The proposed Medium Term Revenue Strategy (MTRS) for the fiscal years 2024–2025 through 2026–2027 is now available. It lays out how and from whom the government intends to earn revenue, as expected.
It is a mixed bag because it suggests lowering taxes while also collecting a hefty amount of tax from the general public. It suggests a drop in corporation tax for businesses that have recently grown impatient with the exchequer taking money out of their budgets for a variety of justifications, such as matching contributions to the financing levy.
In order to increase the tax income to GDP ratio from 13.5 percent in FY2022/23 to 20 percent by the end of FY 2026/27, the recently issued draft MTRS proposes a variety of taxes. About twenty-five of these proposed taxes and amendments to existing taxes must be analyzed for their value or lack thereof.
Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax that is collected by representatives at places of sale. In light of the gradual loss of the value of the VAT, the Exchequer plans to reassess its thresholds upward. Even if the government wants to increase the number of collecting agents in its base, its threshold now stands at Ksh. 5 million.
The evaluation of VAT exemptions and zero rating will also take into account the declining trend in the GDP share of VAT income. The government shall restrict zero rating to exports and eliminate all exemptions save for unprocessed commodities, according to the proposed MTRS paper.
The price of some basic and necessary commodities, like flour, milk, and medicines, would undoubtedly increase as a result. It goes without saying that this will add more inflationary pressure to the majority of Kenyans’ already strained pockets.
Analytical observers cannot not but notice the covert pressure emanating from multilateral lenders in all of these suggestions, who frequently recommend surgery for conditions that would be better treated with analgesics.
Income Tax Bands and Pensions
The current income tax structures are not broad enough to protect low-income earners, hence the MTRS proposal also calls for a revision of tax bands. For the majority of workers, income tax is still a contentious topic, so any changes that would be detrimental to them would undoubtedly cause commotion and conflict.
The proposal also intends to reorganize all pensions so that anyone who withdraws their pension before age 65 will not be taxed, since only those above that age have been exempt. For the elderly, this can be cause for celebration.
VAT on Insurance
Previously exempt from VAT insurance services would henceforth be subject to sales tax, according to the Exchequer. It does this in an apparent effort to broaden the tax base. However, detractors claim that insurance services, which have long experienced weak demand from potential customers, will even perform worse.
Since the money paid out as premiums is mostly used for compensation at an already given value compared to the market, some experts believe it will increase the cost of doing business in the insurance industry. In the end, insurance will become less appealing.
VAT on Education
In order to “make education accessible to all learners” and because certain of these services have been exempt up until now, the Exchequer is proposing VAT on specific education services. The government believes that because swimming is not directly tied to education, it should be subject to VAT charges when it is delivered outside of school.
The new CBC educational system, which places more emphasis on practical skills, talents, and athletics as paths learners can take to effectively prepare them for global prospects, has caused education sector professionals to strongly disagree, and they do so more so now. This will have a severe effect on the educational options available and, in the end, dash hopes for the CBC educational system and the youth’s future.
As another form of wealth tax, The Exchequer suggests enacting a motor vehicle circulation tax. It suggests that this fee be paid each year at the time an insurance policy is purchased. Based on the vehicle’s engine capacity, it will be tiered, starting with the lowest tax and rising up all the way.
For the average Kenyan motorist, who does not drive a private vehicle because he is wealthy but rather because it is necessary due to an unreliable public transportation system, there is a twofold risk because of the local public transportation system, which is currently largely collapsed and extremely chaotic. To accomplish this goal, the government would likely do well to look for additional sources of wealth. What about levies on unoccupied land? In this country, there are hundreds of acres of idle property owned by affluent investors. In 1975, having a car would have indicated prestige and affluence, but in 2023, it sounds ridiculous!
Corporate Tax review and Minimum Tax
The proposed MTRS suggests cutting the current corporation tax rate of 30% to 25%. This might have resulted from looking at regional corporate tax rates, where nations like Madagascar have the lowest rates at 15%. This is a low hanging fruit if the Kenyan government is seeking direct foreign investment (FDI), especially in light of its cascading impacts.
However, other experts claim that this reduction is negligible, particularly for foreign investors seeking extremely advantageous tax structures. Through the FKE, businesses in Kenya continue to vehemently assert that they are subject to a hostile tax policy.
