The National Treasury is proposing to hike the Value Added Tax to 18 per cent from the current 16 per cent in a bid to harmonise it with East African peers.
If this happens, the cost of most products used by households will rise by two per cent, piling more pressure on an already struggling population that now spends almost half of its revenue on taxes.
The other five members of the trading bloc – Burundi, Rwanda, South Sudan, Tanzania, and Uganda – are currently charging VAT rates of 18 per cent.
The proposal to raise the VAT regime in Kenya comes amid concerns by regional peers who insist that Kenya’s reluctance to update its tax could distort the EAC common market.
In 2020, Kenya said it would not change its VAT plan, with the nation’s then National Treasury Principal Secretary Kamau Thugge (now CBK governor) announcing that it would remain at 16 per cent.
VAT is among the top domestic revenue earners for Kenya, with the Kenya Revenue Authority increasing collection by 5.23 per cent, or Sh27.34 billion, last year to Sh550.04 billion.
This was, however, a sharp retreat from the previous year ended June 2021 when receipts grew Sh112.34 billion or 27.35 per cent despite the gradual rollout of the electronic tax invoice management system (eTIMs) last financial year.
The Institute of International Finance says improving the VAT collection to five per cent of GDP can further cut the country's budget deficit by 0.6 per cent.
Also in the detailed Kenya Kwanza government's Draft Medium-term Debt Strategy for the period 2024-25 and 2026-27 is the proposal to introduce VAT on educational and insurance activities.
Ruto’s administration is proposing new taxation measures that will see schools offering more extra-curriculum activities likely to pay more for the services.
This is in total disregard of the ongoing Competency Based Curriculum that infuses theory and practical models of learning.
The National Treasury now wants to go for students who take part in non-educational services, such as swimming lessons, tae kwondo, chess, and skating, which will be subject to VAT.
It asserts that the proposal is warranted because the non-uniformity of tax exemptions on educational services in various schools arises from disparities in both fees and the range of services offered.
“Some schools provide some services that are not directly related to education. The exemption from VAT on education that include all services provided by schools create unfairness as some services like swimming when offered out of school are vatable,” reads Treasury’s MTRS.
Education services in Kenya are exempt from VAT to make them accessible to all learners.
However, the Exchequer argues that the benefit of the exemption is not uniform across all learners due to differences in fees charged and services provided.
Treasury Cabinet Secretary Njuguna Ndung'u in the proposal said that in order to remove this discrimination, there is a need to impose VAT on the additional benefits. In this respect, the government will explore the introduction.
Should Treasury’s proposal go through education services will be subjected to VAT, currently charged at 16 per cent on most products and services.
At the same time, the National Treasury is proposing to put alcoholic beverages and cigarettes on the radar again with excise duty after a short reprieve.
The Exchequer is proposing to harmonise the excise rate for filtered cigarettes, non-filtered cigarettes and other tobacco products while excise duty on alcohol will be pegged on alcohol content.
Currently, taxation of alcoholic products is based on various criteria including consumer behaviour, the value of the product and the volume of consumption as well as alcohol content.
"In order to streamline the taxation of alcoholic products, over the strategy period, the government will review the basis of taxation to the alcoholic content of the product taking into consideration the harmonisation with EAC region," the proposal reads in part.
It adds that given the negative health externalities of these products, the rates will be based on the extent of the externalities as well as recommendations of the ongoing EAC partner states study.
Taxes for sugar-based non-alcoholic beverages will also be reviewed under the proposed tax regime as part of the government’s mission to prevent obesity and diet-related non-communicable diseases.
Furthermore, the National Treasury is proposing to introduce a Motor Vehicle Circulation Tax which will target Kenyans buying cars at the point of acquiring an insurance cover.
The new tax will come into effect once the buyer gains full ownership of the vehicle.
According to the proposal, the Motor Vehicle Circulation Tax will be levied concurrently with the carbon tax, which will be introduced to discourage the use of fossil fuels.
“There will be a minimum tax amount payable by all motor vehicle owners in addition to a graduated amount based on the engine capacity of the vehicle,” the document reads in part.
The Kenya Kwanza government is looking at introducing an excise tax on tractors, forklifts, excavators and earth movers but also introducing tax incentives that promote the use of green energy.
It also intends to review the current taxes on electric vehicles that are environmentally friendly to support the transition into a green economy.
Kenyans have until October 6, 2023, to submit comments on the proposals from Treasury.
