In a bid to revamp Kenya’s revenue collection framework, the National Treasury has proposed a new tax regime aimed at expanding the tax base while sparing essential commodities from increased VAT charges. Treasury Secretary John Mbadi unveiled the Tax Laws (Amendment) Bill 2024, which focuses on high-value sectors, particularly the airline industry, digital services, and certain excise duties, while excluding basic food items like milk, bread, and maize flour from the VAT hike. The decision follows considerable public feedback, particularly over concerns regarding the affordability of basic goods.

The government aims to raise an additional Sh140 billion in revenue to support the nation’s development agenda, including infrastructural projects and the digitalization of services under the Kenya Revenue Authority (KRA).

Key Highlights of the New Tax Proposals

1. VAT on Airline Industry

The airline sector, which has traditionally enjoyed VAT exemptions to support its growth, will now face a 16% VAT levy on a broad range of services, including air tickets, aircraft hire, leasing, and parts. The Treasury’s rationale is to generate revenue from sectors that serve higher-income demographics and businesses, as opposed to imposing a burden on everyday consumer goods.

Airline operators have voiced concerns over this shift, indicating that the additional VAT on inputs—such as fuel, maintenance services, and parts—could increase operational costs. Experts suggest that this cost may likely be transferred to consumers through higher ticket prices. “This is expected to affect the cost structure of the airline industry, which might see ticket prices rise as operators adjust to the new tax implications,” said aviation analyst Peter Karanja.

2. Retention of Zero-Rated VAT for Staple Goods

The proposed tax revisions initially included a shift of certain essential goods, including milk, bread, and maize flour, from a zero-rated VAT category to an exempt status. However, following public pushback, the Treasury opted to maintain the zero-rated VAT on these items to prevent an increase in retail prices for basic food items. This move underscores the Treasury’s commitment to easing the financial burden on Kenyan households, particularly as the cost of living remains a pressing issue. Mbadi emphasized, “Our goal is to ensure that these changes do not negatively impact the common consumer.”

3. Increased Excise Duty on Cigarettes and Internet Services

The bill proposes excise duty hikes across various goods and services. The excise duty on cigarettes with filters is set to rise from Sh4,067.03 to Sh4,100 per 1,000 sticks, while non-filtered cigarettes will jump to Sh4,100 per 1,000 sticks from Sh2,926.41. Products containing nicotine substitutes for inhalation, such as vapes and e-cigarettes, will also incur an excise duty of Sh2,000 per kilogram.

Internet and telecommunication services will see their excise duty increase from 15% to 20%. This hike may lead to higher prices for data and call services, which could impact both individual and business consumers reliant on affordable internet for communication and digital transactions. Kenya’s growing digital economy, supported by mobile payment services like M-Pesa, faces potential repercussions from increased costs in connectivity.

4. Digital Marketplaces and Significant Economic Presence Tax

In an effort to adapt to the growing digital economy, the Treasury has reintroduced the Significant Economic Presence Tax, a 6% levy targeting digital platforms with a substantial economic footprint in Kenya. This tax is designed to capture revenue from international digital services operating within Kenya’s economy but without a physical presence in the country. The proposed tax aligns Kenya with similar global digital tax initiatives, as seen in countries like Nigeria and India, which have moved to ensure that international tech giants contribute to local tax revenues.

Additionally, digital marketplaces—including ride-hailing and food delivery services—will face a 5% withholding tax for resident providers and a 20% rate for non-resident providers. This approach addresses concerns over tax evasion and aims to establish a standardized approach for taxing the digital economy. As digital transactions proliferate in Kenya, Treasury officials argue that these tax measures are necessary to ensure fairness between digital and traditional businesses.

5. Changes to Agricultural and Export Tax Policies

Agricultural products, including fertilizers and pest control goods, have been moved from zero-rated to exempt status, meaning farmers can no longer reclaim VAT on these purchases. Critics argue that this change could raise input costs, impacting agricultural productivity. The Treasury defends this approach as a necessary adjustment for broadening the tax base.

