Arror ‘dam’, Kimwarer ‘dam ‘, and Itare ‘dam’ in Nakuru County are three famous dams in Kenya. These three dam projects were being fronted by government parastatals, specifically the Kerio Valley Development Authority and the Rift Valley Water Services Board. The construction of the dams was partly funded by the Kenya government with taxpayers’ money.
In the recent past, Kenyan media have been awash with stories about the construction of these three dams, among other dams in Kenya. The “dams” are famous for the wrong reasons.
The media has told us that the Kenyan government paid money for the construction of the dams, but so far the contractors have not delivered anything close to the colossal sums they were paid … and the contractors are asking for more.
In this post, we will assume that what the media has told us is the absolute truth and nothing but the truth.
The question is, what is the implication of this from a tax perspective? The implications are in the tax losses. There are three main tax losses:
- Past collected taxes lost.
- Current tax potential lost.
- Future tax potential lost.
a. Past collected taxes lost
The money paid out and supposedly lost is from past taxes collected from Kenyans. During the campaign period leading up to the 2017 National elections, politicians from all political parties made promises on what they would do for Kenyans if given the chance.
Among the promises was more development in the country.
However, the political parties did not tell us that they did not have the money to live up to their promises. They only promised Kenyans that they would provide a management team to propel the country to the level of developed nations worldwide.
The current government is formed by managers from the Jubilee political party. True to its promises, the political party did not provide Kenyans with money. Kenyans have had to provide the money so that the government can fulfill its promises.
Kenyans have paid taxes, keeping their part of the bargain.
Therefore, the money that was used to pay for the dams is tax money. This money was provided to Kenya’s corporate management team by Kenyan taxpayers. Taxpayers in Kenya are many. All Kenyans are taxpayers. Among the taxpayers are street families, beggars, and the jobless.
Other taxpayers are business persons who trade as individuals, sole proprietors, partners in business, company owners, etc. This includes all traders who purchase goods and services that are subject to VAT, Excise duty, etc.
It is the taxes that are paid by millions of Kenyans who are salaried, including waiters in hotels, house girls and house boys, drivers, watchmen and women, teachers, nurses, CEOs, members of the security forces, religious leaders, corporate chiefs, members of Parliament, members of the Judiciary, and members of the Executive.
Every single Kenyan has contributed tax money in one way or another.
Effectively, if there is any money that has been lost, it is not the government’s money but the money that Kenyans have contributed in the form of taxes.
b. Current tax potential lost
Kenya has lost not only the tax money that has already been collected. Kenya has also lost current tax collection potential. This is the tax that could have been generated as the dams are being constructed.
The following are the current tax potential that Kenya has lost:
Value Added Tax
Failure to construct the dams will deny the government Value Added Tax (VAT). Although some supplies for the construction of the dams may have been exempt, many other supplies, either directly or indirectly, were subject to VAT. The VAT will not be collected.
PAYE in Employment
Construction of the three dams would have created direct employment at the construction sites. It would also have created indirect employment among goods and services providers, such as drivers supplying construction materials, restaurant workers catering to site workers, and farm workers producing food for construction workers.
Many jobs would have been created both directly and indirectly. These jobs would have generated PAYE.
Corporate income tax
Most companies transacting business directly or indirectly with the dam construction companies would have made profits and paid corporate income tax. Companies providing such services as transport, catering, security, cleaning, internet, power, water, laborers’ services, and many other services would have generated taxable income and paid corporate income tax.
Also, companies providing goods such as stationery, computers, uniforms, construction materials, etc. would also be required to pay corporate income tax. This tax has been lost.
Personal income taxes for individuals
Many persons who are trading in their own names, have sole proprietorships, or partnerships, who would have transacted business either directly or indirectly with the dam construction companies or those trading with them. These persons would have paid personal income taxes. However, this tax is now lost.
Rental income tax
People working on construction sites needed to be housed either next to the dam sites or far away. The providers of the houses would have been required to pay tax on the rental income. This tax is lost.
Domestic Excise duty
Various goods and services are subject to Domestic Excise duty in Kenya, such as airtime, mineral water, alcoholic drinks, juices, etc. These are some of the consumer goods and services that would have been consumed and subjected to domestic excise duty. This tax is lost.
Capital Gains Tax
Land transactions would have taken place around the dam and also in faraway places. Some of the money from supplies for dam construction would have been used to purchase land. Capital gains tax would have been collected from those selling land. This tax is lost.
The potential to correct current taxes is lost.
c. Future tax potential lost
Construction of the three dams would have led to development in the local areas where they are located, in different ways. The developments would have resulted in tax revenue for the government.
Some of the developments that would have resulted in future tax revenue for the Kenyan people are economic development in such areas as housing, towns, roads, transport, etc., social amenities such as schools, hospitals, markets, etc., creation of recreation facilities, e.g., hotels, picnic areas, boating, camping, etc.
Also, there would be water supply for home use, industry, etc.; hydroelectric power for homes, industries, exports, etc.; tourism due to the creation of marine and wildlife habitats; and fishing for both domestic and industrial purposes.
Further, dams help control floods, thus helping farmers save lives, livestock, and plants downstream by impounding floodwaters. The water is then released on a timely scheduled basis. The dams would have provided water storage for agricultural (for irrigation to produce crops for domestic and export), industrial, and home use.
Other effects
Reports of misappropriation of money allocated for the dams, or failure to construct them, have other ramifications that affect tax compliance and, hence, the amount of taxes collected. The following are some of those effects.
Demotivated taxpayers
Taxpayers want accountability for their taxes from the government. Reports of misappropriation of tax money demotivate taxpayers, and this affects tax compliance in the country. Also, the direct beneficiaries of the dams will be demotivated to pay taxes since they may read sabotage in the development agendas for their respective Counties.
Broken promises by the government
The Jubilee government promised development in all parts of the country. Since national independence in 1963, the provision of water has been at the heart of each successful government. However, despite all the good intentions, the water goals are somehow not realized. This has resulted in broken promises to Kenyans and broken dreams for Kenyans yet again in the water sector.
Kenyans in general and taxpayers specifically expect the government to keep its promises.
Bad publicity for the country
Whatever the true status of the three dams is, Kenya’s reputation as a developing country has already been dented badly. This affects both current and future local and foreign investments. It increases the country’s international credit risk, making credit access difficult and expensive. Whatever is happening today will affect generations of Kenyans in the future.
These are not the only negative effects of the failure to construct the Arror, Kimwarer, and Itare dams. There are many other effects.
Note:
At the time of posting, investigations are underway to establish the truth about the three dams. Our assumption is based on the public information provided by the media.
For any clarifications, get in touch via email.
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Disclaimer
This post is for a general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner, or associates do not take any responsibility for the results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. The tax industry in Kenya is very dynamic.
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