Kenya’s tourism industry directly contributing Ksh. 294.6 billion (USD 2.9 billion), which is approximately 3.7% of the GDP in 2017. Kenya’s tourism industry directly contributing Ksh. 294.6 billion (USD 2.9 billion), which is approximately 3.7% of the GDP in 2017.

Kenya Budget Review 2019/20: Finding Growth Verses Taxation Balance

Written by  Edwin N. Kimani Jul 01, 2019

The Budget Statement for the Financial Year 2019/20 was read on 13th of June 2019 by the Cabinet Secretary for the National Treasury, Hon. Henry Rotich.

The theme for this year’s Budget Statement is: Creating Jobs, Transforming Lives – Harnessing the “Big Four” Plan. This theme is probably befitting an economy that faces a paradox of high unemployment among the youth, low income and high economic growth.

Over and above that, The Government of Kenya has been on a relentless drive to rein the runaway recurrent expenditure, embezzle and fleece of public resources. The International Monetary Fund and The World Bank have been piling pressure on the government to institute reforms that require a reduction on the recurrent expenditure which have translated to government audits that have recommended a reduced size of government, recurrent expenditure on wages and salaries as well recommended monitoring of public resources to reduce misuse.

This year’s budget chose a route to achieving this uphill quest of taking expenditure to endurable limits which will in turn reduce the government borrowing. Kenya’s economy grew by 6.3% in 2018 compared with 4.9% growth in 2017 with a forecasted growth of 5.8% in 2019/2020 when the Big 4 Agenda gains momentum.

 Kenya Expected Growth

The 2019/2020 budget then in a nutshell seeks to address the following;

  1. To create an enabling business environment especially for the micro small and medium enterprises and this will lead to job creation
  2. Sensible and systemized spending to curb misuse of public funds
  3. Priority spending on key projects to be funded by domestic resources
  4. Reduction of the fiscal deficit to reduce the national debt
  5. Implement reforms that will enhance efficiency thus making Kenya more competitive

To review the budget, we shall briefly delve into the raft of proposed tax measures and emerging challenges to achieving the goals envisioned in the budget statement.

A Highlight Of The Tax Measures

Capital Gains Tax

  • The rate of Capital Gains Tax is set to be increased from 5% to 12.5%. There is no indication that indexation or some form of cataloguing will be introduced to take into account the effects of inflation over time.
  • Property transferred by corporates as part of group restructuring to be exempted from Capital Gains Tax to allow for seamless restructuring for operational efficiency and encourage business growth. Corporate Tax
  • Framework on the implementation of the 30% rebate on total electricity costs by manufacturers introduced through the Finance Act 2018 has now been developed.
  • Investors operating plastic recycling plants to enjoy a reduced corporate tax rate of 15% for the first five years.
  • Introduction of amnesty covering penalties and interest, on any outstanding tax for two years prior to listing, for SMEs under the Growth Enterprise Market Segment program at the Nairobi Securities Exchange.
  • The Cabinet Secretary indicated that measures aimed at the taxation of income generated from the digital economy would be introduced. The measures were not specified by the Cabinet Secretary.

Personal Income Tax

  • Exemption of Income earned under Ajira Program: The Government through the Ministry of Information, Communications and Technology in partnership with academia, civil society and the private sector has set up a program known as “Ajira Digital Program” whose aim is to bridge the gap between skills available and skills demand. A major objective of the program is to enable over one million youths annually to be engaged as digital freelance workers.
  • The Government has proposed that the youth registered for the program pay a registration fee of ten thousand Kenya shillings for the next three years in lieu of income tax with effect from 1st January 2020.
  • The Cabinet Secretary has proposed to amend the Income Tax Act to exempt registered members from regular taxation for the specified period.

Turnover Tax

  • Turnover tax, which was replaced by Presumptive Income Tax in 2018, is to be reintroduced.
  • Turnover tax will apply to taxpayers whose business income does not exceed KShs 5 million per annum.
  • Tax rate of 3% on the gross turnover accounted for every month.
  • Turnover tax will apply in addition to presumptive income tax, which was introduced through the Finance Act 2018.

Withholding Tax

  • The scope of qualifying services subject to withholding tax set to be expanded to include:
  • Security services;
  • Cleaning and fumigation services;
  • Catering services offered outside hotel premises;
  • Transportation of goods excluding air transport services;
  • Sales promotion; and
  • Marketing and advertising services.

Value Added Tax (VAT)

  • Reduction of the withholding VAT rate from 6% to 2%.
  • The Cabinet Secretary for The National Treasury to constitute a taskforce which will validate outstanding VAT refund claims for settlement within the next two months.
  • Adjustment of the VAT refund formula introduced through the VAT Regulations, 2017 to ensure a full refund of input tax credit relating to zero-rated supplies.
  • Zero rating of denatured ethanol.
  • Introduction of VAT exemption on the following:
  • Locally manufactured motherboards and all inputs used in their manufacture
  • The supply of machinery and equipment used in the construction of plastic recycling plants as well as all services offered to these plants.
  • Agricultural pest control products.
  • Electric accumulators and separators used in the manufacture of automotive and solar batteries.

