Treasury banks on tax policy reforms to increase revenues

The National Treasury expects ongoing tax reforms to lead to a more efficient system and improve the tax to gross domestic product (GDP) ratio.

While addressing an economic forum in Nairobi yesterday, Treasury and National Planning Cabinet Secretary Njuguna Ndung’u said the country needs a tax system that will not only optimise revenue collection but also reduce tax expenditures.

Such a tax system, he added, should also not destablise the market. “We need to design a tax system that optimises revenue but at the same time optimises compliance.”

The stakeholders workshop was hosted by the Africa Economic Research Consortium, with participants including the Development Economic Research Group and University of Copenhagen, Kenya Institute for Public Policy Research and Analysis and Kenya Revenue Authority (KRA).

Increase ratio

The purpose of the meeting was to discuss research papers on the country’s tax system, touching on value added tax, excise - particularly alcohol and tobacco - personal income tax and the overall tax efforts by the government.

Prof Ndung’u said economic shocks have reduced the tax to GDP ratio from 23 per cent during his tenure at the helm of Central Bank of Kenya to 13.7 per cent. 

The government’s plan is to raise this to 25 per cent by 2030.

“We are recovering from that so essentially that is something we are working on,” the CS said. 

KRA has faced increased pressure from the William Ruto administration to raise tax revenue to allow the Treasury to reduce its dependence on public debt, but has been falling short of target.

A recent report by Treasury revealed that the taxman missed its targets by nearly Sh100 billion in the five-month period to November 2023, with ordinary revenue for the period at Sh878.9 billion against a target of Sh977.1 billion.

The International Monetary Fund has also been pushing the government to increase tax collection.

President Ruto has implemented a set of contentious taxes, including a 100 per cent increase in value-added tax on fuel to 16 per cent, and a 1.5 per cent levy on salaries to finance the construction of affordable housing, which was recently suspended by court.

The government anticipates that these measures will generate an additional Sh200 billion annually.

Ndung’u yesterday said the research being undertaken by the think tanks are important to determine where Kenya stands in terms of tax policy in order to take the necessary steps. 

He said the findings will reveal where the weaknesses are, institutional or otherwise, in the country’s tax regime.

KRA Commissioner General Humphrey Watanga said he is keen to have some of the reforms included in the upcoming Finance Bill, 2024.

“My expectations is this workshop will be able to submit tangible tax policy proposals that will be included in the Finance Bill 2024,” he said. 

He mentioned VAT, personal income and excise taxes on alcoholic beverages and cigarettes as as some of areas that require policy reforms.

“I reiterate KRA’s commitment to collaborate with academia and research institutions in redesigning the tax policy,” he said.

The discourse on tax reforms between Kenya and the DERG, University of Copenhagen, AERC is a three year partnership that involves scrutiny and  analysis of the country’s tax policy.