The news headlines in Kenya have been dominated by talk about the Finance Bill of 2024 which was tabled in Parliament on 9th May 2024. The bill has brought with its fair share of criticism from members of the Kenyan public who are convinced that it is bound to cause more harm than good. In this article, we dig deeper into what the bill offers, unmasking the potential ramifications arising from its ascension into law.
The Finance Bill is an annual statutory amendment propounded to Parliament every year after the presentation of the Annual Financial Budget. The Bill is then debated and passed in parliament before being assented into law by the President, becoming the Finance Act. The Finance Act can contain omissions and additions not initially included in the Bill.
Table of Contents
The proposed Finance Act of 2024 proposes amendments to the country’s tax-related laws, seeking to redefine and realign them to fit within the current fiscal situation. These laws include; The Income Tax Act (Cap 470, Laws of Kenya), Value Added Tax Act, 2013, Tax Procedures Act, 2015, Miscellaneous Fees and Levies Act, 2016, and Excise Duty Act, 2015.
The drafting of the Finance Bill is motivated by a need to increase the country’s tax bracket to ramp up revenue by targeting untapped economic areas that are not included in the current tax regime.
The Significant Economic Presence Tax (SEPT).
The bill repeals provisions in the Income Tax Act (ITA) for a Digital Service Tax which is charged at a rate of 1.5%. It nonetheless seeks to replace it with a new profit-based tax known as the Significant Economic Presence Tax which could see the taxation rate rise to as high as 6% of gross income generated.
SEPT seeks to expand the mandate of the Digital Service Tax before it targets non-residents who derive income through the digital marketplace in the country. It is also meant to align with the OECD/G20’s income-inclusive framework which is meant to ensure that huge multinational companies pay their fair share of taxes in countries where they have a huge economic but little physical presence. These companies will also be expected to pay a minimum Top-up Tax on income arising from economic presence in their jurisdictions of operation.
However, the effects arising from this law spread to affect everyone offering their services on the digital marketplace.
Furthermore, this bill also seeks to introduce a withholding tax on individuals operating in the digital marketplace. The bill also clears the ambiguity introduced by the Finance Act of 2023 by defining the ‘digital marketplace’ as a platform that enables a person to sell and provide any goods, property, or services (food delivery, ride-hailing, freelance, professional and rental and task-based) that are not tax-exempt. The withholding tax applies at a rate of 5% for resident individuals and 20% for non-individuals.
Advance Pricing Agreements.
The bill proposes the introduction of Advance Pricing Agreements that aim to create room for preferential tax-paying regimes that entities can enter into with the revenue authority. These agreements are meant to last for up to 5 years, but can be discarded by the Commissioner of the Revenue Authority should it emerge that there was a misrepresentation of facts during the agreement process.
Motor Vehicle Tax.
The Bill introduces an annual motor vehicle tax for all vehicles, that is to be paid to the issuer of the insurance cover. It sets an applicable rate of 2.5% of the value of the vehicle, with a minimum cap of Ksh 5000 and a maximum cap of Ksh 100,000.
The Affordable Housing Act.
The Finance Bill introduces some important amendments to the Affordable Housing Act, of 2023;
- It scraps Section 30 A of the Income Tax Act that provided affordable housing relief at a rate of 15% of the amount payable through the Affordable Housing Scheme. Consequently, this relief is to be replaced with a new revision that allows for the levy to be deducted as an allowable amount by the employer on an employee’s income. The levy shall also be treated as deductible expenditure by all individuals earning non-employment-based income.
- The sale of affordable housing units can now only be completed 8 years after the completion of paying for a housing unit, upon approval by the Affordable Housing Board.
Taxes on Infrastructure Bonds.
Government securities issued after 1st July 2024 will now attract a withholding tax of 5% on interest accrued. This shall not apply to non-resident investors.
Withholding Tax Revisions.
The Bill repeals a cap of KSh 24,000 placed on payment of withholding tax for resident individuals. All payments made to individuals are now subject to taxation regardless of profession.
Employment Income Benefits.
The Bill set thresholds on benefits deemed that would be otherwise deemed to be employment income and therefore, subject to income tax. Per diems (travel, meals, and entertainment allowances) rates that were initially set at a rate of Ksh 2000 per day have been revised to no a figure of more than 5% of an employee’s income.
