committee and agreed to incorporate other organizations with

similar initiatives. Since then EATGN has held several meetings to deliberate on its mandate

10Eurodad Website, http://www.eurodad.org/debt/accessed on August 2nd2010
http://www.eurodad.org/debt/http://www.eurodad.org/debt/http://www.eurodad.org/debt/http://www.eurodad.org/debt/


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and thrust of work. The EATGN has a strong media focus due to the strong involvement of

PANOS.

Through Centre for Governance and Development (CGD), the National Taxpayers

Association was established in 2007. The NTA still operates as a program under CGD but will

soon become independent. The nexus of the work in CGD/NTA is based on the recognition that

95% of recurrent expenditures of the Kenyan Government are from tax revenues and therefore

the voice of citizens-taxpayers (expressing how the resources ought to be spent and on what)

needs to be heard, yet on the contrary however, the governments tend to listen, and to be more

accountable vertically to the donors who contribute 5% of the recurrent and 40% of the

development budget.

CGD/NTA main mandate therefore has been to track expenditure of the budget, provide

evidence to the citizens on how resources are being spent, and provide opportunity for advocacy

and citizens action in demanding accountability. NTA tax justice work entails demanding

accountability for service delivery and management of devolved funds which includes

Constituency Development Funds (CDF), Local Authority Transfer Funds (LATF), and Free

Primary Education Fund (FPE), Roads Maintenance Levy Fund, Transport and Water funds.

Institute of Economic Affairs (IEA) has been one of the leading not-for-profit

organizations focused in influencing tax policies in Kenya. IEA whose mandate is to promote

informed debate on key economic and political policy issues and to propose feasible policy

alternatives in these areas, has been running budget information and trade information programs

that have significantly increased public debate and influenced policies in these areas.

IEA publishes an Alternative Budget which it submits to the treasury on behalf of many

stakeholders representing the private sector and CSOs who participate in its public hearing every

year before the budget reading. In 2010/11 Alternative Budget Submission, IEA outlined a


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number of taxation proposals that the stakeholders felt will assist government to deepen and

broaden the tax base if implemented.

3

Methodology

3.1 Sampling

Purposive sampling was used for the research to identify civil society organizations that

are currently involved in some tax justice work, or those potential allies and network members.

The government agencies and private sector institutions that have an active role on tax matters or

influence tax issues were sampled. Donor agencies involved in governance work were also

sampled as key respondents.

3.2

Tax Design

In Kenya, income tax has been designed to target corporate profits, Corporate Income

Tax (CIT); and individual incomes from employment, personal income tax (PIT) and Pay As

You Earn (PAYE). Income tax is charged directly on business income, employment income, rent

income, pension earnings, investment income (dividends, royalties) and commission. Income

from self-employment is subject to the PIT while employment income is subject to PAYE. The

PIT and PAYE are charged at the same graduated scale while CIT is charged on profits on

limited liability companies. Other income taxes include fringe benefits tax, advance tax, taxes

under Widows and Orphans Act and Parliamentary Pensions Act11.

The share of the informal sector in Kenyas economy is large- accounting for about 18%

of GDP. Many small-scale but prosperous business people, who are mainly self-employed, have

enormous scope for evading tax. Those who work for Government and for large-scale employers


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have tax deducted from their wages at source and have no scope for evading tax. In such

conditions, income tax tends to be very inequitable and the more the government relies on

income taxation the less equitable the system becomes.For instance to capture one large part of

the informal sector, changes were introduced in the public transport sector aimed at enhancing

the working conditions and improving tax compliance, led to Public Service Vehicles (Matatu)

owners being registered as employers and therefore they are required to pay PAYE for their

employees. The operators are also required to prepare accounts and submit self-assessment

returns. Unfortunately, this turned out to be a poor tax design for the sector and to a large extent

has resulted in non compliance.

On the other hand, reforms in PIT, which lowered the rates and rationalized the system,

most likely enhanced efficiency through the reduction of administrative and compliance costs.

However, the extent to which these reforms have reduced prospects for tax evasion is uncertain.

Differentiated CIT rate structure was also rationalized by unifying the structure across all types

of business was a key reform in 1990s. However, differentiated rates between local and foreign

companies have persisted during the reform period. The CIT system has also introduced

incentives, designed to boost export-led industrialization and to provide an enabling fiscal

environment for Foreign Direct Investment. Foreign companies that invest in export processing

zones (EPZs) are granted a 10 year corporate tax holiday, exemption from import duty, VAT (on

all inputs except for motor vehicles), stamp duty and withholding tax over a 10 year period. This

is sometimes a disincentive to local companies, which are not eligible for incentives that are

available to their foreign counterparts.

