Treasury to approve new county taxes if Bill passes

Governors will have to get the Treasury’s approval 10 months before introducing new taxes or waiving existing ones if a government Bill that seeks to lower the cost of doing business in devolved units is passed into law.

Counties will be required to submit proposed changes 10 months before commencement of the financial year in which they intend to introduce the levies, vary existing ones or waive charges and accrued interest.

Those that fail to comply will be severely limited in their quest to collect taxes in an environment where many are perennially falling short of target.

The proposed law is aimed at curbing taxes that could undermine national economic policies, distort cross-county trade or impede the movement of goods and labour.

Counties have recently sought to increase the revenues they collect from charges like parking fees, business permits and land rates to boost their revenues in an environment where the national government has been hesitant to allocate more cash to governors.

“Where a county government intends to impose a tax, fee or charge, the County Executive Member for Finance shall, ten months before the commencement of the financial year, submit particulars of the proposal to the National Treasury and the Commission on Revenue Allocation,” the County Governments (Revenue Raising Process) Bill, 2019 states.

The Bill, brought to Parliament by Leader of Majority Aden Duale, will not affect the current taxes that have been imposed by county governments.

In recent years, counties have been increasingly dependent on the Treasury to finance their operations. For instance, they only collected Sh28.29 billion in the nine months to March compared to Sh302 billion that they received from the Treasury over the same period.

Counties’ revenue collections have remained little changed since the onset of devolution in March 2013, prompting Governors to seek to raise fees and rates in the race to boost tax revenues. Their target has been parking fees, land rates and business permits.

This Bill could yet become the biggest test to the national government’s ability to challenge decisions by counties, which can charge new taxes using powers granted under the Constitution. The first crop of governors, whose term ended after the August 8 elections, introduced a raft of higher taxes that shocked the business community and offered property rate waivers at the recommendation of governors. For instances, former Nairobi governor Evans Kidero more than doubled parking fees while Machakos Governor Alfred Mutua lowered land rates to woo investors. Other governors waived penalties to encourage payment of arrears. Mombasa governor Hassan Joho shocked the market when he defied opposition from the national government and introduced new taxes on shipping containers. The Kenya Ports Authority failed to collect the levies proposed by the county government, arguing it would be illegal for the port to do so.

In the past, the national government has opposed some of the levies proposed by the devolved units, warning that they could undermine economic growth.

If passed, the proposed law will compel counties to give reasons for the imposition of a new tax, fee, levy or a charge to the National Treasury and CRA.

“The submission shall identify, and where appropriate, describe the persons liable for the tax, fee, levy or charge and any relief measures or exemptions,” the Bill states.

The Bill will mandate the County Executive Member in charge of Finance to specify the collecting authority, the persons responsible for remitting the collections, the methods and likely cost of enforcing compliance and the compliance burden on taxpayers.

Counties will also be required to provide particulars of, and describe the estimation methods and assumptions used to determine the amount of revenue to be collected on an annual basis over the three financial years following the introduction of the tax, fee, levy or any other charge.

Treasury will also expect counties to provide the economic impact of new rates and charges on individuals and business residing in the county, the economic impact on individuals and business residing in neighbouring counties as well as the effect on county’s economic development.

“The commission (CRA) shall review the proposal submitted by the county government and submit the same to the National Treasury within a period of one month upon receipt of the proposal,” the Bill says. “The National Treasury may consult any other organ of State or interested persons on the submission by county government.”

The Treasury will be required to notify the counties within three months of receiving the proposals of its decision to approve or reject the proposed rates.

“Where legislation permits the waiver of any tax or licensing fee, a public record of each waiver shall be maintained together with the reason for the waiver and each waiver and reason for it shall be reported to the Auditor-General within three months of granting the waiver,” the Bill, which is now up for discussion, proposes.