Export goods will continue to benefit from zero-rated VAT status, allowing Kenya’s exports to remain competitive on the global market. The Treasury’s decision to maintain zero-rating for exports reflects the government’s intention to bolster Kenya’s international trade standing and ensure local producers are not disadvantaged abroad.

6. Increased Levies on Alcohol and Beverages

Alcoholic beverages, particularly beer and wine, are set to face increased excise duties based on alcohol content. This measure aims to raise government revenue from non-essential products, potentially reducing excessive alcohol consumption. Critics within the beverage industry argue that the proposed taxes could impact business revenues, lead to job losses, and encourage the growth of illicit alcohol markets. However, Mbadi reiterated that the government remains open to feedback from industry stakeholders and is considering potential amendments to the proposal.

7. Reintroduction of Withholding Tax on Interest from Infrastructure Bonds

Infrastructure development is a core part of Kenya’s Vision 2030 strategy, and infrastructure bonds play a crucial role in financing these projects. To attract more revenue from these investments, the Treasury has proposed reintroducing a withholding tax on interest from infrastructure bonds. This move, while aimed at increasing tax revenue, could also impact investor sentiment, as infrastructure bonds have been historically popular among investors due to their tax-exempt status. Treasury officials have indicated that the new tax would be reviewed periodically to ensure it aligns with Kenya’s infrastructural goals.

8. Railway Development Levy and Minimum Top-Up Tax on Multinationals

As part of its infrastructure development strategy, the Treasury plans to increase the railway development levy from 1.5% to 2.5%. This levy, initially introduced to support the Standard Gauge Railway (SGR), is a significant component of the government’s efforts to improve logistics and trade efficiency within Kenya and across the East African region.

Additionally, the Treasury has introduced a minimum top-up tax to ensure multinationals pay a corporate tax rate of at least 15%. This measure aligns with global efforts, such as the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, which seeks to curb tax avoidance by multinational corporations. Kenya’s move is expected to bring additional revenue to the exchequer while ensuring a fair playing field for local businesses.

Public and Stakeholder Reactions

The proposed tax revisions have generated mixed reactions from the public and industry stakeholders. While consumer advocacy groups have commended the Treasury’s decision to shield essential goods from VAT increases, some business leaders express concern that the new taxes on sectors like aviation and digital services may stifle economic growth. “It’s essential that the government finds a balance,” said Samuel Maina, president of the Kenyan Association of Manufacturers, “to avoid creating disincentives for investment, especially at a time when economic recovery is critical.”

Meanwhile, digital economy stakeholders, particularly foreign tech giants and local startups, are monitoring developments closely. While the Treasury has emphasized that the new digital taxes are intended to level the playing field, industry insiders fear that the tax burden could disproportionately impact small businesses and deter investment in the fast-growing digital sector.

Treasury’s Stance on Competitiveness and Economic Growth

Treasury CS Mbadi has repeatedly emphasized that the tax measures are not intended to hinder economic growth or burden consumers unnecessarily. Instead, he argues, they are essential for modernizing Kenya’s tax system, broadening the tax base, and fostering a more equitable fiscal environment. “We are not interested in making the Kenyan economy uncompetitive,” he stated in a recent meeting with KRA officials. Mbadi also encouraged industry leaders and the public to share feedback and concerns to ensure the new tax regime serves Kenya’s economic interests.

Looking Forward: Implementation and Adjustments

As the tax bill progresses through parliamentary review, additional amendments are anticipated based on feedback from various stakeholders. The Treasury has signaled that it remains open to adjustments and will continue working with industry representatives to address concerns and minimize potential economic disruptions. If implemented as planned, the new tax measures will come into effect in January 2025, with the government closely monitoring their impact on revenue collection and economic growth.

In summary, the proposed tax reforms represent a pivotal shift in Kenya’s fiscal policy. By targeting sectors with higher disposable incomes, the Treasury aims to increase revenue without significantly impacting the affordability of essential goods. However, the success of these reforms will largely depend on how effectively they are implemented and the government’s responsiveness to industry feedback. With Kenya’s growing economy and ambitious development goals, the tax review underscores the Treasury’s commitment to modernizing its revenue collection framework while addressing the diverse needs of its citizens.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

8th November, 2024