Since enterprises are the engine of job creation and growth, it is expected that lower

corporate tax rates encourage investment, entrepreneurship and production by increasing the net


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In the period of 2005 to 2010, further analysis of government tax receipts indicate that income

tax has been in the range of 37% 41% of the total tax receipt; while VAT has comprised of

about 23% of tax receipt. However, the tax on property (capital tax) has been less the 1% of the

total tax receipt. See table 2 below.

3.2.2

Table 2: Central government tax receipts 2005/06 2009/10

3.3

Data Collection

The sampled institutions approached to respond to a questionnaire or through an interview.

To use appropriate tools, four questionnaires were prepared for the four categories of

respondentsCSOs, government/government agencies, private sector, and donor agencies.

Ksh. Million

2005/ 06 % 2006/ 07 % 2007/ 08 % 2008/ 09 2009/ 10 %

Taxes on income, profits and capital gains 114,629.06 39.71 130,719.00 37.72 165,078.00 40.42 184,446.78 40.15 220,281.00 41.36

Income Tax from individuals (P.A.Y.E) 60,484.93 69,575.00 85,953.00 98,602.62 116,626.00

Income Tax from corporations (other income tax)

.

54,144.13 61,144.00 79,125.00 85,844.16 103,655.00

Taxes on property. 189.59 0.07 253.06 0.07 331.9 0.08 336.79 0.07 341.76 0.06

Imm ovable pro perty. 10.59 27.06 61.9 62.52 63.15

Fina ncial and capital transaction.. 179 226 270 274.27 278.61

Taxes on VAT 79,925.91 27.69 96,479.01 27.84 111,904.51 27.40 126,854.07 27.61 148,353.00 27.86

VAT on domestic goods.. 46,093.32 51,341.01 58,277.00 66,216.49 75,673.00

VAT on imported goods and services 33,832.59 45,156.00 53,627.51 60,637.58 72,680.00

Taxes on other goods and services.. 61 ,709.65 21 .38 76,111.19 21 .96 80,736.09 19.77 91 ,844.94 19.99 100,625.81 18.90

Exercise taxes.. 46,645.62 56,123.00 61,905.51 69,872.05 78,066.00

Taxes on specific services 6.38 12.54 0 0 0

Taxes on use of goods & on permission to use the 2,122.30 1,099.35 70 86,18 106

Royalties 354.35 401.72 187.8 156 176

Taxes on goods and services collected as

...

12,161.00 18,016.00 18,505.00 21,345.00 21,591.00

Other taxes on goods and services 420.01 458.59 67.78 385.71 686.81

Taxes on international trade transactions.. 29,861 .43 10.34 40,235.00 11 .61 45,857.77 11.23 51 ,201 .60 11.15 57,746.00 10.84

Custom duties 20,511.43 27,927.00 32,944.35 36,180.60 40,600.00

Other taxes on international trade and transactions 9,350.00 12,308.00 12,913.42 15,021.00 17,146.00

Other taxes not elsewhere classified.. 2,353.23 2,747.87 4,536.39 4,684.29 5,192.19

Total tax revenue. 288, 668. 86 99. 18 346, 563. 14 99. 20 408, 444. 66 98. 89 459, 368. 47 98. 98 532, 539. 76 99. 03


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3.4

Response Rate

Of the 16 sampled CSOs, 12 responded to the questionnaire. Of the 12, four stated that

they are not involved in tax justice work although they are involved in governance work similar

to some of TJN-A and EATGN members tax work. Two interviews were done with government

agencies, and amongst the business/private sector, one interview was conducted and two other

responses came through the questionnaire. Of the 28 sampled institutions sampled, 19 responded

making it a 68% response rate. This high response rate is expected when purposive sampling is

done.


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REFERENCE LIST

1. Marti, L O, et al(2010), Taxpayers Attitudes and Tax Compliance Behaviour InKenya, African Journal of Business & Management (AJBUMA),

http://www.aibuma.org/journal/index.htmVol. 1 (2010), AIBUMA Publishing2.

