Kenya waived Sh259bn in taxes last year - Treasury

The 2022 Tax Expenditure Report indicates the expenditure was equivalent to 2.15 per cent of the GDP; and was a decrease by 0.067 per cent compared to 2020.

According to the report, the government’s tax expenditure in 2020 totalled Sh302 billion (2.82 per cent of the GDP).

Tax expenditure is where instead of collecting tax and expending it for a specific development goal, the Government opts to forego it in order to motivate private players participate in provision of goods and services.

It is one of the avenues that the Government uses to support its development objectives, other than direct budgetary expenditure.

Tax expenditure can also be targeted towards achievement of welfare objectives like reduction in cost of basic commodities for the vulnerable citizens.

Domestic Value Added Tax accounted for most of the total revenue forgone followed by VAT on imports.

Domestic VAT exemptions was the highest contributor to the decrease followed by income expenditure on income tax.

“Between 2020 and 2021, domestic VAT exemptions decreased by Sh22.4 billion while income tax decreased by about Sh20 billion which represent a decrease of 41.52 per cent and 38.98 per cent respectively,” says the report.

“On the other hand, VAT on imports and excise tax exemptions decreased by Sh5.7 billion and Sh4.9 billion, respectively.”

Tax expenditure on domestic VAT are spread across a range of sectors such as agriculture, manufacturing and transport.

The bulk of tax expenditures related to corporate income tax are allowances and deductions designed to encourage investment in plant and machinery.

The report noted that income tax expenditures (both personal and corporate income tax) accounted for about 6.75 per cent of the total tax expenditure for the last five years.

The 2022 Tax Expenditure Report is part of the structural benchmarks between Kenya and International Monetary Fund (IMF), that requires the National Treasury to publish Tax Expenditure and its budget implication report by end of September each year.

The report provides the information needed for tracking and evaluating tax expenditure, aids in the development of efficient tax regimes, and increases the transparency and accessibility of data on national tax expenditure.

The report also facilitates monitoring and review of tax expenditure and informs the design of effective tax interventions.

The publication of tax expenditure serves different objectives among them, to ensure openness of public finance, to foster government`s budgetary transparency and achieve specific public policy objectives.

Tax expenditure reporting provides a more complete picture of where governments spend their money and also improves transparency and accountability

To ensure sustainability and value for money from the resources foregone through such incentives, National Treasury Cabinet Secretary Ukur Yatani said the Government will continue to upscale efforts to rationalise and harmonise the tax expenditures.

He said the government will remove redundant tax expenditures and enhancing those intended to promote investments.

“In addition, there is need to have an elaborate framework for monitoring and evaluating the impact of tax expenditure in the economy,” he added.

The report noted that during the period 2019, 2020 and 2021, there was introduction of a reduced rate of 8 per cent on petroleum products which amounted to Sh9.1 billion, Sh16.8 billion and Sh28.0 billion respectively.

"The introduced reduced rate increased the tax expenditure on imports as a percent of GDP to 0.35 percent in 2019, 0.37 per cent 2020 and decreased to 0.34 per cent in 2021," it said.

"Declining trend of tax expenditure on imports as a percentage share of the GDP between the year 2020 and 2021 is attributed to the growth of the GDP which increased from Sh10.1 trillion in 2020 to Sh12.1 trillion in 2021."

The total tax expenditure for Kenya is comparable to other countries which ranges from 1.38 per cent of GDP in Burkina Faso, 4.69 per cent in Poland and 6.13 per cent in Ghana, according to Taxation, International Cooperation and the 2030 Sustainable Development Agenda and United Nations University Series on Regionalism 19.