State flops on key promises amid quest for more taxes

National Treasury Cabinet Secretary Prof Njuguna Ndung'u. [File, Standard] This time last year, the National Treasury noted that among the most pressing issues for Kenyans were the high cost of living, high tax burden, and unemployment. But today, these issues remain, according to a new survey, with the general feeling being that the Kenya Kwanza administration has failed in addressing the difficulties Kenyans face. Instead, the government is proposing more taxes in the Finance Bill, 2024 even as Kenyans grapple to absorb the shocks that the Finance Act, 2023 dealt them. When National Treasury Cabinet Secretary Prof Njuguna Ndung'u made his Budget Speech in Parliament on June 15 2023, he said during the budget making process, Kenyans had identified the high cost of living, the high level of unemployment and high tax burden as among the most pressing issues for them at the time. There were also concerns over the wastage of public resources and high public debt burden. A year later, these issues remain unresolved despite the Kenya Kwanza administration implementing its first full budget over the 2023/24 financial year, having come to power in August 2022. As Prof Ndung'u prepares to deliver his budget speech this Thursday, highlighting some of the issues that came out of the public participation process for this year's budget, a poll published last week Thursday showed high cost of living as topping the issues that make Kenyans (45 per cent) think the country is headed in the wrong direction. This was alongside high taxes (27 per cent), poor governance (seven per cent) and unemployment (six per cent). "A majority of the respondents (63 per cent) noted that the country is headed in the wrong direction, with only 19 per cent agreeing that it is headed in the right direction," said the Infotrack poll . "Among the reasons mentioned that point to the country heading in the wrong direction, we had a high cost of living (45 per cent) and high taxes imposed on them (27 per cent)." "The cost of living and unemployment have been the prevalent and recurring issues of concern in recent polls conducted since August/September 2023 and February 2024." In his maiden budget speech last year, Prof Ndung'u presented a raft of measures that he said were aimed at addressing the challenges that Kenyans had told Treasury were most pressing for the country. The measures ranged from its plans to subsidise production that would ease cost of living and increasing access to credit for small businesses through the Hustler Fund to the creation of thousands of jobs directly through the affordable housing programme and interventions aimed at easing households' access to cooking gas. The impact of these measures appears to have had little impact. For instance, many Kenyans are unable to access the cheap credit promised by the Hustler Fund, while the government has been diverting funds collected through the affordable Housing Levy to invest in Treasury Bills as opposed to creating jobs and farmers swindled into buying fake seeds and fertiliser. And while Kenyans are still grappling with taxation measures under the Finance Act, 2023, Treasury has proposed what some analysts have noted are more punitive tax measures in the Finance Bill 2024. New and additional tax measures in last year's Act such as the controversial affordable Housing Levy, the higher Value Added Tax (VAT) on fuel, higher Pay as You Earn (Paye) tax for some Kenyans working in formal employment, have seen individuals left with little to spend. This is even as the cost of many items go up, while companies are unable to grow and some have had to reduce employment as they cope with the impact of a tough operating environment partly due to higher taxes. The Finance Bill 2024 has proposed to hike taxes on milk and bread, which would further make it more difficult for Kenyans to put food on the table. It also proposes the introduction of a new motor vehicle circulation tax, which is expected to hit the price of everything, including bus fare, bread and milk as transportation costs go up. The bill also proposes to increase the cost of banking and mobile money transactions, a move that analysts note will erode gains made in increasing financial inclusion in the country. "We are currently at 90 per cent financial inclusion... but what we are seeing with the introduction of VAT at 16 per cent and we also have excise duty is that taxes on financial services will have cumulatively increased to 39 per cent. This will make people reduce the number of transactions that they are making and also move away from using the normal channels and people will go back to a cash economy," said Lydia Ndirangu, head of tax at Equity Group. Industry players commenting on the Finance Bill, 2024 have noted that Kenyans are still grappling with the impact of the Finance Act, 2023. They also warn that the proposed tax measures would have a major impact in terms of capacity by companies to create or sustain jobs while pushing the basics out of reach for many Kenyans. "With mwananchi still recovering from the adverse impact of the fiscal changes imposed in 2023. We strongly believe that the focus as a country must be on supporting the manufacturing industry to reduce the cost of locally produced products and services, to drive job and wealth creation, boost productivity, as a result, it will lower the cost of living for mwananchi and create prosperity for Kenya," said Kenya Association of Manufacturers (KAM) Chief Executive Anthony Mwangi. Alex Kanyi, a partner at law firm Cliffe Dekker and Hofmeyr (CDH), noted that the government should have considered the impact of last year's Finance Act on Kenyans before proposals to load them up with more taxes. "It is quite clear that there is the feeling that people are getting taxed more than they could perhaps bear. We have heard investors giving their comments on the taxes they have to pay and the uncertainty around the many tax changes," he said "We are getting into another difficult cycle. The tax measures that were introduced last year already stretched many Kenyans. We are, however, seeing more taxes being introduced through the Finance Bill, 2024. The government should have gone through the old taxes introduced last year instead of coming up with entirely new proposals and see what did not work out instead of introducing new ones." In the budget for the current financial year, subsidising production was perhaps one of the most attractive proposals by President William Ruto's administration, at the time seen to be speaking to a sustainable