You feel it when the lights flicker and die, but you may not be aware of the drain on the country’s tax revenue. The fan stops. Your computer screen goes black. This is a power gap. The power supply has been interrupted.
An electricity interruption is more than an inconvenience, not only to you as a consumer but also to the economy as a whole. It is a direct drain on Kenya’s economy. Unfortunately, it also hits a critical national resource: tax revenue.
The question may be how the electricity power gap, evidenced by the power interruption, is connected to tax revenue.
What is an Electricity Power Gap?
An electricity power gap is the difference between the power needed and the power supplied. Simply put, this is when electricity demand outstrips supply. This causes three significant problems:
a. Blackouts – total loss of electricity power.
b. Unsteady supply – short interruptions of power supply.
c. Load-shedding – planned power cuts to manage the shortage.
The three problems bring business to a grinding halt. This affects production and business operations. And hence the country’s tax revenue.
What is Tax Revenue?
Tax revenue is the government’s income from taxes and duties paid by the people. The government’s income is not only from taxes. The government also collects fines, fees, royalties, and other revenue sources.
There are various sources of tax revenue. The following are some of those sources:
a. Income Tax (PAYE, withholding income tax, instalment tax, personal income tax, corporate tax)
b. Value Added Tax (monthly VAT, withholding VAT)
c. Domestic Excise Duty
d. Customs taxes (import duty, excise duty)
The tax revenue is used to build our roads, pay our doctors, fund our schools, and cover the salaries of government employees. Lower tax revenue in the country means less funds for public services.
In cases where there is no power supply, what happens to the tax revenues?
How Power Gaps Shock the Tax System
When the power goes out, consumers are affected. This also affects the tax commissioner immediately in the following ways:
a. Business Operations and Profitability
The most immediate effect of a power interruption is on business operations and, hence, profitability. When the power goes out, many businesses are unable to operate.
Businesses that rely solely on electricity for production will have to stop operations unless they have an alternative power supply. Let us illustrate this scenario.
Illustration
A small bakery in Nakuru that relies solely on electricity for production loses power for six hours every week. Its ovens stop operating. Its refrigerators warm up.
The bakery cannot produce bread for its customers. The period when the bakery is without power represents a full day’s worth of sales lost.
Tax Impact
When the bakery is not operating, there are no sales, but costs continue to accumulate. Electricity is not the only production cost. It also incurs other costs, such as salaries and security. With lower sales and expenses, the bakery will have lower profits.
The low profits mean the bakery will pay less corporate tax. Its employees might earn less, thus reducing the PAYE. The business also purchases fewer supplies, resulting in reduced VAT collections. The tax commissioner will collect less tax revenue.
A single blackout creates a ripple effect of lost tax revenue in the country.
b. Increase in Costs
Businesses do not want electricity interruptions to paralyse their operations completely. Hence, they are forced to incur additional expenses. This involves investments in alternative sources of electric power, which can be expensive.
The cost of investments is often more damaging than a temporary shutdown. Let us illustrate this with an example.
Illustration
A manufacturing plant in Athi River has had its operations interrupted due to occasional power outages. The directors purchased an expensive diesel generator to use during a blackout. Their production costs increased.
Tax Impact
The increased production costs led to higher operational costs, which in turn reduced profits. This lowered the company’s taxable income. Hence, the government collected less corporate tax. This scenario may be replicated in many businesses.
High costs also discourage business expansion and new hiring. This stifles production capacity, which has a direct impact on corporate tax. It also stifles job creation and affects the PAYE system. Overall, electricity interruptions have a direct effect on the country’s tax revenue.
c. Investments
Electricity interruptions scare away investments. Investors, both local and foreign, seek stable and predictable environments in which to invest their money. Electricity supply is one of the key factors they consider in their investment decisions.
Investors do not consider investment factors in the short term. Their decisions are also based on their outlook on the long-term future of the economy. Hence, electricity supply is a key consideration. Let us illustrate this.
Illustration
A foreign investor is considering building a factory in Kenya. They read reports about the country’s unreliable power supply. Investors will be concerned about the constant disruptions and the associated costs of putting up power generators. They may choose to invest in a country with stable electricity, for example, Ethiopia.
Tax Impact
Investments in a country equal tax revenue. Lost investment means lost tax revenue, as well as lost future business and job opportunities. The power interruptions mean Kenya will miss out on new corporate taxpayers and more people paying PAYE. This will reduce the country’s long-term tax revenue.
4. Small Traders
Electricity interruptions hurt the small traders the most. While large companies may afford generators for an alternative electricity supply, small businesses often lack this safety net. This means that when there is no power supply, their operations come to a complete halt. Let us illustrate this.
Illustration
A barbershop operator in Kibera, an informal settlement, loses power for a whole day. He cannot use his electric clippers in his business. His income for the day drops to zero. Without sales, there is no tax revenue.
Tax Impact
Many small traders in the informal sector would benefit from consistent power. It would help their businesses grow. While the majority may not be operating formal businesses, growth will enable them to formalise their businesses and start contributing to Kenya’s income tax.
Th formalisation of the businesses will have a direct impact on the country’s total tax revenue. Hence, power gaps not only keep small businesses in the dark, literally, but they also keep them in economic darkness.
These four points demonstrate that power supply gaps not only cause frustration but also actively shrink the economy, reduce business profitability, and hinder the tax revenue the government needs to provide public services. The question is: Is there a solution to this problem? What can be done?
The Solution
Every problem has a solution. Even this power supply problem in Kenya has a solution. The solution requires a multi-pronged approach involving many sectors of the economy..
a. Invest in Grid Infrastructure
One of the causes of electricity power interruptions is infrastructure damage. Think about the electric poles, the transformers, etc. There is an urgent need to upgrade the old power lines and transformers to reduce technical losses and outages.
b. Reward Renewable Energy
The population in the country is growing at a faster rate than the power production can cope with. This means that the electricity demand exceeds the supply. This means that the country must explore other, more cost-effective sources of electricity supply.
One of the sources is solar energy. The government should start encouraging businesses to install solar power through tax breaks. This will reduce the business’s reliance on the national grid. The electricity can be supplied to companies that may not be able to afford to install solar power.
c. Improve Maintenance
Apart from water, the electricity supply relies on machines. These machines need to be maintained. Scheduling regular, proactive maintenance to prevent unexpected breakdowns and ensure optimal system performance is an urgent requirement.
When machines are not properly maintained, they can affect power transmission. Sometimes, power is lost, resulting in a complete loss of power transmission.
Other times, power is not transmitted at all. This will make power transmission expensive, and it is also costly for the consumers. Hence, proactive scheduled maintenance is essential.
d. Expand Geothermal and Hydro
The country has many sources of electricity that remain unexploited. To maintain and improve the power supply, the government should continue developing reliable and affordable domestic energy sources.
The costs may be prohibitive initially, but they will be cheaper in the long run. Reliable power is not a luxury. It is the backbone of a modern economy. Every time the lights stay on, a business thrives.
When a business thrives, it pays more taxes. These taxes build a better country for all of us. Closing the power gap is crucial for enhancing tax revenue in Kenya.
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a. Kenya’s 5 Years Power Gap Explained
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