Customs Duties

  • Extension of stay of application of the Common External Tariff rate on a wide range of iron and steel products at 25% or the corresponding specific rates.
  • Application of 25% import duty on paper and paperboard instead of 10%.
  • Reduction of import duty on raw timber from 10% to 0%.
  • Proposal to retain import duty on finished timber products at 25%.
  • Detailed Customs measures to be communicated through the East African Community (EAC) Gazette effective 1 July 2019.
  • Kenya Electronic Single Window System Bill to be tabled in Parliament.

Excise Duties

  • Introduction of excise duty on betting activities at 10% of amounts staked.
  • Reduction of excise duty on fully-powered electric motor vehicles from 20% to 10%.
  • Increase in excise duty on motor vehicles of engine capacity exceeding 1500cc to 25%.
  • Increase in excise duty rates on cigarettes, wines and spirits by 15%.

Miscellaneous Fees and Levies

  • Manufacturers of paints and resins to receive a refund of anti-adulteration levy paid on kerosene used as their input.
  • Reduction of Import Declaration Fee on raw materials and intermediate goods from 2% to 1.5%.
  • Increase in Import Declaration Fee on finished goods from 2% to 3.5%.
  • Increase in Railway Development Levy on finished goods from 1.5% to 2%. Remission available for approved manufacturers.
  • Introduction of export levy on tanned or crust hides and skins at 10%.
  • Continuation of Revenue Enhancement Initiatives such as:
    • Scanning of containers to detect concealment;
    • Regional electronic cargo tracking system;
    • New debt collection strategy;
    • Resolution of tax disputes; and
    • Enhanced investigative capacity

Emerging challenges: The Realities of Playing the Balancing Act

Deficit and Resource Mobilization: One of Kenya’s recurring challenge is the growing budget deficit which forces the country to borrow internationally. In 2018 for example, Kenya recorded a Government Budget deficit equal to 6.70 percent of the country's Gross Domestic Product. This has been noted to be very alarming.

Currently, there is an estimated deficit of Sh607.8 billion, an increase from Sh562 billion. The government is likely to borrow more in the next fiscal year to bridge the deficit as Kenya Revenue Authority (KRA) is expected to miss this year’s revenue collection target by Sh118 billion, a move likely to plunge the country into further debt. Treasury Cabinet Secretary Henry Rotich has set a revenue target of Sh2.2 trillion while KRA is expected to collect approximately Sh1.9 trillion. The government might also heighten the tax regime to fill this budget deficit. 

Kenya Budget Deficit                                                                                                           

Tax Efficiency and Public Participation

Kenya’s tax efficiency and universal suffrage in the tax policy making process has been routinely tested and shows that not much is being achieved. An example can be drawn on the presumptive tax issue.

Finance Act 2018 replaced turnover tax with presumptive tax to persons who are issued with a single business permit by a County Government applicable at 15% of the single business permit fee in a move to widen revenue collection in the informal sector.

The Finance Bill 2019 however, proposes to reintroduce turnover tax for businesses whose turnover does not exceed KES 5 million citing, the revenue collection will not be commensurate to the revenue earned by the business. It is however worthy to note that, presumptive tax will still be maintained as minimum tax. The lack of coordination between the local governments and national governments in tax collection and administration as well as failed tax measures shows that there is need for a policy on public participation in the tax policy making and administrative process.

New Frontiers: Taxing the Digital Space (e-commerce)

Kenya has experienced a surging growth in e-commerce. This is not only evident from the major e-commerce trading platforms, but the number of individuals selling goods and their services on social media platforms such as Instagram, Twitter and Facebook.

In a public notice, the taxman said it had noted that some taxpayers carry on online business but they do not file returns or pay taxes on the transactions. It is however important to note that the Kenya Revenue Authority has not developed rules to guide the taxation of e-commerce.

The rules will be interesting to watch due to the challenges the digital space offer in terms of jurisdiction. e-commerce makes it easier for businesses to be conducted without having to create an entity which would otherwise be subject to tax. Thus, will the taxman tax the entities based on the presence of their servers to determine tax residence or place of actual sale? The rules will be interesting to watch.

Conclusion: Most Kenyans felt a disconnect between their experience and the growth in the economy in 2018. This is mainly because a significant portion of growth arose from government spending and initiatives and capital intensive sectors including large scale agriculture, forestry and fishing, transport and storage and wholesale trade. This led to a disproportionate change in employment. Further, constrained access to credit experienced by the private sector led to SMEs borrowing at very high rates outside the banking system and poor performance by firms led to thousands of job cuts, resulting in a reduction in consumer spending.

This informed the theme of the budget. It will be interesting to see the effects of the budget on common citizens as well as Medium and Small enterprises. A judgment as to whether the taxman’s obligations and the entrepreneurs rights to associate in business can only be properly arrived after the end of the financial year. Taxation has to have a cause and its consequences may be far from the cause.

 

By Edwin N. Kimani

*The writer is a Lawyer and the managing partner at Avikele Services, a professional services firm offering legal, tax, accounting, business development and consulting services to enterprises of all sizes and industries.

Contact: This email address is being protected from spambots. You need JavaScript enabled to view it. / Tel: +254727363338

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