Re-Thinking Revenue Mobilization measures in Kenya

On June 26, 2023, the Kenyan president, William Ruto, passed the Finance Act 2023.  The Finance Act introduced various measures and amendments to the Income Tax Act, Value Added Tax (VAT) Act, and Excise Duty Act. The aim was to broaden tax capacity and stabilize debt. Following the enactment of the Finance Act, there has been an increase in living costs, being a knock-on effect of the rise in VAT on petroleum products from 8 percent to 16 percent. Additionally, there are massive job losses as employers revert to laying off staff to meet increasing operating costs. The aftermath will not only erode citizens’ standards of living but also curtail their economic freedom. The adverse effects of the Finance Act 2023 demand that the government rethink its revenue mobilization measures by reviewing its tax expenditures policy. Additionally, the Kenyan government can more effectively foster revenue collection through proper governance and an improved business environment.

The Kenyan government should review its policies on tax expenditure to ensure more efficacy. Tax expenditure is the total amount of money that the government forfeits through tax incentives to encourage investments in specific sectors of the economy. Kenya’s total tax expenditure rose from KSh 267.1 billion in 2020 to KSh 316 billion in 2021, peaking at KSh 393.6 billion in 2022. However, the growth and job creation returns are not commensurate with the tax expenditure. One of the primary reasons for the disparity is that large corporations have been the greatest beneficiaries of VAT-related tax expenditures, leaving out small, micro, and medium enterprises (SMEs), which comprise 98 percent of Kenyan businesses. Incentives should be re-designed to target key sectors like the agriculture and manufacturing sectors known for driving business growth, and job creation, and expanding the tax base. In addition, the National Treasury and the Kenya Revenue Authority (KRA) should review the incentive criteria and publish selected corporations to ensure transparency and equity. This review should involve assessing factors such as incentives’ economic impacts, job creation’s extent, and alignment with national goals. Information on the selected corporations for tax incentives should be published along with the reasons for their selection.

To read more, check the full article on Ventures Africa.

Photo by Mustafa Omar via Unsplash.