Tax AdvisoryOctober 4, 2023by fiecon

Charting A Course For Sustainable Growth: Kenya Medium-Term Revenue Roadmap – Prt 2


Tax Policy Changes

Value Added Tax

  • Firstly, there is a proposal to review the VAT threshold, aiming to optimize operational efficiency within the VAT system.  Reviewing the VAT threshold can enhance efficiency by streamlining the administration of VAT, potentially reducing compliance burdens for small businesses.
  • Secondly, a comprehensive assessment of exempt and zero-rated supplies is in progress, with the intention of aligning these provisions with international best practices. Aligning exempt and zero-rated supplies with international best practices can improve trade relations and economic competitiveness
  • Additionally, there is a contemplation of reviewing the existing VAT rate from the current 16% to 18% as per East Africa Community.  A review of the VAT rate can impact consumers and businesses. A higher rate could generate more revenue for the government but potentially increase the cost of living and reduce consumer spending
  • Furthermore, the proposal includes the introduction of VAT on education and insurance services, acknowledging the need to broaden the tax base. This review may result in higher costs for education and insurance services, potentially impacting affordability and access for individuals and businesses.
  • Lastly, a significant measure involves the removal of the threshold criteria for applying the VAT input tax apportionment formula. Eliminating the threshold for applying VAT input tax apportionment can simplify compliance for businesses but may also increase tax liabilities for some, affecting their cash flow.

Excise Duty

  • In the context of tax policy refinement, a series of significant measures have been proposed with implications for the excise duty structure. These include a comprehensive review of excise duties on petroleum products, reflecting the government’s commitment to adapt to changing energy dynamics.
  • Additionally, there is a proposal to introduce excise duties on coal, aligning with broader environmental and fiscal objectives.
  • Further, the harmonization of taxation practices is being considered. This encompasses the review of excise taxes on tobacco products and other related items, as well as a prospective shift in the excise tax regime for non-alcoholic beverages, anchoring taxation on sugar content
  • Lastly, the proposal envisions a comprehensive review of excise taxation on alcoholic beverages, aiming to base taxation on alcoholic content. These measures collectively underscore the government’s efforts to modernize and align excise duties with evolving economic, environmental, and health considerations

Customs Duty

The Kenyan government through the treasury plans to propose a review of the East African Community Common External Tariff (EAC CET), aiming for uniform duty rates on all imported goods and exemption of duties on primary raw materials/inputs.

Kenya’s proposal to review the EAC CET has the potential to promote economic integration, facilitate trade, and attract investment within the East African Community. However, it also poses challenges related to revenue distribution, sector-specific effects, and the need for consensus among member states. Careful planning and execution will be crucial to realizing the intended benefits while addressing these challenges.

Other Tax Measures

The introduction of these tax measures can have diverse implications, including revenue generation, behavioural changes, economic effects, and environmental benefits. Careful planning, impact assessment, and effective implementation will be crucial to realizing the intended outcomes while addressing potential challenges and concerns. The other tax measures include;

  • Review excise duty on betting and gaming
  • Introduce a surcharge tax
  • Introduce carbon tax
  • Introduce Motor vehicle circulation tax

Tax Administration Changes

The proposed measures encompass a range of initiatives aimed at enhancing the effectiveness and efficiency of Kenya’s tax administration system. These initiatives include, but are not limited to, the integration of the tax administration system with government systems and those of third-party data producers. This integration is designed to enable the seamless exchange of information, facilitating a comprehensive analysis of taxpayers’ economic transactions through the utilization of big data analytics to drive compliance.

Furthermore, the plan entails the reform and modernization of the existing tax systems to align them with contemporary requirements and practices. In tandem with this, there will be a concerted effort to bolster compliance measures, ensuring that taxpayers adhere to their obligations under the tax laws.

To streamline tax refund management processes and boost overall efficiency, measures will be implemented to optimize the handling of tax refunds. Additionally, there will be a focus on establishing a well-structured workforce within the Kenya Revenue Authority (KRA), which is vital for effective tax administration.

Lastly, the enhancement of taxpayer audit procedures will be a priority, with the aim of ensuring a fair and transparent auditing process that aligns with the evolving tax landscape. These combined measures seek to create a more robust and responsive tax administration system in Kenya.

Legal Framework Changes

The legislature will enact tax laws and vetting of Regulations to support the implementation of the Strategy. As part of its responsibilities, the judiciary is committed to ensuring the effective resolution of tax disputes between the Kenya Revenue Authority (KRA) and taxpayers.

To facilitate this process, the judiciary will establish a dedicated tax court designed to handle tax-related matters. Additionally, efforts will be made to encourage and support out-of-court dispute resolution methods, contributing to a more efficient and equitable tax dispute resolution system in Kenya.

Author: Eddie Opiyo