Kenya’s Treasury has recently published the draft Medium-Term Revenue Strategy (the MTRS) for the financial years 2024-2025 and 2026-2027. The overarching theme of this MTRS is to reverse the declining government revenue as a share of Gross Domestic Product (GDP) which has been the case since the financial year 2013-2014 to date. In a bid to reverse this decline, the government’s focus for the medium-term shall be largely on tax reforms hinging on:
improving efficiency in revenue administration;
identification of loopholes for tax evasion; and
enhancing taxpayer compliance.
Additional themes in the MTRS include the mobilisation of additional resources to finance the development agenda as guided by the Government’s Bottom-Up Economic Transformation Agenda (BETA) by increasing investment in the following sectors deemed to have the largest impact and linkages to Kenya’s economy:
agricultural transformation and inclusive growth;
micro, small and medium enterprise economy;
housing and settlement;
healthcare; and
digital superhighway and creative industry.
Tax Policy Measures
Income Tax
Income taxes formed 46.1% of the total tax revenue of the government for the financial year 2022-2023, being the largest share of tax revenue. The highlights of the proposed reforms include:
reduction of the corporate tax rate from 30% to 25% and harmonising the application of this rate to cover all companies over the medium term;
downward revision of the non-resident withholding tax rate;
registration of property agents and mapping of properties to enhance compliance of residential rental income taxes;
review of the corporate and personal income tax exemption regimes;
reintroduction of the minimum tax provisions;
review of the personal income tax bands;
exemption of pension withdrawals; and
review of existing tax reliefs on personal income.
Value Added Tax (VAT)
The MTRS has identified that underperformance of revenue collection of VAT is as a result of policy and compliance gaps in the VAT system. The proposed reforms include:
upward review of the VAT registration threshold which is currently at KES 5,000,000;
limiting zero rate VAT to exports;
removal of all VAT exemptions except for unprocessed goods;
downward review of the VAT rate; and
review of input tax apportionment formula.
The MTRS also seeks to loop in sectors which have in the past enjoyed general VAT exemptions including:
Education Sector: imposition of VAT on extra services provided by schools but are not directly related to education.
Insurance Sector: imposition of VAT on all insurance services vis-à-vis the current exemption on all insurance services.
Excise Duty.
As has been the norm every financial year, the government has upwardly reviewed the excise duty chargeable of various products with negative externalities. The MTRS focuses on the increase of excise duty on petroleum products, coal, alcoholic spirits/high alcohol content products, tobacco products and non-alcoholic sugar-based beverages based on sugar content.
Import Duty
At present the applicable customs rates are 0%, 10%, 25% and 35%. The MTRS seeks to have Kenya request the other countries of the East African Community for duty free entry of all primary raw materials and capital goods and a uniform duty ranging between 15% and 20% on all other imported goods.
Miscellaneous Tax and Revenue Collection Measures
Tax Measure | Proposed Reform | Outcome |
Carbon Tax, Green Incentives and Motor Vehicle Circulation Tax | gradual increase in excise taxes for vehicles that use fossil fuels; evaluation of introducing excise on other heavy machinery; downward review of taxes on electric vehicles; and imposition of an annual tax on motor vehicle owners. | The outcome of these proposed reforms will see an upward spike in the capital cost of mobility due to the globally low market penetration of electric vehicles. Additionally, the operational cost of mobility (regardless of the vehicle) is likely to increase in the medium term due to the proposed increase in excise taxes on petroleum products and the current high cost of electricity. Inversely, demand for electricity to power mobility and heavy machinery will increase providing incentives to independent power producers, power storage solution providers. |
Betting and Gaming Taxes | upward review of excise taxes; and government integration with telecommunication companies to facilitate real time transmission of data to the Kenya Revenue Authority. | Increased scrutiny on and cost of compliance by participants in the betting and gaming industry. |
Zooming in on Hard to Tax Sectors
The MTRS has identified that the hard to tax sectors in the Kenyan economy are characterised by informality, limited record keeping and inadequate regulation. The major sectors identified include:
The Informal Sector
The MTRS does not define what constitutes the informal sector however the challenge posed by this sub-sector is the lack of visibility of taxpayers’ transactions. The proposed reforms to overcome this challenge include:
use of information technology and data sharing with county governments;
develop a simplified compliance regime to tax the players in this sector through cooperative societies/associations;
use of customs data for businesses that deal in imported merchandise;
introduction of presumptive taxes based on sector and location;
use of mobile applications to simplify tax payments;
amendment of the Data Protection Act to exempt the Kenya Revenue Authority from the provisions of this Act in order to access information; and
introduction of a creditable withholding tax on all imports.
The Digital Sector
The MTRS has defined the digital sector as the parts of the economy where value creation occurs within information technology. Kenya has in the past decade, grappled with consolidating a wide enough and identifiable tax base within the digital sector. The proposed taxation reforms in this sector will include:
the use of third-party information from banks and telecommunication companies to identify transactions within the sector;
taxpayer education; and
review of the digital service tax regime to include persons tax resident in Kenya.
The Agriculture Sector
The MTRS identifies that the agriculture sector contributes highly to Kenya’s GDP and employment despite having low tax revenue contribution. In order to address revenue collection, the government will introduce a withholding tax on agricultural produce delivered to cooperatives or other organised groups.
Conclusion and Analysis
Based on our analysis of the MTRS, Kenya’s successive budget policies and financial/business laws will be heavily focused towards formalising business operations, integration of data collected by county governments with the national government, integration of telco data with the Kenya Revenue Authority and incentives towards investment in the governments key five (5) sectors in a bid to boost revenue collection by the government as a percentage of GDP.
Comments, inputs and proposals for the improvement of the MTRS should be forwarded to the Cabinet Secretary - Treasury by 6 October 2023.
Africa Law Partners is willing to engage you (clients, partners, professional colleagues) in putting together a memorandum to be forwarded to the Cabinet Secretary – Treasury, by the abovementioned deadline.
For further information please contact Samuel Kisuu or your relationship partner at Africa Law Partners.