Massive tax breaks granted to various parties under the law, including foreign and local investors, the military, and the Kenya Police, force the taxman to forfeit billions of shillings in import duties and other taxes every year, official data shows.
The National Treasury in the past estimated that the Kenya Revenue Authority (KRA) loses about Sh369.6 billion every year to cumulative tax exemptions and incentives.
The country’s tax laws provide for various tax breaks. These include; tax exemptions, tax deductions, allowances, tax deferral and concessional tax rates or timing rules, such as accelerated depreciation of capital assets.
Projects undertaken with funding from foreign governments also often enjoy tax exemptions under Kenyan law in a practice that is aimed at encouraging aid inflows.
Treasury argues that going forward there is a need for a delicate balancing act on the usefulness of the incentives through “management and monitoring of the tax incentives to safeguard the tax base and ensure value for money.”
“Although the incentives are aimed at promoting investments and providing relief to the low-income earners and vulnerable groups in the society, they erode the tax base and cause the government to forego tax revenue estimated at 2.96 per cent of GDP as of 2020 compared to 2.9 per cent average for African countries,” says the National Treasury in the June 2022 National Tax Policy.
“This impacts negatively on revenue mobilisation and implementation of the national development programmes.”
Experts also weighed in on the subject.
“The use of tax incentives, particularly as deductions against income, tends to erode a country’s tax base. As a result, a number of countries are reducing tax incentives,” said Nikhil Hira, a tax expert and business partner at Kody Africa LLP.
He added: “Kenya actually reduced a number in 2020 and no doubt will continue to review them.”
The list of exemptions also includes waivers or exemptions granted to donor-funded projects.
“Over the years the government has provided tax incentives and exemptions to support government programs and projects,” says the Treasury in the recent draft national tax policy.
“Although the tax expenditures through tax incentives amounted to 2.96 per cent of GDP in 2020, which is comparable to the average of 2.9 per cent for African countries, there is need to have an effective tool for monitoring and evaluating the effectiveness of incentive regimes.”
The exemptions apply to imports and procurement of goods and services, and extend to both direct and indirect taxes —including customs duties.
Exemptions for various transactions under international assistance projects apply in Kenya, often at the insistence of donors and foreign governments.
Kenya’s bilateral partners ordinarily offer assistance in the form of grants, in kind or project financing using concessional loans.
The KRA has also been forfeiting billions of shillings chargeable on Kenya Police supplies.
Tax experts say aid-funded projects provide a catch-22 situation for the government because taxing them could force assisting countries to take their money elsewhere.
The Treasury proposes that going forward tax exemptions are restricted to projects financed by development partners only where financing agreements provide for such exemptions.
The Treasury further argues that tax exemptions should be restricted to persons with privileges and immunities in accordance with international agreements and conventions; supplies to armed security forces and financial services, educational services, and social services supplied by government.