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Division of Revenue: Why Constitution Should Remain at 15% Minimum

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President Uhuru Kenyatta signs Division of revenue bill. President Uhuru Kenyatta signs Division of revenue bill.

“Today I signed into Law the Division of Revenue Act, 2014 which raises county allocation from the previous 15% minimum threshold. County governments will now receive Kshs 226.7 billion, representing 43% of the National Revenue. I signed the Division of Revenue Act alongside the County Governments (Amendment) Bill 2014. I also signed into law the Counsellors and Psychologists Bill 2014 which provides for the training, registration, licensing, practice and standards of counsellors and psychologists and other connected purposes,” President Uhuru Kenyatta posted after signing the bills.

The revenue sharing between national government and county government is currently one of the issues that CORD coalition is looking to have as a referendum issue. Passing this 40% as a referendum could easily trap Gross Domestic Product (GDP) growth to less than 10% as revenue is anchored more on national collection per 209. (1) Only the national government may impose— (a) income tax; (b) value-added tax; (c) customs duties and other duties on import and export goods; and (d) excise tax.

Kenya Constitution 2010 system as set could easily lead to achieving a sustainable economy that grows GDP faster if the growth of county revenue is anchored on the direct power given to each county via Kenya constitution 209 (3) A county may impose— (a) property rates; (b) entertainment taxes. 

Below is an illustration showing how grow could occur based on 15% and 209 Six revenue sources.  

GDP ( Kshs billions)

5,000

 

8,000,

 

10,000

 

20,000

 

Tax 20% of GDP

1,000

100%

 1,600

100%

 2,000

100%

4,000

100%

National (Income, VAT, Customs & Exercise)

900

90%

1,120

70%

1,200

60%

1,600

40%

County (Property & Entertainment)

100

10%

    480

30%

800

40%

2,400

60%

To County Budget

Minimum 15%

234

26%

235

21%

228

19%

240

15%

Budget 

National

666

67%

    885

55%

960

48%

 1,360

34%

47 Counties  &  Towns /Cities

334

33%

    715

45%

1,040

52%

 2,640

66%

Total

1,000

100%

 1,600

100%

 2,000

100%

 4,000

100%

Points from Table 

The table shows a hypothetical Kenya economy Gross Domestic Product (GDP) of Kshs 5 Trillion and growth to Kshs 8 trillion, Kshs 10 trillion and to Kshs 20 Trillion with assumption that 20% of GDP is the total Government revenue for both national and counties that is collected through the constitution six revenues sources with the minimum 15% applying.       

GDP Kshs 5 trillion: 20% of Kshs 5 trillion would create total revenue collection of Kshs 1 trillion. On table we allocate Kshs 900 billion (90%) by the National Government 4 revenues (Income, VAT, Customs and Excise) and Kshs 100 billion (10%) by Counties 2 revenues (Property Rates and Entertainment taxes.) The share from National is set at 26% of Kshs 900 million. This transfers 234 million to give a budget of Kshs 666 billion (67%) National and Kshs 334 billion (34%) to 47 Counties collectively. This is what is currently leading the debate for 40% increase without first projecting to the future.    

GDP Kshs 8 trillion: When the economy grows to Kshs 8 billion, 20% revenue would be Kshs 1.6 trillion. Devolution application would see property rates and entertainment taxes increase. The Senate in supporting devolution could pass a bill where a taxpayer could deduct property rates during income tax computation. This would lower the growth of income tax and allow proeprty rates to grow. In example the 20% Kshs 1.6 would be collected at National Kshs 1.12 trillion (70%) and Counties Kshs 480 billion (30%). If a 21% is applied (based on 15% minimum) Kshs 235 billion would be the division of revenue. However, the counties would collect Kshs 480 billion and the total governments budget would be National Kshs 885 billion (55%) and 47 Counties Kshs 715 billion (45%). The ratio improvement showing growth in devolution.  

Kshs 10 trillion GDP: Still holding the revenue paid by taxpayers at 20% of GDP the total revenue would be Kshs 2 trillion. Per table Kshs 1.2 trillion (60%) would be through National taxes and Kshs 800 billion (40%) through counties property rates and entertainment taxes. This means as economy doubles from Kshs 5 trillion to Kshs 10 trillion the percentage ratio of revenue collection increases in favor of counties. Per table, Kshs 240 billion from national budget would go to division of revenue. The result would be National budget Kshs 960 billion (48%) and counties kshs 1,040 billion (52%). At this point devolution would succeed to give 25% of Kenyan families decent property and settlements this reflected by property rates they pay. Increase in entertainment taxes would imply more Kenyans affording entertainment. The per capita incomes of counties would be different based on the efforts governments and residents in county. 40% minimum level would affect grow of county per capita of hardworking counties whose residents payment more income tax or exercise tax would take their money to give to less hardworking counties.   

Kshs 20 trillion GDP: Per table 20% estimated revenue would give a total of Kshs 4 trillion. The national revenue (income tax, VAT, Duties and Exercise) would be Kshs 1.6 trillion (40%) and Kshs 2.4 trillion (60%) would be from counties (property rates and entertainment taxes.) At this point the constitution sustainable point of 15% minimum would become applicable and a Kshs 240 billion division of revenue. This would mean national budget of Kshs 1.36 trillion (34%) and Counties at Kshs 2.64 trillion (66%). The counties budget could be further applied to devolved units of towns and cities. 

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