The specific objectives of the MTRS are to: raise the tax revenue to GDP ratio from 13,5% in the financial year (FY) 2022/23 to 20% by the end of FY 2026/27; increase the tax compliance rate from 70% in FY 2022/23 to 90% by FY 2026/27; promote investment through removing market distortions through the rationalisation of tax expenditures and reviewing the tax rate; and align tax policy with government priorities.

Income tax

Corporate income tax

The draft MTRS proposes to:

1. Reduce the corporate rate of income tax from the current 30% to 25%

The draft MTRS states that according to a corporate income tax (CIT) gap study by the Kenya Revenue Authority (KRA) in 2022, the gap between the CIT collected and the potential is high and on a rising trend. It also notes that the gap is attributed to low compliance and tax expenditures among other factors. The Government is therefore proposing to reduce the CIT rate so as to narrow this gap.

2. Review residential rental income tax so as to ensure fairness and equity

To address compliance challenges in rental income taxation, the Government will enhance registration of property agents, mapping of properties and leveraging technology. In addition to this, in order to ensure fairness and equity, the Government will review the taxation of residential rental income and implement either or both of these options: tax residential income at the corporate rate and allow for expenses; or retain the simplified tax regime but progressively increase the rate and allow deduction of at least 40% of the revenue as expenses.

3. Re-introduce minimum tax

The draft MTRS provides that the rationale for this re-introduction of minimum tax is due to the fact that some entities prepare their accounts to depict a perpetual loss position, thus evading taxation. The re-introduction of minimum tax contradicts the Court of Appeal’s decision in Kenya Revenue Authority v Stanley Waweru and Six Others (Civil Appeal No. E591 of 2021) whereby the Court of Appeal upheld the High Court’s decision that declared the minimum tax unconstitutional and the minimum tax guidelines void. However, the Government stated that it will redesign the minimum tax considering the issues raised by the court on the previous minimum tax.

4. Review and rationalise exemptions on entities to expand the tax base

The Government proposes to review the exemption regime during the MTRS period to more efficient and pro-investment “cost-based” incentives.

Personal income tax

The draft MTRS proposes to:

1. Review the personal income tax band structure to improve progressivity

The draft MTRS notes that the current income tax structures are not wide enough to cushion low-income earners and increase opportunities for tax avoidance and evasion. In this regard, the Government intends to align the personal income tax rate with the corporate tax rate. This is good news for taxpayers that are now subject to personal income tax above 30% (the corporate rate) as the draft MTRS indicates a plan to reduce the personal income tax rates.

2. Review taxation of pensions

The draft MTRS plans to restructure all pensions to be exempt for those who withdraw their pension, even before the age of 65, as only those above that have been exempt, while those below are taxable.

3. Review and rationalise exemptions on individuals’ income to expand tax base

The draft MTRS notes that these exemptions erode the tax base and therefore during its review the Government will take into consideration exemptions that are granted on a reciprocal basis and in accordance with international conventions which Kenya is a party to.

4. Review tax reliefs

During the medium-term strategy period, the Government will review the tax reliefs with a view to eliminating the reliefs that are counterproductive. Among the reliefs that the Government intends to eliminate is the insurance relief. It is not clear how this will impact the insurance industry considering the low uptake of insurance.

Value-added tax

The draft MTRS notes that the value-added tax (VAT) threshold has been significantly eroded over time due to inflation, hence the need for review. Therefore, during the MTRS period, the Government will review upward the registration threshold for VAT, which is currently taxable supplies worth KES 5 million or more in a year.

The Government states that the current VAT rate in Kenya of 16% is among the lowest within the East African Community (EAC) member states and the EAC Common Market Protocol foresees harmonization of taxes before the EAC Monetary Union. The Government will therefore review the VAT rates as well as VAT exemptions and zero rating. It is not clear in the draft MTRS whether the Government will increase the VAT rate to 18%, which is similar to Uganda, Tanzania and other countries in East Africa.

The draft MTRS proposes applying VAT on certain education services which were previously exempt in order to “make education accessible to all learners”. The Government notes that the exemption is not uniformly applied and therefore to remove this discrimination, there is a need to impose VAT on services provided by schools that are not directly related to education.

On insurance services, the draft MTRS proposes to introduce VAT on insurance services which have been exempt from VAT. The rationale for this being that this will expand the tax bases and hence raise VAT revenue as a percentage of GDP. This measure could be counter-productive unless the Government has other incentives to encourage taxpayers to take insurance.

Excise duty on petroleum products, tobacco products, alcohol products and sugary juices

The draft MTRS proposes a review of the excise duty on petroleum products and coal as they contribute to negative externalities within the environment. The Government will further review the basis of taxation on the alcohol content of a product. These reviews will take into consideration the ongoing harmonization of excise duty structures within the EAC region.

At the same time, the Government intends to increase the excise duty on tobacco to discourage tobacco use and apply an excise duty on sweet non-alcoholic drinks.

Customs duty

Kenya will request that other EAC partner states review the structure of the EAC Common External Tariff with a view to having a common duty rate for all imported goods and no duty on primary raw materials/inputs.

Carbon tax and excise tax (green fiscal incentives)

In the medium-term 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 draft MTRS proposes incrementally charging excise duty on fossil-fuel powered vehicles as the Government evaluates whether to introduce the same on tractors, forklifts, excavators and earthmovers, among others. The Government will further review the current taxes on electric vehicles with a view to encouraging their affordability and hence support the transition to a green economy.

Motor vehicle circulation tax

The draft MTRS 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 annual insurance cover. The tax will be graduated starting off with a minimum tax and moving up based on the engine capacity of the vehicle.

Withholding tax

Agricultural produce

The draft MTRS notes that the agriculture sector is highly informal, cash based and characterised by the notion that the incomes generated from the sector are meagre and should not be taxed. Therefore, to address these challenges, the Government will:

• introduce a final withholding agricultural produce tax at a rate not more that 5% of the value of the produce delivered to co-operatives or other organised groups; and
• intensify taxpayer education to ensure that taxpayers understand their role in nation building and the need to pay taxes.

Imports

The draft MTRS notes that the greatest challenge in taxation of the informal sector is lack of visibility of taxpayers’ transactions by the KRA. Therefore, to address these challenges the Government will introduce a creditable withholding tax on all imports at a minimal rate of the import’s value.

Comment

From our review, the draft MTRS is a comprehensive and ambitious plan that aims to achieve sustained economic growth, create jobs and reduce poverty. The focus on investing in the five key sectors of agriculture, micro-, small- and medium-sized enterprises, housing, healthcare, and the digital economy, is well-placed, as these sectors have the potential to generate significant economic growth and create jobs. The draft MTRS is well-aligned with the Sustainable Development Goals. This is important, as it shows that Kenya is committed to global and regional development goals.

However, one might argue that Kenya is currently experiencing high inflation and low disposable incomes, which means that many Kenyans are struggling to make ends meet. Introducing new taxes at this time could place an additional burden on households and businesses. An increase in taxes in a depressed economy could be an incentive to evade tax and therefore may not necessarily result in an increase in tax collection. The Government needs to weigh the costs and benefits of the proposals in the draft MTRS.

The Government could introduce new taxes that are targeted at high-income earners and corporations, while also providing relief to low-income households and businesses, and also invest in programmes to help people improve their skills and find jobs, which would increase their disposable incomes and make them better able to afford taxes.

Overall, the draft MTRS is a good starting point. It is, however, important to get feedback from the public and stakeholders to ensure that the final document is as comprehensive and practical as possible.

The Government has set a deadline of 6 October 2023 for stakeholders to present their views on the draft MTRS. We encourage everyone to participate.