Kenya tax plan will hurt business and dim economic recovery - Economists warn

Financial analysts are warning that the Kenya Finance Bill 2024 that was tabled before the National Assembly this week could impact economic recovery if implemented without amending a raft of tax proposals.

The bill introduces, among others, a motor vehicle tax, a minimum top-up tax, a significant economic presence tax, and amendments aimed at enhancing revenue collection and tax compliance.

Economists warn that global shocks such as the geopolitical tensions in Europe and the Middle East, coupled with domestic challenges such as high public debt, could complicate the country’s efforts to meet its financial target of Ksh3.9 trillion ($29.77 billion) for the financial year 2024/25.

“When the economy is depressed and it’s in recession, you don’t go on taxing people. You wait until the economy recovers, then you can start taxing,” said Billow Kerrow, a former senator for Mandera.

“You look for better ways of growing the economy. In fact, you give people incentives to go into business and production so that you can get more revenue and create employment. But when you start asking for money when the economy is down, businesses will move to another place.”

The bill proposes that items that had been zero-rated for VAT would be subject to VAT at the standard rate, currently 16 percent. One of those is bread, whose price would increase by at least Ksh10 ($0.076). Others are electric bikes and buses, and solar and lithium-ion batteries.

The incentives for the e-mobility sector were introduced in 2023 to promote green energy use, leading to increased uptake, with many start-ups setting up in Kenya.

But, in less than a year, even before the tax effect is felt, the Finance Bill 2024 has reversed those gains.

“I was hoping that all the things that were enacted in the Finance Act 2023 that have come to harm the economy and livelihood will be corrected in the 2024 Bill, but that is not the case,” said Diana Gichengo, Executive Director at the Institute for Social Accountability.

“Farmers, the government will be coming for you. Farmers are being targeted. Businesses in the digital market will be targeted. You who own cars and are online, the government will be coming for you again.”

There has been an increased use of the internet and social media to advertise alcoholic beverages, betting, gaming, lotteries, and prize competitions. The bill proposes an excise duty of 15 percent on fees charged for internet and social media advertisements relating to alcoholic beverages, betting, gaming, lotteries, and prize competitions.

The bill targets increasing excise duty from 15 percent to 20 percent on fees charged for money transfer services offered by banks, money transfer agencies, other financial service providers, and cellular phone service providers.

“At what cost? Most people who are trying to get employment—Uber drivers, digital creators—are not going to make it,” said Ms. Gichengo.

Economists warn that whereas the proposal is to introduce the tax via an amendment to the Income Tax Act, the motor vehicle tax itself falls short of what ideally makes it eligible for classification as an income tax.

The bill also proposes to subject to withholding tax all payments made to a resident person with respect to management or professional fees or with respect to a contractual fee without any regard to the gross amount payable.

Implying that all payments for management, professional, or contractual fees shall be subject to withholding tax.

However, this is likely to increase the compliance burden for taxpayers, especially those who make numerous small payments below the current threshold.

The bill proposes to exclude a number of products from excise duty where the products originate from East Africa Community Partner States that meet the East African Community Rules of Origin:

The products include imported cartons, boxes, and cases of corrugated paper or paper board; imported folding cartons, boxes, and cases of non-corrugated paper or paper board; imported skillets; and free-hinge lid packets.

Other products include imported eggs, onions, potatoes, potato crisps, and potato chips.

It also proposes to exclude imported cement clinkers from excise duty and introduce excise duty on all articles of plastic. Previously, only imported articles of plastic were subject to excise duty.