The government lost Sh393.5 billion in taxes through exemptions and zero rating of products and services in 2022 despite the push to raise local revenue collections.
Latest National Treasury data shows that the total tax expenditure increased by Sh100.6 billion to Sh393.5 billion from Sh292.922 billion in 2021.
According to the data contained in the 2023 Tax Expenditure Report, the government's tax exemptions and zero-rating increased on all tax heads in 2022 except Personal Income Tax which had a marginal drop of Sh84.06 million.
According to the report the upward trend on total tax expenditure from 2020 to 2022, is attributed to increasing expenditures across the various tax heads as a result of increased economic activities.
Treasury says the review of various tax laws to achieve specific government objectives has resulted to introduction of several tax incentives thus contributing to the increase in tax expenditures.
“In particular, government provided Import Duty exemption to allow importation of food items into country to cushion Kenyans from high cost of food as a result of drought and high commodity prices; introduction of 150 percent in capital allowance to promote investment; and introduction of insurance relief for contribution of NHIF, among others,” the report reads in part.
In the period under review VAT domestic increased by Sh37.2 billion to Sh248.3 billion in 2022. This was from Sh211.09 billion in 2021, contributing 36.94 percent of the total increase in the 2022 tax expenditure.
The report further shows that contribution to the total tax expenditure by tax head in 2022, shows that Value Added Tax (domestic) accounted for most of the tax expenditure by 63.1 percent, followed by VAT on imports (Fuel) and Corporate Income Tax by 11.3 percent and 10.9 percent, respectively.
Over the same period Corporate Income Tax increased by Sh20 billion, VAT on Imports (Fuel) by Sh16.5 billion, Fees and Levies by Sh9.2 billion, Import duty by Sh8.8 billion, and VAT imports by Sh8.4 billion.
Excise Duty on imports and Excise Duty (domestic) had the least contribution to the total increase in the 2022 tax expenditure by 0.34 percent and 0.4 percent respectively
Despite being the highest contributor to tax expenditure, VAT domestic contribution has been on a downward trend since 2019, declining from 80.3 percent to 63.1 percent in 2022.
VAT on imports (Fuel) and Fees and levies have been on an upward trend, while the other tax heads have been fluctuating over the period
The total tax expenditure to GDP ratio increased to 2.94 percent in 2022 from 2.44 percent in 2021.
VAT expenditure as a percentage of GDP increased from 2.06 percent in 2021 to 2.32 percent in 2022.
There was also an increase in Income Tax expenditure, Import Duty expenditures and expenditures from Fees and Levies to GDP ratio in 2022.
The increase in the tax expenditures reflects the recovery of economic activities in the country after the Covid-19 pandemic and the introduction of tax incentive measures through Finance Acts 2021 and 2022 to promote investment in certain sectors of the economy.
