Kenya’s tax regime has been fluid with every year bringing along far-reaching changes to taxation policies through subsequent Finance Bills.
The constant shifts in the taxation regime have been a bother for not only local firms but also foreign investors seeking to have a presence in the country.
The National Tax Policy, therefore, purposes to bring about predictability in taxation affirming certainty on the of taxpayers.
What does the policy entail?
The National Tax Policy outlines guidelines to tackle the stagnation in revenue collection including the expansion of the tax base, embracing international best practices, creating certainty and predictability of tax rates and bases, enhancing tax compliance, promoting investment and reducing tax expenditures or tax incentives.
What will be the key performance indicators of the new policy?
The immediate key indicators of the tax policy successes will be the growth of collections as a share of GDP to 15.3 percent from the 2020/22 baseline figure of 14.9 percent.
Tax revenue to total exchequer revenue is meanwhile expected to come in at 93.6 percent from 92.5 percent by the end of June 2024 with tax revenue as a share of the government budget expected at 72 percent.
Additionally, the VAT compliance gap is set to improve to 35 percent, narrowing from a wider hole of 43 percent in the year ended June 2021.
The number of active taxpayers is expected to rise to 8.2 million persons from 6.1 million while the average refund processing and payment time is set to be cut by nearly half to 60 days from 102 in June 2021.
Some of these KPIs have been underpinned in the 2023 Budget Policy Statement and the 2023 Finance Bill.
Does the policy propose new tax measures?
No, the policy would not be comparable to the Finance Bill which carries new tax proposals but it instead outlines guidelines through which the government will review both current and future taxation measures.
For instance, the policy sets the standard VAT rate at 16 percent indicating that all present and future taxable goods would attract VAT at the base rate with the government having ended preferential rates of tax to ensure equity in taxation.
The Policy nevertheless contains provisions allowing for preferential rates of tax and other incentives with justifications.
It highlights guidelines to be used in addressing challenges facing the tax system, including difficulties in expanding the tax base, tax incentives, low tax compliance and complexities in taxing the digital economy.
Who will be hit the hardest in the new tax policy?
Micro, small and medium enterprises will be largely targeted in measures to expand the country’s tax base with the government eyeing them to boost revenue collection.
The government, for instance, targets to increase the number of Kenya Revenue Authority agents in big towns while additional provisions explore alternatives, including the appointment of tax collection agents.
Farmers and informal sector players will be obligated to register with sub-sector associations and cooperative societies while the national and county governments will collaborate on the exchange of information on taxpayers.
Tax incentives
The regime governing tax incentives or tax expenditures which come in the form of exemptions and preferential tax rates is set for an overhaul with new guidelines set to inform the granting of incentives.
Tax incentives will be reviewed every five years while sector players who benefit will be required to provide statistical data on their impact on the growth of their businesses.
Increasing tax compliance
Measures to enhance tax compliance will be concentrated in initiatives by the revenue administrator and government.
The National Treasury is, for instance, seeking to integrate tax and custom administration systems with relevant government agencies and third-party systems.
Already the KRA has hooked up its system with those of players in the online gaming industry activating real-time tax payment and assessment while proposals contained in the 2023 Finance Bill have outlined amendments for time-bound tax payment, including accounting for withholding tax on rental income by landlords within a 24-hour window.
The authorities are also expected to strengthen the mechanism of educating different segments of taxpayers on changes to tax laws and procedures.
PAYE
Pay-as-you-earn (Paye) tax bands will be reviewed and designed to provide for progressive taxation.
Personal, mortgage and insurance reliefs will come up for review every five years as will all financial limits and tax bands, including adjustments for inflation.
Predictability in tax rates
Tax laws will be reviewed every five years, aligning them with other government policies to ensure the predictability and sustainability of the rates of tax.
Authorities will be expected to undertake stakeholder investment during the review of tax laws and the assessment of the impact of proposed changes on tax revenue and investment.
