The government plans to start adjusting excise duty on some goods every six months from July to reflect cost of living changes by pairing the tax with the inflation rate.
According to the International Monetary Fund, Kenya disclosed this in a letter last month when requesting for the one-year stand-by loan of $688.3 million (Sh63.09 billion) approved last Monday to cushion against unforeseen shocks to her macroeconomic stability.
The National Treasury said the move is part of the ongoing, far reaching reforms to raise the ratio of tax revenue to national wealth to 25 per cent of the gross domestic product, from about 20 per cent presently.
This will see excise duty paid by manufacturers on some goods passed to consumers through pricing, and will be recalculated half-yearly to reflect inflationary tendencies over six months.
In a memorandum attached to the January 16 letter of intent to the IMF, Cabinet Secretary Henry Rotich said a Bill will be presented to parliament in June for approval.
“We will submit to Parliament by end-June 2015 a proposal to revise excise rates for selected products, and an automatic semi-annual inflation indexation of specific excise taxes, to prevent the erosion of excise revenue in real terms,” Rotich said in the letter to IMF managing director Christine Lagarde.
“This is aimed at generating additional revenue of 0.1 per cent of GDP per year.”
Excisable goods likely to be affected include soft drinks, alcoholic beverages, tobacco, fuel, motor vehicles, plastic bags and imported second hand computers.
The Treasury is targeting in excess of Sh5 billion in additional excise duty collections annually with the indexation, based on 2014 GDP estimates of Sh5.13 trillion ($56.2 billion).
The Kenya Revenue Authority collected Sh963.8 billion in the financial year ended June 30, 2014, roughly 19.6 per cent of the GDP.
The taxman has a target of Sh1.18 trillion, or 24.18 per cent of the 2014 national wealth estimates, but had only managed Sh476.52 billion in the half-year period to December 31.
Rotich told the IMF that the newly reintroduced capital gains tax – five per cent on net proceeds from sale of property, shares and bonds – is expected to rake in about 0.2 per cent (Sh10 billion) of the GDP annually.
However, CGT implementation has faced opposition from the capital markets and have since sought court intervention.
“We will also introduce several measures aimed at improving tax compliance,” Rotich said in the letter.
“This package of measures will allow us to make significant progress towards the EAMU [proposed East African Monetary Union protocol] indicative tax revenue target of 25 per cent of GDP.”