A proposal to reinstate the minimum tax is included alongside this one. The Court of Appeal upheld the High Court’s ruling that the minimum tax is unconstitutional and the minimum tax rules are invalid in a judgement it issued on December 2, 2022.
The order forbade the KRA from enforcing payment of the Minimum Tax through administration, application, or future implementation. It would be, to put it mildly, interesting to see how the minimum tax might be reinstated without breaking the law.
Carbon Excise Tax and Green Fiscal Incentives
The government intends to study green incentives to encourage the use of green energy over the medium strategy period and consider the introduction of a carbon tax depending on the carbon content of fossil fuels. The Exchequer plans to gradually impose excise duties on fossil fuel-powered vehicles and equipment that consumes very little coal for the time being, while it assesses whether to impose the same duties on equipment like tractors, forklifts, excavators, and earthmovers, among other things.
Finally, it promised to reassess the taxes now levied on electric vehicles in an effort to make them more affordable and thereby assist the shift to a green economy. The proposed carbon tax will be added to the existing nine taxes and levies on fossil fuels, bringing the total number of such levies and taxes to 10 in total.
Government taxes, which make up 45.2% of the cost of petrol in Nairobi today and retail for Ksh.211.64, are what bring this price up to these levels. Is the current excise duty on petroleum products not a carbon tax from the very beginning? In its zeal to raise more money, the government is increasingly demonstrating a lack of originality and diversity.
The production, storage, and distribution of clean energy are all still works in progress in the global green energy business. This planned excise duty tax has been criticized by several experts for being dishonest. Kenya should first make sure it puts incentives in place to grow and develop the green sector without threatening to tax fossil fuels in a country where the number of EVs was estimated to be less than 2000 by the end of 2022 while a total of about 2.2 million registered vehicles were likely in use in the same year.
As there is no policy in place to stimulate the acquisition and retention of renewable energy fueled vehicles, the carbon price will undoubtedly not reduce the use of vehicles based on fossil fuels. Looking back, it can be seen that while making up only 3.9 percent of global carbon emissions and home to around 17 percent of the world’s population, Africa suffers disproportionately from the effects of carbon emissions from other regions of the world. Instead than turning against its population, Kenya could be at the forefront of asking the major polluters for carbon funding at COP28 in Dubai in November 2023.
Excise Duty on Petroleum Products, Tobacco products, and Sugary juices
In light of the fact that petroleum goods have negative environmental externalities, the Exchequer suggests reviewing the excise levy on certain products. In the past, the government did not create an atmosphere that encouraged the use of alternative energy sources; as a result, it was primarily focused on increasing money with little regard for the quality of life of Kenyans.
The cost of fuel has reached record highs due to both global (Russia’s invasion of Ukraine) and local (the depreciation of the Kenyan shilling) causes, which has caused the cost of living to increase significantly. Increasing the excise charge on an item that currently has few alternatives is punitive at best and undermines Kenyans’ efforts who utilize fossil fuel to power their everyday labor, such as the movement of goods, people, and services across the nation.
The planned increase in excise duty on tobacco products is intended to reduce tobacco usage and its negative impact on public health. It has always been the same rationale, time and time again over a long period of time; a research may need to be ordered to determine whether taxes are successful in reducing their use and effects on society. It is also suggested to impose an excise tax on people who consume sweet non-alcoholic beverages, with the sugar content serving as the basis for taxation. It would appear that the government is concerned about the effects of carbon on its inhabitants’ lungs, lifestyle diseases, and obesity.
The majority of hardworking Kenyans are sure to suffer the most from the sheer number of taxes that are being suggested for introduction or upward adjustment on the public in Kenya. The cost of living in Kenya is rising at its fastest rate ever, and the government should take into account the predicament of many individuals who are currently barely making ends meet. Are economists pushing Kenyans to engage in the “black market,” which they are aware exists as a means of survival because of intense taxes?
If the method is successful, the exchequer claims that regular revenue will increase to 5%, but at what cost to the populace? The State must examine its own internal waste and corruption, which, by its own admission, have been the only source of subpar or nonexistent public service and progress over the years.
It is also true that this level of taxation exists in other economically advanced countries of the world; yet, this level of taxation produces effective public goods and services. Kenyans are required to provide comments by submitting memos to the authorities regarding this proposed tax. They ought to turn out in numbers and speak up in their submissions to the Exchequer.