Miscellaneous tax benefits have been raised to a threshold of Ksh 48,000 up from Ksh 36,000 and the meal benefits threshold has also been raised from Ksh 48,000 to Ksh 60,000.
However, the Bill also sees the removal of a 15% relief rate on contributions made to the Post-Retirement Medical Fund, raising the cap for the amount deductible to Ksh 120,000 up to Ksh 60,000.
Revised Tax Rates on Goods and Services.
The Bill revises rates of taxation on various goods and services. Some of these include;
- 16% VAT on various aircraft types, aircraft equipment, and aircraft chartering services.
- 16% VAT on the supply of motorcycles, electric buses, and bikes; locally assembled phones.
- Increased excise rates on alcoholic/nicotine-based products; internet, telephone, and mobile money fees (from 15-20%); betting, lotteries, and gaming (from 12.5-20%).
- 15% tax on advertisements for alcoholic beverages and betting that is done via social media.
- 25% excise tax on vegetable oils.
- Bread (from 0% – tax-exempt). This may increase the cost of production on bread products as the VAT accrued during production cannot be recouped. The increased cost is consequently passed on to the consumer.
The Bill has also introduced/amended the Export Promotion Levy on various goods such as leather articles, spirits, ceramics, cooking stoves, motorcycles, and furniture. An Eco Levy is also to be imposed on various goods such as office machinery, data processing units, transmission and recording equipment, rubber tires, diapers, batteries and dry cells, and plastic packaging.
The Data Privacy Debacle.
The Kenya Revenue Authority (KRA) seeks an exemption from the Data Protection Act (2019) that will allow it access to amassing and collecting personal data in the process of enforcing the collection of taxes and duties.
This raises questions on the extent of the law in infringing upon the privacy of the citizenry, in the guise of law enforcement and ensuring adherence.
A Tottering Tax-Fiscal Landscape.
Ruto’s government has been doubling down in recent days on an undying commitment to expanding its tax mandate. All this is in part of the administration’s Medium-Term Revenue Strategy (MTRS) to further strengthen tax-revenue mobilization efforts to over 20% of GDP in the medium term, up from the current 14%.
Nonetheless, one cannot help but question this mostly heavy-handed approach to expanding revenues through tax collection. Kenya is currently in a precarious economic state, where it is just managing to laborious eke out economic growth numbers, amidst a storm of various monetary shortcomings. The exchange rate continues to disfavor the Kenyan currency, leading to reduced foreign currency reserves and a burgeoning debt (the amount of external debt owed increases as the domestic currency continues to weaken).
Gains and Losses.
The Finance Bill of 2024 does little to cushion Kenyans against the current predicament. In some cases, it even opens up a potential can of worms.
The Bill scraps a 15% tax rebate issued to housing developers constructing at least 100 affordable housing units annually, which had been initially introduced in 2017 by the previous administration under The Big Four Agenda. Doing so undoes potential gains for the Affordable Housing Scheme which could have helped in the faster development of affordable housing units. Or in other words, a step backwards.
The Bill also introduces a reimbursement of expenses on personal property accrued by public officers in their performance of duties. The exact jurisdiction of meaning for ‘personal property’ is unclear and it could lead to increased misappropriation of public funds as public officers could exploit the provision to declare unfounded and unsubstantiated expenses.
However, the Bill also introduces a withholding tax from public entities (government-related agencies, ministries, and organizations) on gross payment to suppliers, at a rate of 3% on resident suppliers and 5% on non-resident suppliers. So a win, I guess?
The Bill also introduces tax exemptions to pension benefits paid to early retirees (those who retired early due to health-related ailments). Withdrawals on pension funds have also been made accessible after 20 years after registering for the fund.
Furthermore, the Bill also introduces tax abandonment provisions for individuals and business entities undergoing periods of financial instability and may struggle to pay taxes. The Bill seeks to strengthen the mechanisms of the Alternative Dispute Resolution framework to allow for the creation of an effective and fair resolution of tax-related matters.
