Treasury demand for more taxes will hurt Kenyans, analysts warn

The proposals contained in the Finance Bill 2024 have sparked outrage among Kenyans, who note that the National Treasury’s bid to raise more taxes would further push many essential items out of reach for most households. 

Kenyans also say that they are still reeling from the measures that the government has been implementing since the Finance Act, 2024 came into force. 

Among the proposals that have been met with resistance include increasing the cost of bread, which is the only breakfast alternative that is still within reach for many and could see many Kenyans skip the essential meal.

The Bill has proposed migrating the supply of ordinary bread from VAT (value-added tax) zero-rated status to VAT exempt. Zero-rated supplies are cheaper as manufacturers are allowed to claim a refund on input tax while exempt supplies are not taxable, and any related input tax is therefore not deductible.

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This even as analysts noted that the proposed tax measures could be an overkill coming barely a year after the Finance Act, 2023, which has made life more difficult for Kenyans and even emerged as one of the most contested legislations.

Cases protesting some clauses in last year’s Act are still in court. 

Last year, the Act reduced incomes for many employed Kenyans through the introduction of such levies as the Affordable Housing Levy and higher Pay-As-You-Earn (Paye) tax for some segments.

It also had the effect of pushing up the cost of most products through such measures as higher VAT on petroleum products. 

Alex Kanyi, a partner at Cliffe Dekker and Hofmeyr, noted that the Treasury should have considered the outcomes of the Finance Act, 2023 before coming back to Kenyans with demands to hike taxes. 

He said Treasury should have reckoned with the impact of the previous measures before introducing new ones. He added that the government should make data-driven proposals, ensuring changes are effective before implementing further reforms.

“As for Kenyans, we are getting into another difficult cycle. We thought that the tax changes that were made in Finance Act, 2023 would be enough, because the measures that were introduced last year already stretched many Kenyans. 

“We are, however, seeing more taxes being introduced through the Fnance Bill, 2024. For Kenyans, it means you must tighten your belts since you will be left with less disposable income. 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,” said Mr Kanyi.

Other tax measures include higher taxes on motorcycles, which, though chaotic, have emerged as a formidable sub-sector within the transport sector. 

The Finance Bill has also hit motor vehicle owners who will now pay a new tax of 2.5 percent of the value of their cars.

Hit motorists hard

This is expected to hit all motorists hard, but it will especially increase the tax burden for players in the transport industry, both matatu operators and transporters of goods, with the costs passed on to the users of their services.

The transport industry is still adjusting to the advance tax that was implemented last year. 

“The 2024 Finance Bill presents a complex picture. While it includes some positive measures, the potential for increased taxes, burdens on small businesses, and weakened data privacy protections raises concerns. Kenyans and experts alike are urging the government to adopt a more fiscally responsible approach to ensure a sustainable future for the country,” said Kanyi.

The Bill proposes to introduce VAT on financial services such as issuance of debit and credit cards, telegraphic money transfer services, foreign exchange transactions, assignment of debt for consideration and cheque handling, processing, clearing and settlement. The services, which would attract 16 percent VAT, are at the moment VAT exempt. 

“The proposal would result in an increase in the cost of the above-mentioned financial services where the cost would ordinarily be passed on to consumers,” said law firm Bowmans Kenya in an analysis of the Finance Bill. 

“Further, the removal of some of the exemptions such as the assignment of debt for consideration and issuance of securities for money whereas the granting of the credit is exempt from VAT is irrational.”

The Bill also includes potentially burdensome proposals. The significant increase in the tax burden on non-resident digital service providers and the removal of the definition of “gross investment receipts” for clubs and associations could create uncertainty and hinder growth. Taxing all income earned by amateur sporting associations, not just their investment income, further raises questions about the bill’s fairness.

The Bill also proposes a significant economic presence tax for some foreign digital businesses. This is expected to replace the digital service tax that was implemented last year.

“The proposed significant economic presence tax is largely similar in its application to the digital service tax that it seeks to replace. The key difference is that the tax burden for non-residents under the significant economic presence tax will be significantly higher at the rate of six per cent of the gross revenue as opposed to the current digital service tax that currently applies at the rate of 1.5 per cent of the gross revenue.

KRA was expected to collect Sh2.45 trillion in ordinary revenues in the year to June but it is unlikely to meet the target.