Brace yourself for tougher times as President William Ruto’s Kenya Kwanza administration plans yet another round of more taxes in an aggressive drive to raise at least Sh650 billion annually from people in various sectors of the economy in the three years to the end of his first term.
In the Treasury's Medium Term Revenue Strategy 2024/25 - 2026/27, some of the proposals that are expected to have a huge impact on businesses and consumers include a review of the Value Added Tax (VAT) rate to bring it in line with other East African Community (EAC) states and a review of the excise duty on fuel products.
Kenya's current VAT rate is 16 per cent, while other EAC states charge 18 per cent.
"VAT has been performing below its potential, with a gap of 39.8 percent in 2021/22. This is mainly due to both policy and compliance gaps in the VAT system.
"Currently, Kenya's VAT is one of the lowest among EAC member states. The EAC Common Market Protocol provides for harmonisation of taxes before the EAC Monetary Union. However, studies have shown that low VAT rates coupled with rationalised exemptions encourage compliance and improve revenue collection. In this regard, the government will review VAT rates as well as VAT exemptions and zero rating," the Treasury said in the document that will guide how Kenyans are taxed for the three years from July 2024.
The Treasury, in the document, proposes a review of the VAT rate, without specifying whether the review will be upward or downward, but also notes that other elements related to VAT such as VAT exemptions and zero rating will be reviewed to remove some products from the list, that a single VAT rate will be introduced for all taxable supplies and that VAT will be introduced on some educational services.
The expected outcome of the proposed measures on VAT, as well as other tax headings such as income tax and excise duty, is to generate an additional 5 per cent of GDP in government revenue, or over Sh650 billion, based on last year's GDP of Sh13.37 trillion.
But Treasury Cabinet Secretary Njuguna Ndung'u said yesterday that the government's plan was to reduce taxes below the current level, and that the ministry had not yet decided on a rate.
"Actually, we are going to rationalise taxes to below the level they are now. Higher tax rates do not bring in more revenue. They bring in less revenue and create an incentive to evade taxes. So they destroy the social contract that we want to build. So we are going to rationalise and optimise the tax instruments," Prof Njuguna said.
Asked to what rate the government intends to reduce VAT, the CS said: "When you are doing a thorough analysis to optimise tax instruments one by one, you cannot have a rate in mind at the same time."
However, the Medium Term Revenue Strategy notes that to address the challenges associated with preferential VAT rates, "the government will adopt a standard rate for all taxable supplies during the strategy period".
Prof Ndung'u says the government wants to understand the market structure and increase compliance "with the appropriate tax regime and rates".
The government cannot harmonise the VAT charged in the country with the EAC rates without raising it from the current 16 per cent.
This will have a ripple effect across the economy, affecting both traders and consumers.
VAT on insurance services
The proposed new VAT on educational services "not directly related to education" is aimed at parents of schools that provide services such as swimming pools and other ancillary services to students of such schools, which is likely to lead to an increase in school fees.
"Education services in Kenya are exempt from VAT in order to make education accessible to all learners. However, the benefit of the exemption is not equal for all learners due to differences in fees charged and services provided. Some schools provide some services that are not directly related to education. Exempting education from VAT, which includes all services provided by schools, creates an inequity as some services, such as swimming, are VATable when provided outside schools," the Treasury argues.
Kenyans seeking insurance services could also pay higher premiums as the government proposes to impose VAT on insurance services to increase revenue.
Small businesses and farmers who have not been on the tax radar should also brace themselves as the government has laid out a strategy to raid their pockets, including giving the Kenya Revenue Authority (KRA) explicit access to their financial information and taxing them.
The National Treasury has identified Kenya's informal, agricultural and digital sectors as hard-to-tax, with many players not paying tax despite making money. "Due to changing business dynamics, the hard-to-tax sectors continue to grow. Most players in these sectors believe that they are not obliged to pay taxes on self-generated income, resulting in high levels of non-compliance," the 2023/24 to 2026/27 medium term revenue strategy states.
In effect, players in the informal sector, for whom the government says the KRA's lack of visibility of their transactions is a major challenge, should brace themselves for a new order of things where the KRA will snoop on their transaction information as well as tax them through associations and cooperatives.
The government also wants to use customs data to track micro and small enterprises (MSEs), which deal in imported goods by importing in bulk as groups, to net players in the supply chain.
"For effective revenue collection, the tax authority needs information on the economic activities of taxpayers. However, there have been challenges in sharing information on actors in this sector due to existing laws on data protection. To address these challenges, the government will amend the Data Protection Act to exempt the KRA from the provisions of the Act to facilitate access to information," the Treasury said.
It adds that the government will introduce a sector/location based presumptive tax, which will take into account the unique nature of business in the sector/location to ensure equity and fairness, and introduce a "creditable withholding tax" on all imports.
Farmers who supply produce to cooperatives and other associations should also prepare for a cut in their income, as the government plans to tax the produce at a rate of 5 per cent.
The Finance ministry says agriculture, which contributed 21.2 per cent to GDP last year, is under-taxed and notes that there is a perception that incomes in the sector are meagre.
"To address these challenges, the government will introduce a final withholding tax on agricultural produce at a rate of not more than 5 per cent of the value of the produce delivered to cooperatives or other organised groups," the medium-term strategy says.
Kenya had 26,948 societies and unions in the agriculture sector last year, a 31 per cent increase from the 20,547 such bodies that existed in 2018, as more farmers join the bodies to better market their produce and earn more.
Other proposed tax measures include the reintroduction of the minimum tax, which was declared unconstitutional by the High Court and the Court of Appeal in December last year.
The government also wants to review the housing tax to tax rental income at the corporate rate and allow for expenses, arguing that compliance with the 7.5 per cent tax on rental income saw about Sh27 billion uncollected last year.
Prices of petroleum products could also rise further as the Treasury proposes to review excise duties on the products "to address the negative environmental externalities associated with petroleum products" and "the ongoing harmonisation of the excise duty structure within the EAC region".
Excise duties on alcohol, cigarettes, non-alcoholic beverages such as juices, and vehicles that use fossil fuels as part of the proposed carbon taxes will also be reviewed, with high prices expected as a result.
The Treasury is also considering the introduction of a vehicle circulation tax as a form of wealth tax, which would tax all vehicle owners.
The road tax is part of the contingency tax measures that the government has retained as an additional revenue-raising measure in case the 2023 Finance Bill fails to deliver targeted taxes.
Prof Ndung'u told the IMF that by the end of October 2023, the government would present to parliament "together with a supplementary budget for FY2023/24, a package of legislative changes to strengthen tax collection—including, but not limited to, the introduction of a motor vehicle circulation tax".
