KRA’s tax revenue collection has risen over the recent past and hit a new record by collecting KES 2.031 trillion in fiscal year 2021/22. However, it is currently lagging behind in its revenue targets for year 2022/2023 according to the Statement of Actual Revenues and Net Exchequer Issues published on 16 December 2022. KRA therefore has an enormous task ahead.
The government will, without a doubt, take advantage of several tax measures in the Finance Act of 2022 that commenced on 1 January 2023. First is the taxation of gains from financial derivatives. Such a gain will going forward be subject to tax in Kenya at the rate of 15%. The Cabinet Secretary to the National Treasury is expected to issue regulations on taxing financial derivatives in January 2023. The regulations should at least specify the nature of financial derivatives subject to tax, the date when the regulations come into force, the due date for remitting the tax and how to remit the tax. Kenya should consider if introducing the tax will be counter-productive considering that it targets non-residents who often push back local tax to residents by insisting to be paid net of tax.
The Finance Act of 2022 also increased the rate of Capital Gains Tax (CGT) from 5% to 15% effective 1 January 2023. CGT applies on transfer of land and shares in companies that are not listed at the Nairobi Securities Exchange. Subsequent increase in CGT should be balanced with indexation to reduce the tax impact and maintain Kenya as a preferred investment destination in East Africa.
It is interesting to see how the government will increase revenue collection as anticipated by the President. We expect to see some newsworthy tax measures introduced through laws such as the anticipated Finance Act in 2023. The National Treasury is currently considering comments by stakeholders as they draft Finance Bill 2023. The public should look out for this Bill and thoroughly engage the National Treasury and Parliament in producing tax measures for 2023/2024.
The government is also likely to look at new frontiers for tax revenue such as the digital economy. While we already have income tax and Value Added Tax on services provided on digital platforms, the government may lay more emphasis on enforcing collection of such taxes to boost is revenues. Among the initiatives that KRA is implementing is the Tax Invoice Management Systems (TIMS) which is linked to a traders’ invoicing system and transmits the information in the invoice directly to KRA. This will ensure that ensure that traders remit VAT to the government and seal the loophole of traders pocketing the VAT.
The low-income earners will also need to come in and bolster the government’s tax revenue. While the current regime is keen on enabling low-income earners in the informal sector and agriculture to do business, it will certainly ask such businesses to pay their fair share of tax.
The KRA may also target high net worth individuals; the new regime has openly declared that KRA should prioritise taxing wealth over trade and expenditure. The new tax laws in 2023 may seek to define wealth and introduce new taxes on wealth. It has been argued that Kenya already has wealth tax in the form of property rates, rental income tax, CGT among other taxes. Kenya should therefore carefully think about the role and design of wealth taxes noting that other countries are abolishing wealth tax because of inefficiencies, administrative costs, capital flight and limited revenues that they tend to generate.
On a different note, taxpayers should take advantage of the Voluntary Tax Disclosure Program (VTDP) which ends in December 2023. The VTDP covered tax for the period 1 July 2015 to 30 June 2020. Taxpayers who will declare and pay tax liabilities for that period within the year will enjoy 25% remission of penalties and interest. Considering the success of the VDTP, KRA should in 2023 come up with another one to cover the period 1 July 2020 to 30 June 2022.
Finally, the nation anticipates seeing how the draft national tax policy will be finalised in 2023. The policy intends to guide the government on collection of taxes, provide a basis for review of tax laws, provide a framework for granting and monitoring tax incentives, among others. Some of the objectives are likely to be implemented in 2023, with or without the tax policy, for example the reduction or elimination of tax exemptions so that the country can collect maximum revenue and reduce dependence on debt.
If the political pronouncements are anything to go by, Kenya’s tax environment in 2023 is set for a radical shift. Taxpayers should tighten their belts and expect some turbulence on the way. Bon voyage!