Lackluster performance in tax revenues has warranted the government to rethink its fiscal strategy in an effort to ease the reliance on public debt, particularly from the domestic market. To this, the government has revised its tax laws in an effort to enhance revenue collection for the fiscal year 2018/19. Most notable in the proposed Income Tax Bill (2018) tabled in parliament last month, is the government’s intent to raise the tax rate to 35% on the taxable income for corporates earning in excess of KES 500Mn per annum, and individuals earning in excess of KES 750,000 per month.
Additionally, the bill seeks to review the VAT status on certain commodities, such as maize and wheat flour, from zero rated to tax exempt status. While the move is likely to reduce the burden of paying VAT refunds as well as augment government’s tax income, it could aggravate the production of certain commodities and potentially deteriorate consumers’ disposable incomes. The suggested tax reform could put a constrain on the government’s Big Four Agenda, given that its success is largely dependent on private sector participation.
That said. the current state of tax collection remains wanting and has resulted in the government’s continued signal of increased domestic debt appetite. The government has so far absorbed KES 249.78Bn in cumulative net domestic debt from the market this fiscal year. This is KES 26.02Bn shy of its domestic debt target. Additionally, a total of KES 183.85Bn in government debt maturities is expected within the next six weeks. To cover this maturing debt and as well meet its domestic debt target, the government would have to absorb in excess of KES 209.86Bn from the domestic market through Treasury bills and bonds – equivalent of KES 34.98Bn per week.
To emphasize, the government’s average domestic debt absorption, Treasury bills and bonds, has been KES 23.70Bn per week since January 2018. This begs to question how the government will meet its domestic debt target without providing an incentive to investors through higher interest rates GIVEN the current subdued interest rate environment… In my opinion, something has got to give.