Karingi S, et al (December 2005), Tax Reform Experience in Kenya, Kenya Institutefor Public Policy Research and Analysis, KIPPRA Working Paper No. 13

3. Moyi E. & Ronge E (2006), Taxation and Tax Modernization in Kenya: A Diagnosis ofPerformance and Options for Further Reform, Institute of Economic Affairs, IEA, KenyaIEA (2010), Alternative Budget 2010/11: submissions for Budget 2010/11 made bydifferent interest groups on 9th and 10th February 2010, IEA,http://www.ieakenya.or.ke/viewdocument.asp?ID=191accessed on June 30th2010

4. Omondi F. (June 2010), Budget Blur Lines between Tax Avoidance and Tax Evasion,http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1accessed on November 7th2013

5. Tax Havens Cause Poverty, http://www.taxjustice.net/cms/front_content.php?idcatart=2

accessed on June 22nd20106. Action Aid (April 2009), What next? Tax cooperation after the London G20 summit,

Action Aid UK, www.actionaid.org.uk7. Eurodad Website,http://www.eurodad.org/debt/accessed on August 2nd20108.

ActionAid (April 2009), What next?: Tax cooperation after the London G20 summit, ActionAid

UK, www.actionaid.org.uk

9.

ActionAid (September 2009), Accounting for poverty: How international tax rules keep people

poor, ActionAid UK, www.actionaid.org.uk

10.

Africa Economic Outlook (April 2010), Tax Revenue in Africa

http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-

aid/the-state-of-public-resource-mobilisation-in-africa/tax-revenue-in-africa/ accessed on June

19th

2010

11.

Christian Aid (2008), Death and Taxes: the true toll of tax dodging, Christian Aid

12.

Kar, Dev and Devon Cartwright-Smith, (March 2010), Illicit Financial Flows from Africa: Hidden

Resource for Development, Global Financial Integrity, www.gfip.org, accessed on 22nd June

2010

13.

Kar, Dev, Devon Cartwright-Smith, and Ann Hollingshead (March 2010), The Absorption of IllicitFinancial Flows from Developing Countries: 2002-2006, Global Financial Integrity,

www.gfip.org,accessed on 22nd

June 2010.

14.

Karingi S, Wanjala B, Nyamunga J, Okello A, Pambah E, & Nyakango E, (December 2005), Tax

Reform Experience in Kenya, Kenya Institute for Public Policy Research and Analysis, KIPPRA

Working Paper No. 13
http://www.aibuma.org/journal/index.htmhttp://www.aibuma.org/journal/index.htmhttp://www.ieakenya.or.ke/viewdocument.asp?ID=191http://www.ieakenya.or.ke/viewdocument.asp?ID=191http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.taxjustice.net/cms/front_content.php?idcatart=2http://www.taxjustice.net/cms/front_content.php?idcatart=2http://www.eurodad.org/debt/http://www.eurodad.org/debt/http://www.eurodad.org/debt/http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-aid/the-state-of-public-resource-mobilisation-in-africa/tax-revenue-in-africa/http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-aid/the-state-of-public-resource-mobilisation-in-africa/tax-revenue-in-africa/http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-aid/the-state-of-public-resource-mobilisation-in-africa/tax-revenue-in-africa/http://www.gfip.org/http://www.gfip.org/http://www.gfip.org/http://www.gfip.org/http://www.gfip.org/http://www.gfip.org/http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-aid/the-state-of-public-resource-mobilisation-in-africa/tax-revenue-in-africa/http://www.africaneconomicoutlook.org/en/in-depth/public-resource-mobilisation-and-aid/the-state-of-public-resource-mobilisation-in-africa/tax-revenue-in-africa/http://www.eurodad.org/debt/http://www.taxjustice.net/cms/front_content.php?idcatart=2http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.ieakenya.or.ke/viewdocument.asp?ID=191http://www.aibuma.org/journal/index.htm


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15.

KNBS (2010), Economic Survey 2010, Kenya National Bureau of Statistics, Government Printers

16.

Klemm A, & Van Parys S (July 2009), Empirical Evidence on the Effects of Tax Incentives, IMF

Working Paper WP/09/136, Fiscal Affairs Department, IMF

17.

Marti, L O, Wanjohi M S, Magutu P O & Mokoro J M (2010), Taxpayers Atti tudes And Tax

Compliance Behaviour In Kenya: How The Taxpayers Attitudes Influence Compliance Behavior

among SMEs Business Income Earners in Kerugoya Town, Kirinyaga District, African Journal of

Business & Management (AJBUMA), http://www.aibuma.org/journal/index.htm,Vol. 1 (2010),

AIBUMA Publishing

18.

