IMPACT OF TAX INCENTIVE ON ECONOMIC GROWTH IN KENYA
Introduction
Over the years, Governments have used tax incentives as tools for supporting certain economic endeavors. Tax incentives, are tax preferential granted to a certain group of taxpayers to help them and in return boost investment and eventually economic growth and development. These tax incentives take the form of; Tax holidays, tax exemptions, Tax credits, Investment deduction allowances, differed tax rates, and deferred tax liabilities.
Some of the reasons that justify Tax incentives as a need are: (i) Targeting new industries and investment that is mobile that is attractive to many nations; (ii) providing relief to companies or industries during their decline phases as a way to caution the companies; (iii) Correct market inefficiencies resulting from externalities of particular economic activities; (iv) Create a form of clustered economies. Developed countries, use tax incentives to encourage research and development activities, support competitiveness of their firms in the global market, export activities. On the other hand, developing countries use tax incentives as a way of attracting foreign direct investment and support national industries like in the case of Kenya.
At first, tax incentives seem to be costless as they do not appear to affect the current budget. In the long run, tax incentives may entail substantial costs e.g. revenue losses, an increase in administration and compliance costs, economic inefficiency, increased tax planning. These costs may outweigh the benefits and will eventually erode the tax base.
As costs and benefits from tax incentives differ from one country to another, the impact of tax incentives on economic growth and the overall tax base is not the same. In some cases, tax investments play a vital role in attracting investments that support economic development and growth of a country whereas, in others, tax incentives may lead to minimal investment with huge costs being incurred.
As a result, the theoretical positive gain derived from tax incentives has been questioned and governments have carried out a cost-benefit analysis on their revenue collection on their economic development derived from the tax incentives. One model used to compute the cost-benefit coefficient is the computable general equilibrium model. This model will ensure that any tax incentive policy is worthy and ensure elaborate laws, requirements, and delineating its administration. This is a robust model that is costly and most of the developing countries cannot afford it due to their resource constraints. However, other models can be custom-built based on the financial statements and tax returns submitted to the tax authorities in the respective countries.
Purpose
The purpose of this research is to provide a reasonable methodology that will help them estimate the net effect of a tax incentive project to help them to design, implement and evaluate such a project, thus supporting reforms on administration and improving tax techniques aimed at improving economic growth, equity and greater tax efficiency.
Further, the impact of a tax incentive on economic growth will be analyzed based on the tax incentives in value per annum, stage of development based on global competitiveness index, investment levels in Kenya as a percentage of the gross domestic product, population index of the firms enjoying tax incentive in comparison to the entire population and a consideration of literacy levels will be included.
Both explanatory and diagnostic approaches will be used in this research design. Data will be collected from secondary sources and especially the archival research strategy as data from various government agencies will be used ranging from years 2009 to 2018. Statistical Package for social sciences will be used to analyze data and will be simplified and tabulated to make the data easily comprehendible.
Conclusion
Based on the reasons for tax incentives aforementioned, any developing country including Kenya should put in measures to evaluate the benefits accruing from any tax incentive policy fronted and hinder misuse of the tax incentives by taxpayers. It is thus vital to research this vital aspect of economic development and further look into previous research done on this area to improve the body of knowledge and help stakeholders to make effective and efficient decisions to help in the economic growth of Kenya.