Manufacturers now say higher taxes will not plug Kenya's revenue deficits even as they warn that a rise in illicit trade is denying the state revenue.
This is in the wake of continued revenue shortfalls despite the introduction of new higher taxation measures, with Kenya Revenue Authority struggling to meet its target.
In the eight months to February, KRA collected Sh1.37 trillion, leaving it with a huge task to collect at least Sh1.4 trillion in four months, to hit its Sh2.77 trillion target for the current financial year ending June 30.
The current fiscal year’s first quarter (July-September) registered its slowest pace of increase in tax collection since 2018, excluding the Covid-19 pandemic year.
The 2024/25 budget is placed at Sh4.12 trillion, from a revised Sh3.9 trillion in the current financial year. Ordinary revenues to be collected by KRA are projected at Sh2.96 trillion.
KRA missed its ordinary revenue collection target for the financial year 2022/23 when it collected Sh2.04 trillion, against a target of Sh2.14 trillion.
Among changes in the tax regime include the introduction of income tax on repatriated income, digital asset tax (DAT) payable by persons who derive income from the transfer or exchange of digital assets.
There was also the revision of the Value Added Tax (VAT) rate on petroleum products from eight per cent to 16 per cent, among others.
On Tuesday, President William Ruto also signed into law the Affordable Housing Bill 2023, clearing the path for deduction of a three per cent housing levy on all salaried employees which will be equally matched by the employer.
The government is also targeting 2.75 percent of the gross salary of the employed to the Social Health Insurance Fund (SHIF).
Further, National Treasury is mulling the introduction of a 16 per cent VAT on bread and milk in a fresh push to boost revenue collections.
Also on the cards is the levying of taxes on farm produce delivered to co-operative societies.
The Kenya Association of Manufacturers (KAM) has said over taxation will lead to evasions as businesses and individuals feel pressured.
This, it said, will lead to an increase in illicit trade, which conversely will deny the government revenue.
KAM wants the government to address the challenges posed by high excise taxes and illicit trade through fiscal, regulatory, enforcement and public awareness approach.
“Simplifying tax structures and implementing fair and transparent tax policies can help address illicit trade. Further, collaborating with neighbouring countries to harmonise tax policies and regulatory measures can help tackle smuggling,” KAM’s anti-illicit trade committee chairperson, Zipporah Kuria said.
She said enhancing border security and customs enforcement to detect and deter illicit trade is also crucial.
This includes investing in technology and training of law enforcement officers.
KAM also proposes a robust track-and-trace system for products, such as cigarettes and alcohol to help authorities monitor the supply chain and combat illicit trade.
A recent National Baseline Survey on Counterfeit and Other Forms of Illicit Trade in Kenya by the Anti-Counterfeit Authority (ACA) shows the total value of illicit trade is in excess of Sh826 billion towards the Sh1 trillion mark.
This is enough to fund the country’s development budget for the current financial year estimated at Sh769.3 billion, and it means the country would not need to go for the Sh720.1 billion in loans to bridge the budget deficit.
KRA misses more than Sh153 billion annually in potential revenue to illicit trade, according to ACA.
“While manufacturing currently contributes 7.8 per cent to GDP, the negative extraction from GDP by illicit trade cancels out the contribution by the manufacturing sector,” Kuria noted.
A KAM research shows manufacturers lose about 40 per cent of their market share to counterfeits.