solution to the cost of living. The scheme to subsidise agricultural production has, however, been hit by controversies, and it is unlikely to lead to the expected increase in production and lower the cost of living. While the subsidised fertiliser was much cheaper than what was available in the market at a rate of Sh3.500 per 50kg bag compared to the over Sh6,500, a large number of farmers, it turned out, were supplied with fake fertiliser. Others also claimed to have bought substandard seeds. The fake fertiliser and seeds were largely distributed in the period tending to the long rain's season and might have affected planting among many farmers. The government spent Sh5 billion on subsidising fertiliser over the 2023/24 financial year, according to budget documents. And while the rate of inflation went down to 5.1 per cent in May and sitting where the Government wants it - with the Central Bank having a target of five percent (plus or minus 2.5 per cent) - high taxes and higher cost of products such as petroleum have eroded the spending power of many Kenyans. Treasury CS Prof Ndung'u also said the government would be reviewing policies with the energy sector to improve the sourcing and supply of cooking gas, a move that would complement the gas cylinder distribution project. These, however, did not get off the ground and if anything, the cost of cooking has risen over the last year. Refilling a 13kg gas cylinder cost Sh2,787 in July last year, but this has gone to Sh3,231 in March this year, according to data by the Kenya National Bureau of Statistics (Knbs). In last year's Finance Act, Treasury zero-rated VAT on liquified petroleum gas (LPG), which initially had the impact of bringing down prices but other higher costs such as transport, following higher VAT on other fuels, have seen the cost of the essential commodity go back up. The government has also been trying to offer Kenyans access to cheaper credit through the Hustler Fund. The Financial Inclusion Fund, as the kitty is officially referred to, was allocated Sh20 billion when it was set up in November 2022 and another Sh10 billion in the 2023/24 financial year. The Fund initially advanced credit to individuals but expanded its offering last year to include businesses. Despite the billions that have been set aside for the Fund, not all hustlers are getting loans. Many are only too familiar with the apology from the Hustler Fund informing them that it cannot process their request and instead asks them to try after two hours. While some borrowers have their request processed within a day, after several attempts, there are those who get the loans days after lodging their first request. The government has made a huge bet on the affordable Housing Levy, largely on account of the billions that it will bring the government and help fulfil the many pledges it made on jobs and housing. The affordable housing programme was, in part, expected to create jobs for thousands of Kenyans. And while the Housing Levy has hit salaried employees and reduced their take home salaries, it was expected to contribute heavily in this creation of jobs by giving the government funds to implement housing projects at massive scale, the State Department of Housing since been taking the funds and lending to the government in Treasury Bills. This adds to the controversies that the Housing Levy has stoked, having emerged as one of the most contested clauses in any Finance Act. The National Assembly's Committee on Housing, Urban Planning and Public has recently started investigations on how Sh20 billion Housing Levy funds were invested in Treasury Bills (T-Bills). T-Bills are tools Treasury uses to borrow funds over the short term, typically between 91 and 364 days. Treasury in budget documents for the 2024/25 financial said collections through the Affordable Housing Levy are expected to reach Sh89 billion in the 2026/27 financial year up from the estimated Sh63.2 billion over the current financial year. The levy, however, got off to a faltering start, having been subject to numerous court cases and is unlikely to meet this year's target of Sh63 billion. It had as of December collected Sh26 billion. Last year's Finance Act also increased the cost of petroleum products through the higher VAT. Petrol, diesel, kerosene and other petroleum products used to attract a VAT of eight per cent but last year, this went up to 16 per cent, which is the standard VAT rate. Other than the higher taxes, the government also took a stand to stop subsidising petroleum products, which according to President Ruto amounted to subsidising consumption. Instead said his administration would focus more on subsidising agriculture to boost production. This saw prices of fuel go up and the end result was that the amount of money Kenya spent to import petroleum products dropped last year due to a drop in local consumption of fuel, as many motorists and industries reduced consumption due to high pump prices. The quantity of petroleum products reduced by nearly a third, while the total import bill dropped albeit marginally, with high cost of fuel ensuring the cost of importing it remained high despite the fall in consumption. The import bill, which stood at Sh626.4 billion in 2023, dropping from Sh628.4 billion in 2022. The Economic Survey 2024 showed that many of the industries reduced their petroleum consumption. Usage of fuel dropped to 4.3 million metric tonnes in 2023, a 27 per cent drop from 5.9 million tonnes in 2022. Pump prices rose to a record high of Sh217.97 per litres of super petrol in Nairobi in November last year, driven by the high cost of petroleum products globally, the weakening of the shilling as well as the withdrawal of government subsidies. Last year's Finance Act introduced new Pay As You Earn (Paye) rates for high income earners that came into effect September last year. Kenyans in formal employment earning between Sh500,000 and Sh800,000 will pay Paye at a rate of 32.5 per cent up from 30 per cent. Employees earning over Sh800,000 will pay a higher tax of 35 per cent. Following this increase, the Kenya Revenue Authority (KRA) was expected to increase tax collected through Paye by a substantial margin to Sh682.23 billion over the financial year to June 2024 from Sh494.9 billion in the year to June 2023. This would translate into a 37.8 per cent growth over the year, a huge jump considering that income tax from individuals (Paye) grew by seven per cent in the 2022/23 financial year to Sh494.9 billion from Sh462.36 billion recorded in 2021/22 financial year.

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