Hope for the Best, Prepare for the Worst
Despite the government seemingly tightening its belt on ramping up its taxation efforts, it still struggles to meet taxation targets. The numbers speak for themselves;
The Kenya Revenue Authority (KRA) managed to collect a total of Ksh 2.166 trillion over the entirety of the 2022/23 financial year, vis-à-vis a target of Ksh 2.273 trillion, hence missing its targeted revenue by about Ksh 107 billion.
The Finance Act of 2023 is playing its part, especially given that it was the first act in a slew of the government’s move to expand its tax regime. The revenue collection for 2023/24 has shrunk even further and is expected to miss its target by up to Ksh 300 billion. In the eight-month period lasting from July 2023 to February 2024, KRA only managed to collect Ksh 1.37 trillion, hence needing to collect a further Ksh 1.12 trillion over a four-month period for it to meet its target of Ksh 2.49 trillion. An insurmountable task, to say the least.
Income Tax, VAT, Excise Duty, and Import Customs were the biggest contributors to the reduced projections on revenue collection. It should come as no surprise as taxation on these sectors were the biggest targets of the Finance Act. Income tax missed its collection target by Ksh 35.5 billion and import duties fell by 1.6%. Despite the measures to improve the country’s tax regime and widen the bracket, the revenue remitted grew by 7.9% over the past year compared to a previous year-on-year average of 13%.
Consequently, the public debt figure continued to increase as the government had to borrow more to cover for its fiscal deficits. The figure grew by a record Ksh 1.62 trillion in the period lasting from June 2022-23, and the government has since borrowed over Ksh 1 trillion in the eight-month period ending in February 2024. The total public debt figure stood at over Ksh 10.2 trillion as of June 2023, with a debt-to-GDP ratio of 70.2%.
All in all, the Kenyan government seems to continually overestimate its ability to raise revenue through taxes, a situation that is not alleviated by its continued commitment to an oppressive tax mandate. Kenyan citizens have been feeling the pinch causing them to cut costs on their daily living routines, leading to reduced consumption and hence reduced revenue collected through avenues such as Value Added Tax and Excise Duties.
Employers also pass on the burden of increased taxation to their labor force, reducing salaries and laying off workers which in turn, reduces the amount of revenue collected through Income and Withholding Tax. Foreign investors are also repulsed by the current tax regime, and they are less likely to invest their resources and capital into the country.
Time will tell whether the government’s actions can be vindicated. However, a simple extrapolation from the returns by the Finance Act of 2023 demonstrates that implementing stringent tax measures only leads to reduced collection of revenues. The Finance Act of 2024 promises to generate even worse results. Experts have been quick to warn the government against implementing tougher taxation measures, a warning that has fallen on deaf ears. Why the obsession with squeezing every last dollar from the Kenyan citizenry, one may wonder?
In my opinion, these taxation measures have IMF handwriting written all over them. Kenya recently received a huge loan package of Ksh 150 billion to help offset a Eurobond loan that hung over its head, much like the sword of Damocles. Expanding the scope of the tax regime is a primary part of the Structural Adjustment Programs that the IMF recommends to countries in debt distress, of which Kenya is an example. The Kenyan government will prioritize toeing the line provided by the IMF as that improves its credibility score, allowing it to stay in Washington’s good books to receive more financial and economic incentives in the future.
Read More: How the IMF is Aggravating Kenya’s Debt Situation.
The cost of these measures is passed down to the taxpayer. The burden of a struggling economy is placed upon the Kenyan citizens, as the government continually shrouds them with the delusion that they are responsible for the unstable fiscal and monetary situation being witnessed in the country. All because they do not contribute enough in their taxes.
The government has doubled down on its spending habits despite calls to reduce its wage bill as a way of stabilizing the financial climate in the country. For example, the government aims to collect Ksh 2.948 trillion in the 2024/25 financial year. However, it retains a recurrent expenditure budget of Ksh 2.859 trillion, meaning that the vast majority of the funds amassed through revenue collection are diverted into cyclical expenses! Let’s not even get started with looking into the details of the budget estimates as it gets quite disheartening.
By taxing the people the government ends up collecting less, quite ironically. If left unchecked, this can lead to an uncontrollable death spiral as the government seeks to reach deeper into the pockets of its citizens who will only continue to have less to contribute should the current measures be extrapolated. Should the Dominos start to fall, things could get out of hand, fast.
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