In the quest for economic development tax incentives are granted by the government to businesses to attract Foreign Direct Investment (FDI). The primary beneficiaries of such tax exemptions and incentives are foreign multinational companies. It is important to ensure incentives are structured to promote tax justice and equitable distribution of benefits.
In 2023, the total tax expenditure increased to KSh 510.56 billion from KSh 393.13 billion in 2022. Value Added Tax (VAT) accounted for 65.22% of this expenditure, followed by Income Tax and Import Duty at 18.63% and 12.35%, respectively. The 2021 Tax Expenditure Report highlighted VAT exemptions as the highest tax expenditure at 2.18% of GDP, compared to Corporate Income Tax at 0.53% of GDP. These substantial revenue losses from tax incentives and exemptions have implications for funding essential public services, including health. Addressing these inefficiencies could enhance the government's capacity to finance critical sectors.
One of the primary concerns of tax incentives governance is the lack of transparency and accountability surrounding tax incentives. Often, these incentives are granted through opaque processes, leading to potential abuse and misuse by multinational corporations and wealthy individuals. TJNA advocates for greater transparency in the allocation and utilization of tax incentives to prevent illicit financial flows and ensure that the benefits are channelled towards sustainable development projects that benefit the broader population.
Moreover, there is a pressing need to reassess the effectiveness of tax incentives in achieving their intended goals. While these incentives are often justified as tools for attracting foreign direct investment and stimulating economic growth, evidence suggests that they may not always deliver the desired outcomes. TJNA calls for rigorous impact assessments to evaluate the effectiveness of tax incentives in generating employment, fostering innovation, and promoting inclusive growth. This evidence-based approach will inform policymakers' decisions on whether to retain, modify, or eliminate specific incentives.
Furthermore, the issue of tax competition among African countries exacerbates the "race to the bottom" — a situation where countries continuously lower taxes or offer excessive incentives to attract investors, often to the detriment of their own economies and public services.
This not only erodes the tax base but also undermines efforts to achieve tax justice and fiscal sustainability. TJNA advocates for regional cooperation and harmonisation of tax policies to address this challenge.
By establishing common standards for tax incentives and sharing best practices, African countries can mitigate harmful tax competition while promoting fair and equitable taxation.
Lastly, there is a need to ensure that tax incentives align with broader development objectives, such as poverty reduction, gender equality, and environmental sustainability. TJNA emphasises the importance of incorporating social and environmental criteria into the design and evaluation of tax incentives. By adopting an integrated approach to tax policy, African governments can maximise the developmental impact of incentives while safeguarding against potential negative externalities.
