Advantages And Disadvantages Of Tax Incentives

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Question Three
The Kenya Revenue Authority (KRA) defines tax incentive as a provision that grants any person or activity favorable conditions that deviate from the normal provisions of the tax legislation. It is therefore a special provision that allow for exclusions, credits, preferential tax rates, or deferral of tax liability that is meant to impact positively the person or activity as it obtains a favorable tax treatment compared to others in the industry. Tax incentives in Kenya can be grouped into either investment promotion incentives or export promotion incentives.
Impact of Tax Incentives on the National Tax Base in Kenya
Kenya offers various types of tax incentives as provided for in the Income Tax Act CAP 470, The VAT Act CAP 476
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Tax Holidays – Special Economic Zones
In Kenya companies operating in EPZs enjoy a 10-year tax holiday and a reduced corporate tax rate of 20% for the next 10 years (ITA, 2010). This is a measure to attract Foreign Direct Investment and also encourage local investors.
While tax holidays are known to have attracted increased foreign direct investment (FDI) to Kenya and hence promoting growth and employment, they have many disadvantages due to lack of proper design and control. First, it attracts short term projects because once the period for the tax holiday is over, businesses soon wind up and move out to invest elsewhere (Blackwell, 2009). It also encourages tax avoidance by allowing businesses to move from high tax regions to low tax jurisdictions such as Kenya.
c. Capital Allowances / Deductions
The law, under the Income Tax Act provides for various capital allowances. These incentives are mainly intended to encourage investments in the country and since the year 2010, the government even sought to encourage investments outside the main cities by giving higher incentives to businesses setting up business in such areas. Though the main goal is to increase investment and improve economic standards, I feel the capital allowances have been exploited to create tax credits that take close to ten years to exhaust before an entity can start paying
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However, the government has consistently been unable to capture the transactions in this sector as there is no clear way on how to transform the informality to formality across sectors. Government should invest in mobilizing the larger informal sector businesses and activities into cooperatives across different sectors, for easy access to financial services for profitable investment. By forming cooperatives, a largely-unorganized informal sector can be transformed into a formal one, making it easy for the government to track their income performance for tax collection

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