On June 26, 2023, the Kenyan president, William Ruto, passed the Finance Act 2023. The Finance Act introduced various measures and amendments to the Income Tax Act, Value Added Tax (VAT) Act, and Excise Duty Act. The aim was to broaden tax capacity and stabilize debt. Following the enactment of the Finance Act, there has been an increase in living costs, being a knock-on effect of the rise in VAT on petroleum products from 8 percent to 16 percent. Additionally, there are massive job losses as employers revert to laying off staff to meet increasing operating costs. The aftermath will not only erode citizens’ standards of living but also curtail their economic freedom. The adverse effects of the Finance Act 2023 demand that the government rethink its revenue mobilization measures by reviewing its tax expenditures policy. Additionally, the Kenyan government can more effectively foster revenue collection through proper governance and an improved business environment.
The Kenyan government should review its policies on tax expenditure to ensure more efficacy. Tax expenditure is the total amount of money that the government forfeits through tax incentives to encourage investments in specific sectors of the economy. Kenya’s total tax expenditure rose from KSh 267.1 billion in 2020 to KSh 316 billion in 2021, peaking at KSh 393.6 billion in 2022. However, the growth and job creation returns are not commensurate with the tax expenditure. One of the primary reasons for the disparity is that large corporations have been the greatest beneficiaries of VAT-related tax expenditures, leaving out small, micro, and medium enterprises (SMEs), which comprise 98 percent of Kenyan businesses. Incentives should be re-designed to target key sectors like the agriculture and manufacturing sectors known for driving business growth, and job creation, and expanding the tax base. In addition, the National Treasury and the Kenya Revenue Authority (KRA) should review the incentive criteria and publish selected corporations to ensure transparency and equity. This review should involve assessing factors such as incentives’ economic impacts, job creation’s extent, and alignment with national goals. Information on the selected corporations for tax incentives should be published along with the reasons for their selection.
In the 2020 Business Report by the World Bank, Kenya’s rank in property registration had declined to 134 from 122 in the 2019 report. This decline in the ease of registering property impedes both domestic and foreign investment. The government can improve the ease of property registration by lowering consent applications and title search fees that ordinarily create hurdles in the property registration process. The Kenyan government can also foster transparency in property registration processes by publishing official court statistics on property dispute cases. Improving property registration processes would enhance legal certainty, lowering the risk of property rights disputes. Furthermore, it would also be property ownership by businesses, which they can use as collateral to secure loans for expansion.
The Office of the Director Of Public Prosecution estimates that Kenya loses 30 percent of its budget to corruption. One reason for this is poor governance, as governance plays a significant role in promoting tax revenues. Proper governance entails ensuring transparency and accountability in the use of tax revenues. If businesses and citizens realize more value for the taxes they pay through improved public services, they would have less incentive to evade taxes. The Kenyan government must carry out civil service reforms to weed out corrupt officials involved in the pilferage of tax revenue.
International donors and civil society groups can play a pivotal role in ensuring accountability in governance and tax transparency. International donors can demand that the government seal the loopholes highlighted in the auditor general’s reports on tax revenue expenditure as a condition for receiving aid or funding. Likewise, civil society groups can pursue collective action to demand proper governance. Collective action entails actions undertaken by groups of individuals towards achieving a collective goal, in this case, pressing for accountability from the government in the use of tax revenues. An example of where collective action succeeded is in Brazil. Brazilian civil society organizations led a movement against parliamentary impunity, resulting in a clean record bill that bars politicians with a criminal record from running for office for at least eight years. The combined efforts of international donors and civil organizations can provide a crucial frontier for checking the excesses of the government.
Taxation is one of the surfeit ways to fund a country’s budget. However, just a few months after the enactment of the Finance Act of 2023 in Kenya, the aftermath effects seem largely negative: business closures, job losses, and heightened living costs. To mobilize more revenue collections, the Kenyan government should review its tax expenditures policy, improve the business environment, and improve governance.
Article by Lewis-Miller Kaphira is a writing fellow at African Liberty.