Moyi E. & Ronge E (2006), Taxation and Tax Modernization in Kenya: A Diagnosis of

Performance and Options for Further Reform, Institute of Economic Affairs, Kenya

19.

OECD (2008), Governance, Taxation and Accountability: Issues and Practices, DAC Guidelines

and Reference Series, OECD20.

OECD (2010), African Tax Administration: A new era, OECD Observer,

http://www.oecdobserver.org/news/fullstory.php/aid/3133/African_tax_administration:_A_ne

w_era.htmlaccessed in June 22nd2010

21.

Omondi, Fred (June 2010), Budget blurs line between tax evasion and avoidance,

http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1accessed on

June 25th2010

22.

Tax Justice Network (September 2005), Tax Us if You Can: The true story of global failure, Tax

Justice Network Briefing Paper, TJN, www.taxjustice.net

(NB: This tool was modified and three other versions developed to gather information from donors,

private sector and government agencies)

YOUR ORGANISATION

1.

Is your organisation involved in Tax work? Please explain the nature of the tax work e.g. policy

influencing, tax justice, tax incentives proposals during budgeting process, etc

2.

If yes to 1 above, how long has your organisation been engaged in tax work?

3.

Do you have a budget designated specifically for the tax work?

4.

What are the main activities you have carried out so far since the work was initiated
http://www.aibuma.org/journal/index.htmhttp://www.aibuma.org/journal/index.htmhttp://www.aibuma.org/journal/index.htmhttp://www.oecdobserver.org/news/fullstory.php/aid/3133/African_tax_administration:_A_new_era.htmlhttp://www.oecdobserver.org/news/fullstory.php/aid/3133/African_tax_administration:_A_new_era.htmlhttp://www.oecdobserver.org/news/fullstory.php/aid/3133/African_tax_administration:_A_new_era.htmlhttp://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.standardmedia.co.ke/InsidePage.php?id=2000011616&catid=623&a=1http://www.oecdobserver.org/news/fullstory.php/aid/3133/African_tax_administration:_A_new_era.htmlhttp://www.oecdobserver.org/news/fullstory.php/aid/3133/African_tax_administration:_A_new_era.htmlhttp://www.aibuma.org/journal/index.htm


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5.

What are your goals for future work on tax?

OTHER CSOs

6.

What other organisations do you know that are currently involved in tax work? Please list them

below

7.

Do you think there should be more CSOs engaged in issues of tax justice? Yes No

8.

What do you think are the reasons for low participation in tax justice as a key policy advocacy issue?

9.

Have you heard of Tax Justice Network? of East Africa Tax and Governance Network (EATGN)? If

so are you involved?

10.

If your organisation is a member of EATGN, do you know of other organisations that you think

should be invited into the EATGN?

ISSUES

11.

Do you think Kenya has a progressive tax regime? Yes No

Why or why not?

12.

What are the policies that make you consider a tax regime progressive?

13.

What policies do you think Africa Tax Justice Network & EATGN should focus on to bring about

change in the tax regime?

14.

Since 2003, the government of Kenya has significantly increased the tax collection and currently the

tax revenue percentage to GDP is the second highest following that of SA. Do you think there is still

more room for improvement? If so, explain where in your opinion you think the government should

lay emphasis?

15.Do you think Kenyas redistributive policies are effective? Yes No

Why or why not?

16.

Kenya is said to have high inequality (among the top ten) in the continent. What do you think the

government should do in order to fairly collect the taxes and redistribute them with the aim of

reducing inequalities?

17.

In the recent past there has been discussion on introducing new levies that will be ring fenced to

address certain issues e.g. AIDS levy and Air ticket tax for HIV/AIDS. Do you support such

measures?


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18.

Do you know of international companies that have been receiving tax incentives? If you know which

companies or the nature of the incentives, please list. Do you know of any local companies that

receive comparable treatment?

19.

Do you believe there are many companies that ought to pay more tax? If so, give an explanation

20.

Do you think CSOs in Kenya ought to do policy advocacy and activism to demand changes in the tax

regime in Kenya? If so, please mention the issues that CSOs need to focus on

21.

Do you think CSOs in Kenya and the region ought to do policy advocacy and activism to demand

changes in the tax regime at the international level and harmonization at the regional level? if so,

please elaborate.

proposal - mark final

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