Kenya's proposed pain through taxes

It is a mixed bag as it proposes to lower taxes and on the other hand, it scoops copious amounts of tax from the public. It proposes a reduction of corporate tax for firms who have lately become restless due to the exchequer raiding their budgets for various excuses, such as matching contributions to the funding levy. 

The just released draft MTRS proposes a plethora of taxes ostensibly to raise tax revenue to GDP ratio from 13.5 percent in FY2022/23 to 20 percent by the end of FY 2026/27. These proposed taxes and changes to existing taxes are about twenty-five and hence the need to dissect a number of them for their merit or lack thereof.

Corporate Tax review and Minimum Tax

The draft MTRS proposes a reduction in corporate tax from the current 30% to 25%. This might have come as a result of looking at the regional corporate tax levels in which countries such as Madagascar have the lowest corporate tax rate at 15%. If the Kenya government is looking for direct foreign investment (FDI’s), this is a low hanging fruit, especially in view of its ripple effects. 

However, some observers say this is an insignificant reduction especially for those investors looking for really favorable tax regimes oversees. Businesses in Kenya, through the FKE, are still adamant that they are subject to a hostile tax regime.

Alongside this proposal is the suggestion to reintroduce the minimum tax which the Court of Appeal, through a judgment delivered on December 2, 2022, upheld the High Court decision that declared the Minimum Tax unconstitutional and the Minimum Tax guidelines void. 

The order prohibited the KRA from implementing, further implementing, administering, applying and enforcing payment of the Minimum Tax. To say the least, it would be interesting to see how the minimum tax is reintroduced without falling foul of the law.

Income Tax Bands and Pensions

The MTRS proposal also seeks a review of tax bands since the current income tax structures are not wide enough to cushion low-income earners. Income tax remains a thorny issue for a majority of employees and to tinker with it to their detriment will sure bring up noise and acrimony. The draft also plans to restructure all pensions to be exempt for those who withdraw their pension even below sixty-five years of age as only those above that have been exempt while those below are taxable. This might be something to smile about for the senior citizens. 

Value Added Tax (VAT)

The Value Added Tax (VAT) is a consumption tax collected through agents at points of purchase. The Exchequer intends to review its thresholds upwards in view of VAT erosion over time. Its threshold currently stands at Ksh. 5M even as the government proposes to add more collecting agents to its base. 

There will also be a review on VAT exemptions and zero rating as VAT revenue as a percentage of the GDP had decreased over time. The draft MTRS document says the government shall limit zero rating to exports and remove all exemptions except for unprocessed goods. 

This will definitely see the rise of some basic and essential commodities such as flour, milk and medicines rise. It goes without saying that this will continue to pile inflationary pressure on the already battered pockets of most Kenyans.

In all these proposals, keen observers cannot fail to see the underhand pressure coming from multi-lateral lenders who more often than not prescribe surgery for a condition that would be well handled by a painkiller.

VAT on Education

The Exchequer proposes VAT on certain Education Services as some services therein have remained exempt to date and to “make education accessible to all learners.” The government feels that when an activity like swimming is offered out of school it should be subject to VAT charges because an activity like swimming is not directly related to education. 

However, education sector experts beg to differ more so now under the novel CBC system of education that places more emphasis on practical skills, talents and sports as avenues to be taken by learners to prepare them adequately for worldwide opportunities. This will have negative impact on the education sector offerings, and ultimately put paid any hope of CBC system of education and the future of the youth.

VAT on Insurance

The Exchequer proposes to introduce VAT on insurance services which have hitherto been exempt from VAT. It seeks to do this ostensibly to expand the tax base. However, critics have said that insurance services, which for long have endured depressed uptake from potential clients will even slip lower in performance. 

Some observers feel it will make insurance business even more expensive as the money paid out as premium is primarily for compensation at an already given value relative to the market. It will end up making insurance less desirable.

Excise Duty on Petroleum Products, Tobacco products, and Sugary juices

The Exchequer proposes a review of excise duty on petroleum products as they contribute to negative externalities within the environment. The government in times past did not cultivate an enabling environment for use of alternative sources of energy and therefore, it only geared towards getting more revenue while showing no concern to Kenyans’ quality of life.  

