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International Air Transport Association (IATA) Country Manager East Africa Agnes Mucuha, Ethiopian Airlines Area Manager for Kenya Soble Azene and South African Airways Finance Manager Mohammed Hussein when they appeared before the National Assembly Finance Committee during the public participation on the Finance bill, 2024 at Hilton Garden Hotel on June 3, 2024. [Boniface Okendo, Standard]

Businesses shutting down, massive job losses, further increase in cost of living and failure by the taxman to grow tax collections are some of the likely impacts of some of the proposed tax measures in the Finance Bill 2024.

This is according to industry players, who while making submissions to the National Assembly’s Committee on Finance and Planning, noted that many proposals are likely to cause major negative disruptions to the economy. This is in comparison to the National Treasury’s intended impact of growing tax collections and enabling the government to rely less on borrowing to meet its spending plans.

The Finance Bill 2024 witnessed more opposition yesterday, with different industry players telling the National Assembly’s Committee on Finance and Planning that some clauses would lead to job losses in certain sectors while the taxman might not see an increase in tax revenues. 

The Association of Kenya Insurers (AKI) warned that the proposed Motor Vehicle Tax would see more people opt to take third party insurance covers that offer little protection to vehicle owners but also reduce income for the insurance industry.

“This tax will reduce demand for comprehensive insurance as a market response to the increased costs of motor vehicle ownership. To offset the increase in costs associated with the insurance of motor vehicles, policyholders will shift to third party insurance covers which will significantly reduce the premiums and income earned by insurance companies,” said AKI.

“This will ultimately lead to financial constraints, cashflow problems and pressure on the solvency of insurance companies and eventually loss of jobs.”

The National Treasury has proposed at 2.5 percent of the value of the vehicle and place a lower limit of Sh5,000 and an upper limit of Sh100,000. This, AKI noted, would be discriminatory, with low income earners ending up with the heavy tax burden compared to the rich motorists.

“The motor vehicle tax is discriminative and regressive given that it is capped at Sh100,000. People with equal income could own motor vehicles of different value. Owners of motor vehicles whose value is below Sh4 million will have to spend a larger proportion of their income on motor vehicle insurance as compared to those owning motor vehicles whose value exceeds Sh4 million. This will lead to increased inequalities and discrimination in taxation,” said AKI.

“For businesses, the tax will be payable for owning the motor vehicles regardless of the profitability of the businesses.”

AKI had also opposed proposal to introduce VAT on insurance and reinsurance services as this would negatively impact low income earners and Small Medium sized enterprises SMEs.

Traditionally, insurance and reinsurance services have always been exempt from VAT. If introduced, AKI said that the ripple effect will be increased cost of doing business.

Additionally, insurance penetration which is already low in Kenya, is projected to go even lower if the proposal to introduce VAT on insurance and reinsurance services is introduced.

Rejecting the proposal as contained in the finance bill, the body has said that the insurance sector growth dropped by 1.7 per cent  in 2023 as compared to the previous year, 2022. The drop was caused by the tax complexity issues introduced into the insurance sector including introduction of VAT on compensation for loss of the taxable supplies and the requirement for the insurance entities to onboard to electronic tax invoice management system (“eTIMS”).

The ripple of VAT on insurance services according to AKI is potential increase in cost for essential services, reduced revenue contribution to the exchequer, and loss of employment opportunities and decline in the standard of life.

“Due to the limited growth that insurance companies will exhibit due to the proposed change, some insurance companies including brokerage companies might need to downsize to match the level of operations,” said AKI.

“This can be done through retrenchment of workers or reduction of salary expenses which could result in loss of livelihoods, accelerated unemployment and poor standard of life taking into account the inflationary impact to the Kenyan economy.”

The American Chamber of Commerce in Kenya also opposed the Motor Vehicle Tax noting that it would heavily impact on the cost of doing business that could eventually hit Kenyans through high cost of essentials.

