Slapping Kenyans with more taxes and levies will not lead to additional revenues, Parliament’s economic think tank has told the government, which has revived some unpopular taxes withdrawn after public protests in June.
The Parliamentary Budget Office (PBO) has cautioned the state against ambitious targets backed by introduction of new taxes and increase of others, even as the Treasury on Friday issued proposals to roll out a set of new taxes, which had been rejected in the Finance Bill, 2024.
In a report analysing budget performance for the current fiscal year (2024/25), the PBO notes that despite the government missing revenue targets and its efforts to enhance taxes failing, it continues to propose new taxes as the way for more revenue.
“Despite the country witnessing annual changes in tax policies over previous years, these have not always translated into higher revenue collections. This points to a fundamental problem, in that simply introducing new tax policies does not guarantee better compliance or higher revenue,” the think tank says.
In the year ending June 2024, the Kenya Revenue Authority (KRA) missed revenue targets by Sh205 billion, up from a missed target of Sh123.6 billion during the previous fiscal year. This has been despite a wave of new taxes that were largely introduced since July 2023, including the 1.5 per cent housing levy, and an increase in a number of taxes.
The PBO notes that the current fiscal year’s ordinary revenue target of Sh2.6 trillion—including Income Tax of Sh1.2 trillion, Value-Added Tax of Sh723.8 billion, Excise Duty of Sh324.8 billion and Import Duty of Sh160 billion—is also a long shot.
Domestic revenue mobilisation
“In line with the government’s efforts to enhance domestic revenue mobilisation, the projected ordinary revenue represents an increment of Sh342.5 billion (15 per cent) from the actual collection for FY 2023/24. This projection is higher than the annual growth rates in ordinary revenue over the last decade, with an average of approximately 10 per cent,” the office notes.
On Friday, the Treasury published a list of proposed tax laws that included a return of several proposals in the rejected Finance Bill, 2024, where the proposals by the Treasury on Friday include a return of higher excise duty on alcoholic drinks. The government now wants to tax alcohol based on content rather than total volume of the beverage, an increase of railway development levy from 1.5 to 2.5 per cent, which would raise the cost of imports.
The Treasury also proposed to tax infrastructure bonds at five per cent and introduce income tax on ride-hailing and food delivery services.
When former Treasury CS Njuguna Ndung’u handed over the reins of power to current officeholder, John Mbadi, he just fell short of naming figures, who had forced him to implement a raft of new and higher taxes, but was categorical that high tax rates would not yield more revenues.
“We need to run away from this notion that high tax rates will raise high tax revenues. The reality is the opposite. Because high taxes cannot bring you high tax revenues, we need to study how we can optimise each tax instrument,” Prof Ndung’u said.
Prof Ndung’u advised his successor to establish ways to tap into the informal sector without disrupting the market, which would expand the tax base.
The PBO cautions that the government should carefully consider indirect effects of new taxes before introducing them, to avoid undermining the revenue collection in different sectors.
“The government should prioritise alternative approaches to revenue enhancement over new tax proposals, including closely monitoring current tax administration systems and ensuring their full implementation and effectiveness to achieve improved tax compliance,” it says.
The think tank observed that loss of the Finance Bill, 2024, which was rejected following widespread protests over new taxes it proposed to impose, ought to have been an opportunity for the Treasury to improve revenue collection, not through new taxes, but by tapping technology and utilising data.
“Rather than relying on the introduction of new tax policies that are likely to create new tax burdens on Kenyans, the government may focus on improving tax administration through better enforcement of current policies, enhanced data analytics, and increased use of technology to simplify tax processes and improve compliance,” the PBO said.
The PBO says the key to KRA growing tax collections lies in modernisation of tax processes through digitalisation and data-driven decision-making. KRA would have to upgrade its technological infrastructure, streamline processes, improve data management, and ensue higher operational standards, it notes.
What Kenya needs is an efficient and transparent tax system, not a new round of taxes every time the government feels the need for additional cash, the PBO adds.
“The full roll-out of the electronic tax invoice management system marks a crucial step in enhancing Kenya's tax invoicing process and projects to increase annual revenue collection by Sh312 billion. Before its implementation, the manual tax invoicing process led to challenges in tracking transactions and ensuring compliance, thus contributing to tax evasion and revenue shortfalls.”
The PBO also proposes the full integration of the KRA system with the counties and other national government entities to seal revenue leakages and enable KRA to collect taxes such as Pay-As-You-Earn (PAYE) without challenges. As at close of June 2024, public entities owed the taxman Sh97.8 billion in PAYE arrears.
The think tank also wants the government to address issues related to undervaluation of cargo at importation, which has led to under-declaration of taxes at the point of entry, and missed tax revenues for the KRA.
“To address this challenge, it is necessary to implement customs declarations for each import to streamline the clearance process for consolidated cargo. Additionally, strengthening bilateral collaboration with key import-source countries will facilitate the exchange of information and enhance valuation accuracy,” it advises.
The PBO additionally advised that debts associated with tax disputes have accumulated to Sh313.4 billion in some 1,288 cases pitting the taxman against different companies and individuals, highlighting the complexity and financial impact of unresolved tax disputes.
This is besides high tax expenditures where the Treasury has been handing company waivers and other tax benefits, to see tax expenditures reach Sh393.6 billion in 2022, having significant effect on revenue collection.
“However, the growing cost associated with these measures also raises concerns about the sustainability of such policies. This is particularly in the context of Kenya's broader fiscal landscape that is characterised by a need for enhanced revenue mobilisation and fiscal consolidation. The government should strike a balance between the need to maintain a stable and sustainable tax base and the goal of promoting economic activity,” the PBO notes.
It also cautioned the government on its tax amnesty programme that was extended by a year to March 2025 after netting Sh44 billion tax arrears payments for the government by June 2024, noting that the programme has the potential to undermine overall tax compliance.
The tax amnesty policy provided a pardon on penalties and interest in tax debts accumulated up to December 2022.
“However, the tax amnesty policy risks undermine the overall tax compliance culture as businesses and individuals may choose to evade taxes believing they will eventually benefit from waived penalties and interests,” the PBO warns.
