The macro-environment for businesses operating in Kenya is often characterised by a chaotic fiscal cycle and systemic flaws that force them to endure uncertainty. This exemplifies an unknown reality. The National Fiscal Plan is being treated as a plan for the next planting season, where the tax framework is sown, uprooted, and re-sown annually.
Businesses optimistically revise their forecasts every July, the start of a new national financial year in Kenya. Annually, in February, the National Treasury (Treasury) releases a Budget Policy Statement (BPS) that promises a stable annual plan for Kenya’s economy. However, every June, when the annual Finance Bill is tabled in the National Assembly, businesses are left completely in the dark, despite elaborate public participation forums. Upon enactment, the Finance Act acts like a wrecking ball to those promises in the BPS, because some tax law amendments, such as shifting essential commodities from zero-rated to VAT-exempt, trigger cash flow strain and escalate production costs. The policy whiplash, however, continues throughout the fiscal year. In August this year, the Kenya Revenue Authority (KRA) increased the customs benchmark on consolidated cargo from Sh2.5 million to Sh3.2 million. This sparked protests by traders across Nairobi, and it took the President’s intervention to issue an Executive Order lowering the rate to Sh2 million.
This turbulent fiscal cycle is entirely unsustainable because businesses and investors cannot operate on a hand-to-mouth seasonal horizon. They need long-term predictability, a basic requirement that our volatile annual tax cycle completely breaks.
Pursuant to the Public Finance Management (PFM) Act, Treasury is mandated to develop and implement a long-term policy that drives our tax laws, not the other way round. The BPS provides medium-term macroeconomic and fiscal projections that give businesses a roadmap to plan and invest. Additionally, Article 201 of our Constitution demands openness, accountability, and meaningful public participation in public finance.
However, Treasury’s promises of stability and gradual growth are rapidly extinguished once the Finance Bill is tabled in the National Assembly. In recent years, the Finance Bill has evolved into an annual emergency tool to block short-term revenue gaps, thereby affecting Kenya’s mid-term and long-term fiscal plan.
To break this exhausting and stressful fiscal cycle, the national tax policies should be aligned to the lifetime of investments and not short-term budget cycles. Locking in the major tax anchors, such as VAT and Corporate Income Tax, for fixed three-year blocks could have a significant impact on the businesses’ macro-environment. The finance bills could be tabled for the purposes of advancing cyclical administrative amendments to existing tax laws that are more predictable for businesses and investors.
Furthermore, our fiscal regime can pivot from short-term cash extraction to driving sustainable, long-term economic growth. Instead of constantly straining the current tax base to seal budgetary deficits, the government can expand the tax base by incentivising not only the informal sector with tax reliefs and policies that enhance access to affordable credit facilities that will encourage them to transition into formal tax, but also investments in industries and sectors such as green energy and local manufacturing. This approach shifts the public perception of the government from an aggressive tax collector to an active partner in sustainable business growth.
Moreover, embedding clear transition provisions in the tax laws being amended promotes a seamless transition for KRA, other government entities that support business activities in Kenya, such as the Business Registration Services, and the affected tax base. The rollout of the electronic Tax Invoice Management System (eTIMS) had a rushed timeline that negatively affected businesses. They panicked over the looming deadlines and tackled system downtimes and complex software configurations. Mandatory transition provisions in our tax laws and tax amendment laws would enhance predictability in the business landscape by providing businesses a predictable window to make the necessary adjustments to their business infrastructure and pricing models.
Kenya’s competitive advantage is often overshadowed by the unpredictability of the finance bills that evolve annually. It is imperative that the national fiscal policy is not treated as an annual gamble. This will help eradicate anxiety amongst taxpayers and unlock long-term private sector investment.
The writer is an Advocate of the High Court of Kenya and a certified Governance, Risk and Compliance Specialist
