Kenya: Proposed economic and tax reforms in fiscal year 2023/2024

• General Overview »
  

• Tax Policy Reforms »

• Tax Administration Reforms »

• Reforms to Strengthen Tax Compliance »

• Tax Incentives »

• Conclusion »

To fund the economic turnaround and inclusive growth plan, the government aims to generate revenue of 3 tril­lion KSh in the budget year 2023/24 and 4 trillion KSh over the medium term. This will be achieved through a combination of tax policy and administrative reforms aimed at reducing tax gaps, enhancing revenue per unit, and increasing tax compliance rates. The reforms will be crucial in financing the government’s economic plan which focuses on six key pillars namely, agriculture, micro, small and medium enterprise (MSME) economy; hou­sing and settlement, healthcare, digital superhighway and creative economy, environment and climate change. 

Regarding tax policy, the BPS highlights that the government will finalise the development of the National Tax Policy and the Medium-Term Revenue Strategy (MTRS) for the period FY 2023/24-2026/27 to boost the revenue mobilization efforts by the Government. The main reasons for implementation of the National Tax Policy Frame­work according to the BPS is to strengthen the administrative efficiency of the tax system, impart consistency and certainty in the tax legislations and management of tax expenditure. The MTRS aims to undertake effective tax system reforms comprehensively, with aims including raising ordinary revenue to GDP from 15 per cent in 2021/22 to 25 per cent by 2030 and increasing the tax compliance rate from 70 per cent in 2021/22 to 90 per cent by 2030. Other aims of the MTRS includes ensuring that the tax policy aims align with other government aims such as ease of doing business and enhancement of the domestic revenue mobilization by strengthening collaboration between the ministries, departments and agencies, county government, private sector and the general public.

The BPS has proposed various policy reforms that are to be implemented by the Kenya revenue Authority (KRA) to boost revenue collection. It looks to reduce the value added tax (VAT) gap from 38.9 per cent to 19.8 per cent of the potential by introducing an electronic Tax Invoice Management System (eTIMS) as highlighted in the KRA Corporate Plan. The BPS also aims to reduce the Corporate Income Tax (CIT) gap from 32.2 per cent to 30 per­cent as proposed in the KRA Corporate Plan. In addition, the BPS envisages the integration of KRA tax system with telecommunication companies, expansion of tax base in the informal sector based on the MSME survey which shows that the potential taxable base in the sector is 2,800 billion KSh, and implementation of Rental Income Tax Measures by mapping rental properties. Other policy reforms proposed in the BPS includes intro­duction of measures at the Customs and Border Control using on technology and enhanced data analytics to increase revenue per unit and improving the technical abilities of KRA through skills, technology and additional staffing. 

The government through KRA intends to address the challenges hindering tax compliance by implementing va­ri­ous measures. KRA aims to address the challenge of missing trader phenomenon/non/under declaration of sales and use of false input claims by fully introducing eTIMS, restrictions to eTIMS compliant invoices for in­come tax deductions and deployment of big data analytics to drive compliance. The KRA also aims to address the challenge of unavailability of critical 3rd Party Data by using for automation of systems for all key Govern­ment entities to allow seamless exchange of information for a complete view of the taxpayers’ economic trans­actions and improvement of KRA ability to drive compliance intervention. Other compliance reforms high­ligh­ted in the 2023 BPS includes placement of resident officers to monitor production in factories, establishment of a Production Monitoring Command Centre, close monitoring of payments from Government to ensure correct taxes are declared and paid, formation of a multiagency team to investigate sources of counterfeits and take necessary action and increasing synergy with the Customs Department on utilisation of Scanners to identify excisable goods and ensure accurate declaration and harmonization of excise rates across the EAC region.

The BPS proposes introducing tax incentives in different sectors to promote local manufacturing and pro­duc­tion. The statement shows that the Government aims to review the tax regime and inflated cost of doing busi­ness to increase domestic manufacturing of pharmaceutical products and other essential to address the issue of punitive taxes and the inflated cost of production in the industry. The government also intends to offer tax incentives to commerce to commercial transporters and public service vehicles operators to encourage the adop­tion of electric vehicles in the transport industry. The BPS articulates tax incentives to harness the poten­tial of the sports industry. The government aims to supply a dedicated tax and public-private partnership struc­ture that will help infrastructure development in the sports industry. 

The BPS looks to transform the nation's economy and spur growth through various tax policies and adminis­tra­tive reforms. The plan proposes measures to reduce tax gaps, enhance revenue per unit, finalise the National Tax Policy and MTRS, introduce tax incentives in different sectors, and improve tax compliance rates. These mea­sures are expected to increase investment in core sectors, generate revenue, and promote local manu­fac­turing and production while enhancing revenue mobilization.