The treasury has come up with an excellent summary on the Budget and the forecast for the next few years see Budget Highlights Final.

Suffice it to say that domestic borrowing will be checked at Kshs. 120 bn. and although the budget deficit looks high at 8% public debt will be checked at 48% of GDP due to a 15% nominal growth in GDP. Collecting the tax revenue and borrowing without increasing interest rates dramatically and choking economic growth will be a huge challenge, but is possible.

However, Treasury and KRA could do a lot more to take the sting out of the economic shocks. Case in point is the pointless increase in withholding tax on payments for professional fees. Increasing it will NOT enhance compliance as those already complying are in the ‘net’ and those not complying won’t do so anyway. All this will simply do is hit cashflow and choke turnover and growth especially for those SME’s that are the engine of growth for Kenya.

Its a lazy way of tackling those professionals (I am told KRA is unable to effectively audit the legal fraternity, for example), and punishes the vast majority of compliant businesses. It won’t even get a significant increase in revenue in the meantime I’d hazard !

An excellent tax guide by RSM Ashvir see RSM Ashvir Kenya Tax Guide 2011 – 2012 is a simple illustration of how complicated it is to comply with taxation – in effect KRA is outsourcing its functions for FREE to large/compliant taxpayers – hardly an equitable situation.

At least there seems to be some movement on wholesale reform of VAT, but the timetable is still too relaxed, and nothing has been done to unlock the tens of billions in refunds that could be put to much more productive use.

I would advocate that each item of tax administration be quantified so that the value can be weighed against the nuisance it creates. Government should realise that the best way of collecting tax is to make it easy for firms to focus on expanding their core business and make KRA actually work for its targets.

You can read more about the Kenyan Economy here by Accelerate