Taxation is essential for governments to fund essential services, maintain infrastructure and drive development. Adam Smith's four canons of taxation—equity, certainty, convenience, and efficiency, as outlined in the book “The Wealth of Nations” in 1776, remain benchmarks for evaluating tax systems.
The Kenyan government has introduced many policies to create a more predictable and efficient tax environment. Notable examples are the National Tax Policy and the Medium-Term Revenue Strategy, which aim to provide a comprehensive framework for reforms.
This article evaluates these policies and other recent tax reforms in Kenya and their alignment with the principles of taxation.
The principle of equity demands that taxation be levied according to one’s ability to pay, ensuring a fair distribution of the tax burden.
Thus, higher-income earners should contribute a greater share of taxes than those with lower incomes. However, it is arguable whether some recent tax changes in Kenya have disproportionately impacted lower and middle-income groups, further widening socioeconomic disparities.
For instance, the Finance Act, 2023, doubled the Value Added Tax on fuel from 8 percent to 16 percent, raising transportation and commodity costs and inflating the cost of living. Given fuel’s centrality across sectors, this tax increase heavily burdens low-income households, who already spend a higher percentage of their income on essentials.
Certainty emphasises that taxpayers must clearly understand their tax obligations – how much they owe, when it is due, and the consequences of non-compliance. Predictability fosters an environment conducive to compliance and long-term economic planning.
Unfortunately, some of the recent tax measures have been marked by abrupt changes, often implemented with little notice.
Whilst most of the employee tax-related measures were welcome, the peculiar date of commencement of the Act negatively impacted taxpayers in their December 2024 payroll processing. Such unpredictability and uncertainty undermine compliance even where there is a genuine commitment to honour tax obligations and additional handicaps on business planning.
Convenience asserts that tax systems and policies should be straightforward, enabling taxpayers to comply with ease. Kenya has made welcome strides in tax compliance through the digitisation of tax systems, notably the Kenya Revenue Authority's (“KRA”) iTax platform introduced in 2015.
However, the transition to iTax, coupled with other technological advancements such as the roll out of the electronic Tax Invoice Management System (“eTIMS”), has in some instances impeded the filing of returns, access to credits and refunds.
For instance, despite KRA’s best effort to offer various eTIMS solutions, taxpayers engaged in businesses with high volumes of transactions, small traders, as well as those in peculiar business models, continue to grapple with compliance.
Additionally, the rollout of such solutions does not seem to take advantage of the digital divide between those with and those without access and technical proficiency to these systems.
Efficiency requires that tax collection costs should not exceed the revenue generated.
An expensive tax collection system is inefficient and negates revenue benefits. Taxing the untaxed informal sector presents substantial challenges, as registration, monitoring, and collection costs are potentially prohibitive.
Particularly, Kenya's tax base expansion pursuit, such as the imposition of taxes on digital service providers, turnover taxes for small and medium enterprises should be subjected to cost/cost-benefit assessment before introduction.
The National Tax Policy (NTP) is central to Kenya's tax reforms, providing broad guidelines for tax administration and revenue collection. Its primary goal is to create a stable and transparent fiscal environment by broadening the tax base, simplifying compliance, and reducing reliance on sudden tax hikes.
By addressing issues like the taxation of the informal sector and poor tax compliance, the NTP aims to establish a coherent and predictable tax system that supports both local and foreign investment. Complementing the NTP, the Medium-Term Revenue Strategy (MTRS) enhances domestic revenue collection over a specified period.
It focuses on implementing coherent tax reforms across all tax heads to foster equitable revenue mobilisation, improve tax administration efficiency, reduce compliance costs, and support economic growth.
Analysing Kenya’s recent tax reforms through the lens of the principles underpinning taxation reveals a complex and perhaps disjointed landscape across the various tax heads.
While the government’s need for increased revenue to meet developmental goals is understandable, it should not deviate from the fundamental principles of taxation.
In our view, the foundational principles of taxation must remain at the forefront as Kenya continues to reform its fiscal policies and digitise its tax compliance systems in a bid to improve efficiency, increase its tax base, and most importantly, maximise its revenue collection.
The writers are in the tax and legal services, PwC Kenya
