Kenya controversial tax law back to parliament

Saturday June 03 2023
psc riots

Members of Public Service Sector Unions participate in a procession along a streets in Nairobi, Kenya, protesting against the proposed punitive taxes by the government on May 29,2023. PHOTO | EVANS HABIL | NMG


Kenya’s controversial Finance Bill 2023 is set to be tabled in parliament for the second reading on June 8 amid stiff opposition by citizens, businesses, religious leaders and opposition lawmakers.

A nine-day public participation exercise yielded a mix of views from the public.

The National Treasury is banking on the proposed taxes, including 16 percent value added tax (VAT) on fuel and 10 percent excise duty on imported cellular phones to raise additional tax revenues amounting to Ksh289.3 billion ($2.09 billion) in the 2023/2024 fiscal year.

But there is a public outcry over the prospects of worsening the high cost of living in the country and stifling economic recovery.
It is feared that the tax proposals have the potential harmful effects of destroying millions of dollars’ worth of investments, killing small businesses, increasing transport and production costs, increasing youth unemployment and reducing household savings through reduction of disposable incomes.

Read: Ruto admits Kenya struggling with debt expenses

Multiple shocker


The Kenya Private Sector Alliance (Kepsa), an umbrella body of private businesses, said over 100,000 jobs could be on the line as a result of the punitive taxation law, while the Kenya Association of Manufacturers warned that the country could lose about Ksh150 billion ($1.08 billion) in capital flight.

Tax experts describe the tax proposals as “significant” to impact economic recovery, amid multiple shocks such as rising cost of living, depreciating shilling, high fuel and electricity prices and the country’s debt vulnerabilities.

According to the Parliamentary Budget Office, the country is facing an increasingly vulnerable debt position underpinned by undersubscription of domestic bond issuance, constrained access to international capital markets and a downgraded credit rating by global rating agencies, which has increased the country’s risk profile.

As a result, the William Ruto administration is weighing options of funding its expanded budget of Ksh3.6 trillion ($26.08 billion) for the 2023/2024 fiscal year, where the government will spend Ksh775.14 billion ($5.61 billion) in interest payments on debt and Ksh850.1 billion ($6.16 billion) in principal debt redemptions.

Caught between a rock and a hard place, the government has proposed to subject petroleum and petroleum products to a VAT standard rate of 16 percent, up from the current eight percent, a move likely to significantly impact prices in the transport sector and consequently trigger a price jump in other sectors of the economy such as manufacturing and agriculture.

“We expect this proposal to have a significant adverse effect on the cost of living taking into consideration Kenya’s dependency on fossil fuel and the already high global oil prices,” said consultancy firm PwC in a note.

The bill also proposes that employees contribute three percent of their basic monthly pay to the National Housing Development Fund, an amount to be matched by the employer's contribution but capped at Ksh5,000 ($36.23).

Read: IMF supports Ruto revenue plan

According to tax experts, the introduction of additional deductions from employee emoluments will further reduce take-home pay and overburden employers with increased cost of employment and may lead to loss of current or potential employment opportunities.

Other contentious proposals include a 15 percent withholding tax for social media influencers and content creators, which is likely to discourage the youth from venturing into content creation as an avenue of employment, and three percent turnover tax on “hustler” businesses with Ksh1,370 ($9.92) sales per day, which will start paying Ksh15,000 ($108.69) tax per year.

A 20 percent excise duty on loans from digital lenders will make mobile loans expensive, as it increases fees charged on micro loans, while five percent excise duty on human hair, wigs, false beards, eyebrows and eyelashes and artificial nails will lead to reduced sales and profit margins in the beauty industry.

The bill proposes to introduce 16 percent VAT on the insurance compensation and will reduce the amount of money policyholders receive as compensation from insurance companies.

It further proposes a requirement for taxpayers to deposit with the Commissioner 20 percent of the tax in dispute or security equivalent to 20 percent of the disputed tax before they file an appeal to the High Court against a decision of the Tax Appeals Tribunal. This is seen as a limitation of taxpayers’ access to justice and their right of appeal as a party unable to make the payment within the tight appeal timelines would be forced to forgo their right to appeal.

A new pay-as-you-earn tax band is coming, with a tax rate of 35 percent on employment income above Ksh6 million ($43,478.26) per annum.

The Bill proposes to introduce Digital Asset Tax to be paid on income derived from the transfer or exchange of digital assets at a proposed rate of three percent.

Read: Ruto pledges wealth tax on tycoons to fix budget

On the other hand, it proposes to scrap 16 percent VAT on aircraft and helicopters, which is seen to benefit the rich.

The government is to increase ordinary revenues by 17 percent to Ksh2.57 trillion ($18.62 billion) from Ksh2.19 trillion ($15.86 billion). The PBO argues that this projection will be unattainable largely due to the risk of court challenges to some of the proposed measures.

The National Treasury has been facing arduous tasks to craft a recovery plan for an ailing economy through a fiscal consolidation process that neither overburden taxpayers nor curtails further production even as pressure mounts on the government to reduce the high cost of living triggered by rising food and fuel prices.

The economy slumped to a 4.8 percent growth last year from 7.5 percent growth in 2021.

The government hopes to lift the economy to a 6.1 percent growth in 2023 through the Bottom-Up Economic Transformation model.

The parliamentary budget team has however faulted the government’s plan to cut spending and raising taxes, saying it will prove counterproductive largely because increasing taxes would overburden taxpayers and expenditure cuts will choke growth in output.