The government will protect economic recovery while tackling the country’s debt in the 2024/25 financial year whose total expenditure target is set at Sh3.9 trillion, National Treasury Cabinet Secretary (CS) Prof Njuguna Ndung’u said on Thursday, June 13.
Presenting the final version of the budget in Parliament, the CS said total revenue target is set at Sh3.33 trillion, with fiscal deficit expected to be 3.3 per cent of gross domestic product (GDP), compared to a revised deficit of 5.7 per cent of the 2023/24 fiscal year.
He also added that economic growth will be in line with the ministry’s expectation of 5.5% this year from 5.6% in 2023.
Some of the proposals appear to be encouraging growth, but for a country whose economy is driven by agriculture sector as per the Medium-Term Revenue Strategy (MTRS), which indicates that the sector contributes more than 20% to the GDP but generates minimal tax revenue, turning things around will take more than ambitious proposals.
The International Monetary Fund (IMF) estimates the country’s potential of tax revenue to GDP at 25 per cent, which is consistent with the East African Community’s target. National Treasury, therefore, will have to do more in its effort to particularly reduce the cost of living while ensuring that economy is strong.
According to analysis by accounting company PwC, the CS retained some tax measures that were already included in the Finance Bill 2024. It says the budget process should aim to achieve not only reasonable and achievable targets and estimates, but also realistic revenue targets with corresponding fiscal consolidation to reduce pressure to borrow.
As proposed in the finance Bill of 2024 and MTRS, the Treasury CS has retained the proposal to introduce motor vehicle tax, meaning insurer of motor vehicles will be responsible for collection and remittance of the motor vehicle tax within five working days of issuing the cover.
However, while the Bill proposed a minimum amount and a maximum amount of Sh5,000 and Sh100,000 respectively, the CS did not touch on the maximum cap of Sh100,000 as proposed in the Bill.
“This is expected to have an adverse effect on the uptake of motor vehicle insurance policies and in the case of commercial vehicles, the additional costs are likely to be passed onto the consumers. For the insurance companies, it is expected to increase the administrative costs relating to compliance,” PwC says.
Application of VAT on certain financial services
As proposed in the MTRS, the CS has reiterated the proposal to rationalise the VAT Act by restricting the VAT exemption and zero rating to only services meant for export. However, while the Bill had explicitly listed certain financial services to be removed from the exemption schedule, in the budget reading the CS did not indicate which services will be taken out.
The Bill had proposed to delete insurance services other than insurance and reinsurance premiums from the exemption schedule as well as the following financial services;
“These proposed amendments are likely to inflate the cost of financial services to consumers. In addition, the changes will bring additional VAT compliance burden to financial services providers increasing their operational costs. It may however provide relief where the institutions incur significant vatable supplies as the institution will be eligible to claim input VAT on supplies used in generating the taxable supplies,” PWC says.
While the proposal to harmonise excise duty rates on fees charged on money transfer services will benefit the retail electronic payments ecosystem, it is likely to render the money transfer services provided by banks more expensive and thus uncompetitive – finance Bill included a proposal to increase the rate on money transfer fees by cellular mobile service providers from 15% to 20%, the CS has proposed for the exclusion of these services from the increment.
Here is the summary of significant tax proposals in the CS’s budget statement
Value Added Tax Measures
- Increase the VAT registration threshold from Sh5 million to Sh8 million to take into account the erosion of the value of threshold by inflation over time;
- VAT input tax deduction threshold for taxpayers producing mixed supplies limited to only input tax
- related to taxable supplies;
- Rationalization of tax expenditure to align with National Tax Policy and the Medium-Term Revenue
- Strategy
Income Tax Measures
- Tax-free allowances for the private sector working out of station increased from Sh2,000 per day
- to a maximum of 5% of the employee’s monthly gross earnings;
- A review of the pension benefits tax structure to exempt-exempt-exempt;
- Affordable Housing Levy and contributions to the SHIF made tax-deductible;
- Telecommunications spectrum licenses to be deductible over a period of 10 years;
- Introduction of annual motor vehicle tax at a rate of 2.5% of the value of the vehicle subject to a
- minimum of Sh5000.
