The Cabinet Secretary of Kenya’s National Treasury submitted the Finance Bill 2023 to the National Assembly for discussion and consideration for enactment into the Finance Act 2023.
The Government is facing a difficult trade-off in steering the economy through the current global and domestic turbulence and supporting inclusive and sustainable economic growth.
The country has been hit by multiple shocks, including drought, devaluation of the Kenyan shilling, a sharp increase in energy and food prices as well as rapidly rising borrowing costs. The Government has continued with its policy of ensuring fiscal stability through revenue mobilisation.
The overarching themes of the Finance Bill appear to be similar to the previous Government. The three broad themes anchored in the Finance Bill include:
- Broadening of the tax base through bringing more Kenyans into the ambit of tax; – Deepening of the tax base through an increase of tax rates; and,
- Real-time collections of taxes.
Broadening of the tax base through bringing more Kenyans into the ambit of tax
The Government has continued to ensure that more Kenyans are mobilised into the tax-paying bracket.
This is witnessed by the proposed introduction of new taxes such as a digital asset tax that would be applicable where a person transfers cryptocurrencies at a rate of three per cent and the introduction of a withholding tax on digital content monetization that would apply to content creators at a rate of 15%.
Exports and investment promotion levy was proposed at the rate of 10% (of the Customs value) which will be applicable on certain imported goods specified.
“The main challenge of the digital asset tax is the determination of whether income arising from digital asset activities is accrued or derived in Kenya. Income arising from digital assets can be accrued or derived outside Kenya and bringing such related income to tax in Kenya will be challenging. This has been a consistent challenge when taxing the digital economy,” Edna Gitachu, Associate Director and Tax Policy Lead.
Whereas there is a need to increase revenue collections, the Government should endeavour to strike a balance between innovative revenue measures and increasing the effective tax rate.
Deepening of the tax base through the increase in tax rates
In a bid to increase revenue collection, the Government has increased the rates of various tax heads such as Value Added Tax (“VAT”) on petroleum products, which has been increased from 8% to 16%. A new Pay As You Earn bracket of 35% has been introduced for people earning more than KES 500,000 and Excise Duty on betting has been increased from 7.5% to 20%.
“The Finance Bill 2023 proposes to double the VAT on petroleum and petroleum-related products from the current 8% to 16% with effect from 1 July 2023. The proposal to charge VAT on petroleum and petroleum-related products was first conceptualized in 2013 in the VAT Act, 2013. The doubling of the VAT rate may increase the costs of living owing to Kenya’s reliance on petroleum in the industrial and homestead process,” Job Kabochi, Partner, Indirect Tax Services.
Increasing tax rates may not automatically result in a proportionate increase in revenue collections. In most cases, consumers tend to adjust their spending behaviour which may not result in a proportionate increase in revenues.
Some of the tax rate increases affect items that play a critical role in the economy e.g. petroleum products and the Government has in the past adopted a cautious approach when increasing the tax rate for such essential goods. This trend may continue after the appropriate stakeholder engagement.
Realtime collections of taxes
With the liquidity crunch the Government has been facing recently, there has been a push to collect taxes daily. The pioneers of the real-time collections of taxes were the betting companies. Since the businesses of most betting companies are automated and are on a cash basis, collecting taxes on a real-time basis is largely straightforward.
Under the Finance Bill, the Government proposed the inclusion of other transaction taxes collection on a real-time basis. A prominent example is the introduction of withholding tax on rental income now imposed on property agents.
The requirement to deduct and remit the tax within twenty-four hours after making the deduction places an impractical compliance burden on the taxpayer, contrary to the design of a fair tax code which should not impose punitive compliance burdens on taxpayers.
Real-time payment of taxes should be applied only to automated transactions where the payments and/or income are received regularly on an automated platform, thus allowing for real-time remittance of taxes.
Government should revisit this issue of real-time collections of taxes and have clear criteria as to what transactions should be subjected to real-time collections of taxes.
“The Finance Bill 2023 is one of the most extensive Finance Bill in the recent past. It has attempted to play a delicate balance between the Government’s objective of increasing tax collections vis-a-vis cushioning the taxpayer against the prevailing high cost of living,” Titus Mukora, Partner/Director, Tax & Transfer Pricing.
