Following the loss of over 70,000 jobs over the last 12 months attributable to the Finance Act, 2023, MPs are now advocating for significant changes in the country’s tax system.
One of the key recommendations contained in the National Tax Policy (NTP) by the National Assembly's Finance Committee is the need for mandatory impact assessments of newly proposed taxes prior to implementation.
This is coming at a time when the measures aimed at improving revenue collection introduced by the Finance Act seem to not be achieving the intended effects. The Kenya Revenue Authority (KRA) missed its 2023/24 FY Quarter 1 (July-September) revenue target (Ksh665.9 billion) by a significant Ksh79 billion.
A report by the Parliamentary Budget Office (PBO) further predicted a shortfall of about Ksh300 billion for the financial year if the recorded trend persists.
“[...] if the performance rate follows the same trend for the rest of the fiscal year, then the annual target is likely to be missed by approximately Sh300 billion,” the report reads in part.
Some of the recommendations by the committee are summarised below:
Income Tax Cap
- MPs propose a cap on the amount of personal income that can be taxed to protect disposable income and purchasing power.
- Concerns raised by the Institute of Certified Public Accountants regarding the lack of a framework for this.
Reversal of Fuel VAT
- Five months after imposing a 16% VAT on fuel, the National Assembly recommends reversing the decision.
- The move responds to public concerns over the unprecedented increase in the price of fuel. Super Petrol, Diesel & Kerosene are currently retailing at Ksh217.36, Ksh203.47 and Ksh203.06 respectively.
- This is as compared to the Ksh182.04, Ksh167.28, Ksh161.48 pump prices for super petrol, diesel and kerosene respectively in June 2023 before VAT was doubled from 8%.
Reforms in VAT Rates
- Parliament calls for multiple VAT rates to provide flexibility and cushion the economy against global trends and price increases.
- Emphasis on granting VAT exemptions based on incentivizing investment and protecting citizens from economic shocks.
Exemption for Local Manufacturers
- The committee suggests exempting local manufacturers from new levies for up to five years to encourage sector growth.
- Calls for any new levy to undergo a comprehensive economic impact assessment before approval or implementation.
Efficient Tax Refund Structure
- Committee recommends a new structure to ensure timely settlement of approved tax refunds within six months.
ICPAK Call for Income Tax Cap
A submission by the Institute of Certified Public Accountants of Kenya (ICPAK) earlier in October 2023 called for maximum tax bands for personal incomes to curb over-taxation.
Some of the issues discussed in the ICPAK submission include;
Absence of Comprehensive Tax Policy
- Kenya operates without a comprehensive tax policy, resulting in the frequent imposition of new taxes on employees and businesses.
- Without a comprehensive tax policy, tax administration legislation is determined by those in authority, creating uncertainty in the business environment. The risks posed by this were acknowledged by the committee.
- ICPAK stressed the need to assess the impact of taxation on household disposable income, savings, and investment.
- The Institute argued that over-taxation may lead to capital flight as individuals and firms seek alternative investment locations.
Proposal for a Single Identifier to Expand Tax Base
- ICPAK suggested the development of a framework for a single identifier for individuals from birth to death to facilitate automatic inclusion in the tax bracket upon turning 18, expanding the tax base.
- Kenya relies on a small pool of taxpayers, ICPAK submitted, with approximately just 8% of the population contributing to income tax.
- A single identifier was proposed as a tool for easing tracking and enabling long-term strategic policy decisions based on expected population and economic activity.