In 2023 President William Ruto offered Kenyans a generous serving of shock therapy through a raft of far-reaching tax measures, largely driven by a programme the country has with the International Monetary Fund (IMF).
The upside of these painful tax measures, President Ruto said in his Jamhuri Day speech, was that the country was able to avert a catastrophic financial crisis that has befallen countries like Ghana, Zambia and Ethiopia.
In June, the members of the National Assembly acrimoniously passed the Finance Act 2023, with the Kenya Kwanza administration seeking to raise an additional Sh211 billion from the tax measures as it sought to fund an expanded budget owing to elevated debt service costs.
The introduction of 1.5 percent housing levy paid by salaried employees, and which is matched by employers, the doubling of value added tax (VAT) on petroleum products to 16 per cent, and the increase in the cost of sending money through mobile phones, have tormented both employers and employees.
Besides the doubling of VAT and the housing levy, the Finance Act 2023 also introduced a tax on the transfer of digital assets such as cryptocurrencies and the tripling of the turnover tax to three percent.
Fees for sending money on mobile phones would attract a higher excise duty of 15 from 12 per cent, a move that saw Safaricom, the country's largest telco, increase its charges for sending money through its mobile money transfer service, M-Pesa, by three per cent.
There was the introduction of a 15 per cent excise duty on advertisements on various media platforms on alcoholic beverages, betting, gaming, lotteries and prize competitions.
The law introduced two new tax bands at 32.5 per cent and 35 per cent on monthly employment income above Sh500,000 and Sh800,000 respectively.
Also starting July, club entrance and subscription fees paid by the employer on behalf of the employee were treated as a benefit and taxed.
The expenditure is, however, allowed to be deducted against the employer’s income.
Entrepreneurs are facing tough times ahead following Parliament’s approval of the proposal by the Kenya Revenue Authority (KRA) to have the smallest of businesses brought under the tax net through a requirement that they use the Electronic Tax Invoice Management System (Etims) to record sales.
Photo credit: Nation Media Group
Imported glass bottles —excluding imported glass bottles for packaging of pharmaceutical products— were hit by increased excise duty of 35 per cent from 25 per cent.
Content creators on social media were also to have their day with the taxman after the Act introduced a withholding tax of five per cent for residents and 20 per cent for non-residents without a permanent place on digital content monetisation.
But KRA was not yet done. Dealers in electronics, and particularly mobile phones, had it particularly tough. On July 1, imported cell phones started attracting an excise duty of 10 per cent.
Towards the end of July, the KRA directed all traders, including those who ship their goods through a cargo consolidator, to pay taxes on their cargo per item and have them cleared within 21 days or be auctioned. Traders affected the most were those dealing in importation of smartphones as they experienced a shortage of the items.
Then the KRA unleashed upon the small businesses the Revenue Service Assistants, a horde of field officers whose work was to enforce tax compliance among the small businesses.
These measures have gone beyond the ordinary revenues of pay as you earn (PAYE), Corporate Income tax, value added tax (VAT), Excise Duty and Import Duty. State departments have also aggressively increased the fees and fines they charge for their services such as processing of passports, marriage certificates, land title deeds and so forth.
“The government has also scaled up efforts on requiring the various Ministries, Departments and Agencies (MDAs) to not only mobilise more non-tax revenues but also transfer resources to the exchequer. Eventually, the majority of the MDAs are expected to be self-financing,” said the Cabinet Secretary for National Treasury and Economic Planning Prof Njuguna Ndung’u.
With their take-home income reduced, some workers have been forced to cut back on their consumption of such items as fuel and food, various data have shown.
Others have lost their entire salaries altogether as employers have been forced to downsize to remain afloat in a turbulent economy characterized, not only by higher taxes, but also a weak shilling as well as increased fuel and electricity prices.
The tax measures contained in the Finance Act 2023, said Federation of Kenya Employers CEO Jacqueline Mugo, was the main reason FKE members had fired some 70,000 workers between October last year and last month as part of the provisions of the law took effect.
Ms Mugo said in a statement that 40 per cent of its members plan to downsize to cope with the tough business environment that has seen their operating costs rise due to the new taxes.
A survey of Chief Executive Officers by the Central Bank of Kenya (CBK) in November shows that Ms Mugo’s sentiments might not be an empty threat by a jilted lobby. The survey found that a fifth of the respondents, who included the CEOs of 1,000 private sector firms, cited increased taxation as the top domestic factor that they thought would constrain their companies’ expansion. It was ahead of a weak exchange rate and the cost of doing business, each of which was cited by 18 per cent of the respondents.
“Increased taxation and the exchange rate were of greater concern for firms in the manufacturing sector. Firms in the services sector cited increased taxation and economic environment as most constraining to their expansion,” said CBK in the survey.
The high cost of fuel and electricity amid cost-of-living pressures arising from increased taxation resulted in the freezing of employment from September, according to the findings of Stanbic Bank Kenya’s Purchasing Managers Index (PMI), based on feedback from about 400 corporate managers.
In September, manufacturers filed a court case seeking to block the new 17.5 per cent export and investment promotion levy on imported goods such as steel and clinker, saying it will negatively affect their business.
Through their lobby, the Kenya Association of Manufacturers (KAM), the manufacturers want the High Court to declare the levy unconstitutional, arguing that it will not achieve its intended goal of boosting local production and exports.
But the Finance Act 2023 was not all gloomy. Calling and browsing became a little cheaper after excise duty on telephone and internet data services was reduced from 20 to 15 per cent. Consequently, Safaricom reduced charges on calls, SMS, data, and home fiber by five per cent.
Royalties and interest paid to a non-resident person by a company undertaking the manufacture of human vaccines was exempted from paying withholding tax as the government sought to attract foreign direct investment into the drug-making industry.
