Finance Act: President Ruto between a rock and a hard place

President William Ruto could find himself trapped between a rock and a hard place as a High Court order halting the implementation of Finance Act, 2023 stands in his way to generate over Sh200 billion more in revenues through different tax measures.

Justice Mugure Thande on Friday temporarily suspended implementation of the tax measures, affecting some of the measures that would have taken effect yesterday, July 1, when the government’s financial year starts.

Among key tax measures that were expected to take effect on July 1 was the increase of Value Added Tax on fuel products from eight per cent to 16 per cent, introduction of the 1.5 per cent housing levy on workers and raising the turnover tax for businesses with annual revenues of between Sh1 million and Sh25 million.

However, the Energy and Petroleum Regulatory Authority (Epra) on Friday ignored the order announcing higher fuel prices. The President targets to collect an extra Sh50 billion by doubling the VAT on fuel during the 2023/24 financial year.

“We are going to increase the VAT by eight per cent because having differential rates; one at eight per cent and others at 16 per cent causes an integrity problem.

Manipulate numbers

People use it as a loophole to manipulate numbers. This eight per cent that we are adding is going to give us about Sh50 billion. It will begin to deal with the problem of roads across the country,” President Ruto said in an interview in May.

The additional revenue would be channelled to construction of stalled roads across the country which require about Sh900 billion to be completed, so the President’s initiative could be jeorpadised should the court order continue standing in the way.

The Kenya Revenue Authority (KRA) collected Sh247.99 billion petroleum taxes in 2021/22 with full revenue collections report. The taxes grew by 9.4 per cent during the year.

Treasury is also scheduled to start implementing the 1.5 per cent Housing Levy on workers’ salaries as well as employers starting this month, which is expected to generate Sh9 billion extra monthly.

“Currently, we have voluntary levy but in the last five years, it has only given us Sh1.8 billion. Mandatory levy will give us Sh9 billion per month. It will give us a foothold in our dealings with partner investors,” said Housing PS  Charles Hinga last month.

The Sh9 billion would total Sh108 billion in new collections by the government, forming 38.6 per cent of the expected Sh280 billion as a result of the Finance Act, 2023.

Housing Fund  

The VAT on fuel and Housing Fund levy measures alone, whose effective date of implementation was yesterday, are expected to generate 56.4 per cent of the targeted Sh280 billion.

But additional revenues from Small and Medium-sized Enterprises (SMEs) with revenues ranging Sh1 million to Sh25 million annually, which have been proposed to pay three per cent turnover tax on their revenues, up from one per cent that they have paid since 2020, will also affect the government’s revenue targets, should implementation delay.

This would also affect the government in the collection of Corporation taxes from businesses with annual revenues of between Sh25 million and Sh50 million, which previously paid the one per cent Turnover Tax. Corporation Tax is paid at the rate of 30 per cent in Kenya.

“Corporation tax collection stood at Sh242.018 Billion against a target of Sh218.161 Billion. This replicates a growth of 32.7 per cent over the last financial year.

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