22 September 2022 by , and Tax & Exchange Control Alert

The new administration should have a tax policy to tackle taxpayers’ woes

Following the recent elections, Kenya has a new administration. Many Kenyans are eager for this new administration to roll up its sleeves and fulfil its promises to the people.

The new administration established by the Kenya Kwanza team has taken over at a time when tax revenue targets are falling behind. The Statement of Actual Revenues and Net Exchequer Issues as at 31 August 2022 indicates that against the annual tax revenue target of KES 2.071 trillion for the financial year from July 2022 to June 2023, the Kenya Revenue Authority (KRA) collected KES 280 billion in two months. Even though tax collection is not expected to be the same every month, the KRA fell short of the KES 345 billion expected by the end of the second month of this financial year if we assume a monthly tax revenue of KES 172.5 billion. This indicates a deficit of KES 65 billion. Against this backdrop, the new administration has cut down fuel subsidies and introduced subsidies for fertilizers.

Knee-jerk reactions to tax policies and measures are not sustainable. Businesses require certain, predictable and simple tax systems. A tax policy can help, and the new administration should proactively collaborate with stakeholders to produce one.

National Treasury has collected views on the draft national tax policy, but this was not advanced by Kenya Kwanza in its manifesto. The manifesto acknowledged that the tax revenue base must be expanded, but did not indicate how the new regime would go about that. In a 30-page manifesto, Kenya Kwanza indicated that it was keen on doing this through taxing the informal sector, that is, the boda boda operators, beauticians, hawkers etc. but this is missing in its more detailed 68-page manifesto. In the detailed manifesto, Kenya Kwanza speaks more to incentives such as reducing the cost of importing agricultural inputs, providing tax incentives to encourage manufacturers in the pharmaceutical sector (dealt with by the Finance Act of 2022), automating value-added tax systems, reducing the cost of calls and data to encourage the creatives sector, tax incentives to convert public service vehicles to electric vehicles, tax incentives for corporates who sponsor sports, and import duty exemption for assistive devices used by persons with disabilities, among other things.

The new regime will need to finance its plans for the country even though it is coming after the country has already prepared its 2022/23 budget. Actualizing some of the promises such as the KES 50 billion hustler fund will need to be financed, presumably through taxes.

A cursory look at Kenya Kwanza’s manifesto indicates what the new regime will focus on in the short-, middle- and long-term. A tax policy should prominently feature in the mind of the new regime in all these plans. Promises and budgets come at a cost to the ordinary businessperson in Kenya.

Consequently, the new administration should aim for more than just subsidies and the promise of a friendlier tax authority. It should collaborate with stakeholders to reduce tax burdens, structure tax incentives and monitor their impact, guide future tax law amendments, facilitate faster review and payment of tax refunds, and simplify tax compliance. These, among other initiatives, are detailed in the draft national tax policy and support from the new regime can help move this forward.

At the end of the day, good tax revenue depends on facilitating income-generating businesses, assisting them to comply with their tax obligations through simple procedures, providing a stable and predictable tax environment, and putting the tax revenue to effective use. The new regime’s tax policy can provide direction in this regard.

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