Kenya Kwanza administration wants to collect more revenues, but it might end up collecting very little
By Antony Mutunga
June 26, 2023 will go down in history as one of the bad days for Kenyans. It is the day that President William Ruto signed into law Finance Bill 2023 soon after it was passed by parliament after a third reading. This is bad news because businesses and workers, will be forced to dig deeper into their pockets to fund the government’s first budget of Sh3.68 trillion, equivalent to 22.6% of GDP, if the Act is implemented.
Accordingly, the Bill introduced a number of taxes that include a 16% value added tax on fuel levy, which is up from 8%, a contentious housing levy which was initially at 3% passed after it was revised down to 1.5% to be contributed by both the employer and employee.
Individuals with a monthly income range of more than Sh500,000 will be slapped with a rate of 35% (up from 30%), a move that is a little exploitative and will not only put more pressure on consumers, but also depress spending.
“We have to have some short-term sacrifices,” Treasury Cabinet Secretary (CS) Njuguna Ndung’u, said in mid-June when he presented a total budget of Sh3.68 trillion, an increase of over 8% compared to the 2022/23 financial year.
In the ‘ambitious’ budget, the Kenya Kwanza administration envisages investment in a few sectors such as education, healthcare, agriculture, and Micro, Small and Medium Enterprises (MSMEs). For perspective, with Sh6 out of every Sh10 from revenue collected going into debt repayment, the spending plan is just an un-implementable wish list.
Begin with the expenditure increase, which is currently more than 4% as compared to the previous financial year. The government has been forced to increase its projected ordinary revenue to Sh2.57 trillion while Ministerial Appropriation-In-Aid is set at Sh348.7 billion and grants at Sh42.2 billion.
As a result, the budget deficit is forecast to stand at about Sh720 billion which will be a reduction from the Sh824 billion in last fiscal year. This deficit is expected to be financed by domestic and external borrowing whereby domestic financing will be responsible for the bigger share of Sh586.5billion as compared to external’s Sh131.5 billion.
“The FY 2023/24 budget is no different from what we had last year,” economic analyst Ephraim Njega, told Nairobi Business Monthly in an interview “The projected revenues are overly ambitious and the borrowing target detached from the market realities especially at the domestic level.”
With the current state of economy, Mr. Njega added, not only will it be a challenge to acquire the required domestic finance but with geopolitical tensions and high inflation in the global economy, external borrowing is not assured.
Interest rates also on the rise and not expected to start falling anytime soon, and dependence on domestic borrowing is expected to be expensive. Furthermore, the projections of the ordinary revenue for the 2023/24 financial year will be a further challenge.
Kenya Revenue Authority (KRA) was only able to collect a total of Sh1.74 trillion in tax revenue in the first eleven months of the previous financial year, with predictions showing that tax revenues will not reach 1.8 trillion, or (even) Sh1.9 trillion. The government will have to rely on reforms in its tax policies and expansion of tax base if it is to plug its revenue collection – the Kenya Kwanza administration hopes to increase the turnover tax to 3% from 1%, and cut the upper threshold from Sh50 million to Sh25million.
These tax changes in the 2023/24 budget will have a significant weight on consumers going forward – already, the energy regulator, Energy and Petroleum Regulatory Authority (EPRA) has reviewed “maximum” petrol prices to be in force from July 1 to 14, 2023 factoring in VAT at 16%, defying High Court order suspending the Bill.
“Pursuant to the Finance Act, 2023, the Value Added Tax on Super Petrol (PMS), Diesel (AGO and Kerosene (IK) has been revised from 8% to 16% effective 1 July 2023,” EPRA said in a statement.
The move to mobilise resources to fund the “overly ambitious” budget is expected to have a negative impact on the informal sector which is the backbone of the economy. At a time that many businesses are already facing financial challenges, the increase of the turnover tax will result to more losses, pointing to a reduction in opportunities.
The sector is responsible for a majority share of the employment in the country (82.9% as of 2022), as over 15 million people are employed in the sector as compared to about 3.2 million in the formal sector according to the Kenya National Bureau of Statistics (KNBS).
Owners of digital assets platforms that thrive on cryptocurrency and non-fungible tokens will be required by law to remit 3% of the value of traded or transferred digital assets thanks to the digital asset tax.
The government has also put in place a withholding tax with regards to digital content monetization. With the pandemic, a majority of users moved online and many entrepreneurs especially among the youth saw an opportunity to improve their lives by becoming online content creators and influencers or through crowdfunding and licensing content. This saw the rise of the digital market in Kenyan economy.
Additionally, reducing the upper threshold to Sh25 million, will result in MSMEs that earn more than Sh25 million in a year be forced in the category of a 30% corporate tax. The shift from a 1% turnover tax to a corporate tax of 30%, will be detrimental to businesses.
“Many MSMEs (Micro-, Small and Medium-sized Enterprises) will be forced to either decrease their expenses in terms of layoffs, less production or move the burden to the consumers, who are already facing a rising cost in products,” Vincent Mutua, a former professor of economics, says.
Critics say the tax increases are retrogressive and go against the Kenya Kwanza administration’s promise of improving the lives of many Kenyans. Today, unemployment rate especially among the youth is worrying, and online opportunities would have offered a better solution.
However, with the government placing a 5% withholding tax, many will have to part with a chunk their already low earnings. The move is expected to also reduce the opportunities that many of the successful online entrepreneurs were responsible for.
“By taxing digital creators, the government is set to cause many opportunities to disappear. These individuals are responsible for giving a number of youth opportunities that allow them to earn, take a part of that little income they earn and the result is disastrous for the increasing youth, little to no opportunities,” says Mutua.
It is a good thing to aim at expanding the tax band by taxing those who earn Sh500,000 and above in a month from the normal 30% to 32.5% (between Sh500,000 and Sh800,00) and 35% (over Sh800,000). By taxing high-income earners more, the government will, indeed, be able to increase its revenue. However, the more will easily dim opportunities in various sectors, which means unemployment rate is expected to continue to rise in the country.
Kenya’s economic problem has been heightened ever since the pandemic hit as the price of goods and services increased, businesses witnessed reduced profits while others closed down and laid off workers.
The situation did not get better once the country got into recovery as geopolitical tensions caused a rise in inflation, increase in taxation and an increasing debt which has led to the current high cost of living. President William Ruto promised Kenyans a better economy with improved opportunities and reduction in the cost of living, when he was running for office.
Employers with many employees may be forced to lay off some workers in order to reduce their expenses which have increased to new heights. On the other hand, employees will incur an extra burden as the salary they take home will reduce amid a high cost of living.
Kenya Kwanza is casting its nets wide in search of more revenues at a time when the economy is decelerating. How it aims to keep revenues collection up in the long run is yet to be seen.