Owing to international factors (Russia’s invasion of Ukraine) as well as local factors (The Kenya Shilling’s downward spiral), the cost of fuel has risen to unprecedented highs which has made the cost of living to rise sharply. To increase the excise duty on a product which for now almost has no alternative is punitive at best and at worst, throws cold water on the efforts of Kenyans who use fossil fuel to power their daily toil such as the transportation of goods, people and services all over the country.

Excise duty on tobacco products is proposed upwards, and is geared to discourage tobacco use and effect on people’s health. It has always been the same reason, time after time over many years; a study might have to be commissioned to find out if taxes are managing to stifle their consumption and effects on the society. Excise tax is also proposed for those who consume sweet non-alcoholic drinks using the sugar content as the base for taxation. The government is keen on limiting carbon on its citizens’ lungs, lifestyle diseases and obesity, or so it would seem.

Carbon Excise Tax and Green Fiscal Incentives 

In the medium strategy period, the government plans to explore the possibility of introducing a carbon tax based on the carbon content of fossil fuels while reviewing green incentives to promote the use of green energy. The Exchequer proposes to incrementally charge excise duty on fossil fuel powered vehicles and very little coal consumption for now while it will evaluate the introduction of the same on tractors, forklifts, excavators and earthmovers among others. 

Lastly, that it will review the current taxes on electric vehicles with a view to encouraging their affordability and hence support the transition to green economy. The exchequer will therefore charge the current 9 taxes and levies on fossil fuels, plus the proposed carbon tax to bring the cumulative total to ten, the taxes and levies on fossil fuels alone. 

Petrol retailing at Ksh.211.64 in Nairobi today, is driven to these heights by government taxes taking up 45.2% of that price. The excise tax charged on petroleum products currently, is this not a form of carbon tax in its very inception? The government is increasingly showing a lack of creativity and diversity in its zeal to draw in more revenue.

Globally, the green energy sector is still fast evolving, from clean power production, storage and distribution, it remains a work in progress. Many experts have called out this proposed excise duty tax for duplicity. In a country where the number of EVs was estimated at less than 2000 by close of 2022, while a total of some 2.2 million registered vehicles or more were likely in use in the same year, Kenya should first ensure it puts in place incentives to grow and develop the green sector without threats to tax fossil fuel.

The carbon tax will certainly not discourage the use of fossil fuel based vehicles as there is no policy in place to encourage the purchase and retention of clean energy fueled vehicles. With hindsight, Africa, which contributes about 17 percent of the world's population, contributes only 3.9 percent of global carbon emissions yet is disproportionately adversely affected by the effects of carbon emissions from other parts of the world. Kenya should be at the forefront in asking for carbon funding at COP28 in Dubai in November 2023 from the big polluters to deal with climate change issues here instead of turning on its citizens. 

Wealth tax

The Exchequer also proposes the introduction of a motor vehicle circulation tax as a form of wealth tax. It proposes that this tax be paid at the point of acquiring an insurance cover annually. It will be graduated starting off with a minimum tax and moving up all the way based on the engine capacity of the vehicle. 

With a local public transport system that is partially collapsed and very chaotic, it is double jeopardy for the simple Kenyan motorist, who does not use a private car because he is wealthy but rather it is a necessity in the face of an unpredictable public transport system. The government could probably do well to seek out another measure of wealth towards achieving this aim. What about taxing idle land? There are thousands of acres of idle land in this country whose owners are wealthy and speculating. A car was a status symbol and a pointer of wealth maybe in 1975, in the year 2023, it sounds like a bad joke!

The sheer number of taxes proposed for introduction or upward revision to the public in Kenya is bound to cause misery and pain in the least to most hardworking Kenyans. Kenya is in the grip of the sharpest ever rise in the cost of living and the government should consider the plight of many citizens who are barely coping with life at this point in time. Economists know that fervent taxes create a “black market,” as a survival tactic, is this where they are pushing Kenyans?

The exchequer says that ordinary revenue will rise to 5% if the strategy is realized but at what price to the citizenry? By its own admission, the State needs to look inwards at the waste and corruption that over the years have been endemic to it and have been the singular reason for poor or nonexistent public service and development. 

It is also true that this level of taxation is experienced in well-developed jurisdictions in other parts of the world but the difference is that it results in functional public services and efficient public goods. This is a proposal to tax and Kenyans are required to give their feedback by presenting memoranda to the authorities. They should come out in their numbers and make their voice heard in submissions back to the Exchequer.