Subjecting commercial and agricultural vehicles to the Motor Vehicle Tax will increase the operating costs of manufacturers and their suppliers who utilise vehicles for commercial (logistics) and agricultural (planting, harvesting, logistics) purposes. These additional operational costs will make businesses less profitable and result in higher prices for consumers,” said AmCham.

“The proposed rate of 2.5% whilst borne in addition to the other taxes, fees and levies applicable on the purchase, general use and maintenance of motor vehicles proves extremely punitive to taxpayers.”

The Chamber proposed exempting commercial vehicles used by industries such as transport, agriculture and manufacturing from the tax and also reduce it to one percent for other motorists as a compromise.

Kenya Private Sector Alliance has said that subjecting commercial and agricultural vehicles to the Motor Vehicle Tax will increase the
operating costs of manufacturers and their suppliers who utilize vehicles for commercial (logistics) and agricultural (planting, harvesting, logistics) purposes and the cost of food items.

"These additional operational costs will make businesses less profitable and result in higher prices for consumers," KEPSA said in its submission to the committee.

Further, they said, some vehicles pay for third party policy and do not require valuation and the new law will force them to undertake vehicle valuation which is also an addition to the new tax.

"The new tax will adversely affect insurance business as many vehicles and especially motorcycles will operate without insurance policies," the memorandum said.

The East Africa Venture Capital Association has said that the 20 per cent threshold for the capital gains tax is low and recommended a 50 per cent threshold as the UN Model Tax Conventions.

EAVCA further proposes deletion of the VAT proposal that seeks to tax various financial services.

In its submission, the lobby has said that introduction of VAT on financial services will make the services more expensive as additional costs will be passed to consumers.

  Finance Bill 2024 has some pinches of sweeteners. [iStockphoto]

This may hamper growth of the financial sector.

On the proposed Sh2 million penalty for every month a person fails to comply with the tax procedures requirements, EAVCA has proposed the penalty be revised to Sh100,000.

It termed the penalty as punitive and likely to cripple the operations of businesses such as early stage startups.

Aviation industry players also protested the proposed scrapping of VAT exempt status for aircrafts and aircraft parts. The current provision in the law makes all aircraft and aircraft parts VAT exempt, the proposal in the finance bill 2024 seeks to limit this VAT exempt status only to aircraft parts, making purchase of aircraft subject to 16 per Cent VAT.

The International Air Transport Association (IATA) has proposed the current provision be retained.

"By keeping all aircraft at VAT exempt status, domestic travel will increase in volume," IATA said In it's submission. If imposed, it added, there will be an additional and irrecoverable cost to domestic airlines in Kenya.

Parliament’s Finance and Planning Committee has been receiving public views on the Finance Bill 2024 before reporting back to the National Assembly with proposals on areas of review so as to strike a balance between the proposals by Treasury and feedback from Kenyans.

Last week, the committee heard that Treasury should expand the number of people who pay taxes and abandon its current strategy that appears to target a small pool of taxpayers.

The Institute of Certified Public Accountants of Kenya (ICPAK) noted that the government had the tendency to increase or add new taxes for the few Kenyans who are already in the tax bracket, avoiding the majority of Kenyans, both individuals and companies.

“Kenya has continued to place reliance on a small pool of taxpayers, largely drawn from the formal sector,” said ICPAK.

The accountants body, cited numbers by the Kenya Revenue Authority (KRA), noted that only 6.3 million taxpayers including corporate entities filed their 2022 tax returns by June 30 last year.

“This implies that out of a population of about 52 million people, about 15 percent of the population is contributing to income tax. As such, the tax burden is not shared fairly as envisaged under Article 201(b)(i) of the Constitution,” said ICPAK.

“Further, the increased deductions on the gross emoluments of salaried employees continue to reduce the disposable income on this segment of Kenyans exacerbating the cost of living and negatively impacting demand and indirect tax revenues. Not only has this resulted in tax fatigue for this pool of taxpayers, it also contravenes the tax maxim of equity and fairness.”

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