Kenyans are staring at further tax pain with more clauses of the Finance Act, 2023 coming into effect Friday, September 1.
Among those that will be hit beginning September 1 include players in the country’s digital economy and importers of steel and clinker that is used in the production of cement.
The Kenya Revenue Authority (KRA) is also operationalising the electronic tax system, which requires firms to issue electronic tax invoices and records of stocks, giving the taxman a better view of economic activities.
The three per cent digital assets tax (DAT) is expected to enable the government to collect more taxes from the growing digital economy. The tax will, according to the Finance Act, be “payable by a person on income derived from the transfer or exchange of digital assets”. This will include cryptocurrencies. Owners of digital assets who sell these assets will be required to pay the three per cent digital asset tax within five days of making the sale.
“The requirement to remit tax within five working days after making the deduction is administratively onerous. In addition, by taxing the turnover rather than the gains, the tax is likely to be a disincentive for persons seeking to engage in digital asset trading,” said KPMG in an analysis of the Finance Act.
Chief Economist at Mentoria Economics Ken Gichinga noted that it might be a bit early for the government to start taxing the digital economy because that could slow down its growth in the country. He said it has potential to offer many unemployed Kenyans an opportunity for employment.
“The world has gone digital especially after Covid-19 when people lost jobs and many found solace in the digital economies. It is an area the government has to be careful about because it is price sensitive so if you add taxes that tend to price people out, it could become an undoing measure,” he said.
“It is one of the areas that can create jobs and I think it would have been ideal for a few years until the digital economy reaches full maturity. I think it is a premature tax that might add to the cost of doing business and will make people and Kenyans businesses less attractive.”
Also affected by the new tax measures that kicked in Friday are importers of goods such as cement clinkers, bars, rods and semi-finished products of iron or non-alloyed steel, who will have to pay a 17.5 per cent Export and Investment Promotion Levy.
A rate of 10 per cent will apply on kraft paper, sacks and bags.
The move is aimed at protecting local manufacturers but the industry has in the past argued that higher taxes on these products, which are used as inputs in their production processes, would increase their costs. They also noted that product packaging will also be affected through higher taxes on kraft paper, sacks and bags.
“The proposed introduction of the levy aims at protecting local manufacturers. While this is a commendable move, it shall be interesting to see whether the government will hold the local manufacturers accountable to ensure that local consumers are protected from low-quality products and that the local industry products retain a competitive edge in the global markets,” said KPMG.
KRA will also starting September implement an electronic system for firms to issue tax invoices and keep records, following the Finance Act’s review of the Tax Procedures Act.
Analysts noted that this will align the Tax Procedures Act with the roll-out of the electronic Tax Invoice Management System (eTIMS) in 2022.
“The issue of the electronic tax system is to try to reduce possible leakage of revenue… all the revenues will be mopped and there is not any ground for revenue loss,” said Dr Tobias Olweny, a senior lecturer of finance at the Jomo Kenyatta University of Agriculture and Technology (JKUAT).
He added that there could be a feeling of intrusiveness and many businesses would take time to adopt to the culture shock.
“The system shall give the Commissioner visibility of transactions and possibly also assist taxpayers in dealing with potential issues of disallowed input VAT on the basis of insufficient documentation,” said KPMG.
Failure to comply with the electronic tax system, firms face a penalty of Sh1 million or two times the tax due up from the earlier Sh100,000.
While most of the measures already took effect on July 1, there were others that were to come into effect on September 1 while the remaining are set to take effect on January 1, 2024.
Implementation of the Act was, however, delayed following court cases that challenged its constitutionality.
Through the Finance Act 2023, the state increased Value Added Tax (VAT) on petroleum products to 16 per cent from eight per cent, resulting in pump prices hitting record highs in July.
High prices resulted in the government reinstating fuel subsidies in the August-September pricing cycle, which prevented the retail cost of super petrol from breaching the Sh200 point in Nairobi. Unstabilised, the pimp price for a litre of super petrol would have reached Sh202 compared to the Sh194.68 a litre when the subsidy is applied.
Other than increasing the cost of fuel, the Finance Act 2023 has also resulted in reduced take-home pay for Kenyans employed in the formal sector through different measures including the 1.5 per cent affordable housing levy and the higher taxes for high-income earners.
Following an injunction on the implementation of the Act, employers did not deduct the levy in July but after the freeze on implementation of the new law was lifted, KRA said it would backdate collection of the levy. The Act has also increased taxes for the very small businesses that pay turnover tax to three per cent from one per cent. This is even as the Act had the effect of moving SMEs earning over Sh25 million per year to the corporate tax band, which analysts note would make them pay higher tax rates of 30 per cent on their income but also make it more expensive and difficult to become tax compliant.
Analysts note that these measures could have the unintended effect of reducing consumption and in turn the taxes that Kenya Revenue Authority might collect over 2023/24 financial year.
“The government badly needs cash to meet its obligations but sometimes adding taxes can be myopic in that you are increasing tax with the idea of raising more revenue but you get to a point where people stop participating in those economic activities. You cause them to move to other more friendly investment destinations,” he said.
The Finance Act is expected to enable the government to increase tax revenues and finance the Sh3.6 trillion budget over the current financial year, with expectations that it helps the taxman raise an additional Sh289 billion this financial year. KRA is taxed with collecting Sh2.7 trillion in the 2023/24 financial year.