Kenyans face more tax pain as the government begins implementing IMF-backed revenue growth measures that are expected to generate an additional Sh806 billion over the next three years.
The government will include in the 2024 Finance Bill all tax measures proposed under the first year of the recently published Medium-Term Revenue Strategy covering the period from 2024/2025 to 2026/2027 fiscal years, the IMF said in a new assessment report on Kenya.
The IMF’s demand that the government immediately implement new tax measures comes at a time of rising inflation and weakening economic activities, which has made it difficult for Kenya’s Kwanzaa administration to impose new taxes and fees without opposition.
The MTRS envisages a gradual increase in Kenya’s tax-to-GDP ratio by five percentage points by 2027 – effectively translating into additional revenues of Sh806 billion over three years from the country’s projected 2024 nominal GDP of Sh16.124 trillion. shilling.
The tax-to-GDP ratio is expected to close the current fiscal year (ending June) at 15.1 percent, with the International Monetary Fund noting that Kenya is the only country in the East African Community that has seen a long-term decline in its tax-to-GDP ratio. Total. -GDP ratio since 2014.
In its first year of implementation, the MTRS calls for a range of changes including a motor vehicle circulation tax, reintroduction of minimum taxes, withholding taxes on all imports and payments for supplies to public bodies, and a review of duties on alcohol and tobacco products. .
There is also an expansion of the digital services tax to include local entities, a potential upward revision of the rental income tax to match the corporate tax rate and the introduction of a VAT on non-essential education services, excluding early childhood and basic education.
“Implementation is expected to begin in early 2024 and be subject to a formal monitoring process at ministerial level to ensure that any emerging issues are resolved in a timely manner with the adoption of the mid-term strategy,” the IMF said. “In this regard, the authorities have developed a well-sequenced implementation matrix for the mid-term strategy measures and intend to include in the 2024 Finance Bill all revenue measures envisaged under the first year of the mid-term strategy.”
The Finance Bill will be submitted to Parliament by the end of April, in accordance with the time limits set in Kenya’s budget preparation process.
But despite the enhanced tax measures, revenue performance in the current fiscal year has remained below target, indicating an economy that is increasingly struggling to keep up with the creation of new revenue-generating jobs.
The latest revenue performance data from National Treasury shows that in the five months to November 2023, tax revenues amounted to Sh847.3 billion, which is Sh164 billion short of the pro rata target of Sh1.01 trillion.
In a letter to the IMF ahead of the program review, Treasury Secretary Njuguna Ndongo attributed the poor performance to lower-than-expected income taxes and windfall taxes due to weak activity in key sectors such as banking, construction and ICT.
“The poor performance… (was also due to) the continued implementation of transfers to provinces and public sector enterprises (affecting the payment of income-based wage tax of public sector employees) as well as to enterprises (affecting VAT),” the CS said in the letter, which he shared in Signed by Central Bank of Kenya Governor Kamau Thugge.
The IMF published the report after completing the sixth review of Kenya’s multi-year arrangements with the Fund. The audit revealed new disbursements worth Sh110 billion, bringing total disbursements to Sh418 billion ($2.6 billion).