The World Bank has warned Kenya against tax increases in the coming fiscal year, saying it may end up slowing down economic activity and growth.
In its latest Kenya Economic Update (KEU), the bank said at the current rates, tax revenues have already recorded a modest growth, but at the expense of economic activity, resulting in “sluggish growth in employment and household consumption”.
The lender said the ongoing tax reforms, coupled with the already high electricity tariffs and tight monetary policy, will dampen private consumption – which is the main driver of domestic demand in Kenya.
A slowdown in domestic demand will mean the government will collect less revenue from value-added taxes (VAT) and income tax, which currently account for about 76 percent of all ordinary revenues in the country.
The Finance Bill 2023 proposes a myriad of tax increments and new taxes in efforts to increase revenue collection and contain fiscal deficit.
Among the new taxes are a 10 percent excise duty on mobile phones, five percent tax on a number of cosmetic products including wigs and artificial beards, and a 3 percent turnover tax on small enterprises with revenues of between Ksh500,000 ($3,590) to Ksh1 million ($7,181).
The Bill also seeks to double value-added tax on petroleum products to 16 percent and raise excise tax on mobile money transfers from the current 12 percent to 15 percent.
It also seeks to introduce a mandatory contribution of three percent of a Kenyan’s salary to the National Housing Development Fund.
Leaders of the opposition have warned that they will rally their supporters to take to the streets in protest of these tax increments should they pass parliament, but World Bank warns such protests could further worsen the country’s economic outlook and impede growth.
“Furthermore, a rise in political tensions could lead to unexpected fiscal expansion (due to failure to achieve the projected fiscal consolidation), aggravating debt vulnerabilities and crowding out private investments.”
At the current trajectory, without any disruptions, World Bank expects Kenya’s GDP to grow at five percent, 0.2 percentage points higher than last year’s increase, signalling an economic rebound to pre-pandemic levels.
It also anticipates that inflation will stabilise at 7.8 percent, before dropping to 5.8 percent next year, while the current account deficit will slim by 0.1 percent on increased exports.
"The purchasing power of households in the medium term will be negatively affected by the proposed tax measures in the Finance Bill 2023," the World Bank has said.
This is likely to add to the current inflationary pressures owing to an increase in prices of basic commodities, especially food and fuel, and also signals tougher times ahead for businesses dealing with reduced demand on account of the high cost of goods.
In its 27th Kenya Economic Update, the bank said the tax reforms, including raising value-added tax (VAT) on fuel from eight to the standard 16 percent, will dampen growth in the near term.
“Private consumption is expected to remain on a robust growth path, although it will be dampened in the near term by ... ongoing tax reforms to boost revenue and sustain fiscal consolidation,” said the bank.
The report, which is produced twice a year, assesses recent economic and social developments and prospects in the country.
The economy is projected to grow faster at five percent this year, compared with 4.8 percent last year.
This growth, however, is likely to be dampened by the proposed taxes, which will eat into the disposable income of most Kenyans, especially those in formal employment.
The government has introduced sweeping tax measures aimed at helping Kenya reduce its borrowing, with risk of debt distress rising to high from moderate.
“The fiscal consolidation that the government is planning is crucial. It is important for Kenya to generate the surplus that it is planning,” said Aghassi Mkrtchyan, a senior economist at the World Bank.
Other than increasing VAT on fuel, the Finance Bill, 2023 also proposes a pay-as-you-earn tax paid by employees with a gross salary of over Ksh500,000 to 35 percent from the current 30 per cent and 15 percent withholding tax on digital content creators.
Those selling cryptocurrencies and non-fungible tokens will be expected to pay a digital asset tax.
There will be excise duty on mobile money transactions and its introduction on beauty products such as fake hair, wigs and nails.
Kenya’s decision to increase the tax revenue has been hailed by the International Monetary Fund (IMF), with the country being rewarded with an additional Ksh162.5 billion under the 38-month programme.
“The authorities have responded promptly to the challenges. On the fiscal side, government spending execution has been prudent this fiscal year, consistent with available resources,” said Haimanot Teferra who led the IMF mission to Kenya.