Nairobi — Kenya’s tax laws are to be reviewed once every five years as part of a national tax policy proposal that is seen as part of reforms aimed at increasing revenue and promoting a predictable tax environment for businesses operate.
The National Treasury has denounced that Kenya’s revenue yield is still below the East African Community’s desired target of 25% of GDP, as ordinary revenue as a percentage of GDP has declined over the past ten years, rising from a peak of 18.2% in the 2013/14 financial year. to 13.8% in fiscal year 2020/21.
The new provision of the draft policy aims to eliminate the unpredictability of tax policies, seen as an obstacle to the country’s attractiveness for investors.
“To ensure a reasonable degree of predictability of tax rates and tax bases, the government will engage stakeholders before undertaking any changes to tax laws. The analysis should consider the impact of proposed changes on tax revenue, development, investment, employment, and economic growth,” the draft policy reads in part.
This will be a change from the current regime where taxes are frequently changed by the finance law, the government for example in 2018 halved the VAT on petroleum products and a week ago it also reduced the VAT on LPG gas by 50%.
But Ukur Yattani’s office now argues that the 8% VAT rate for petroleum products creates unfair advantages over other goods that are subject to 16% VAT.
“In 2020, there are two general VAT rates: 8% for petroleum products, 16% for other goods/services and 0% for exported goods. The rate on petroleum products creates undue advantages over other goods “explained the Treasury. part of his challenge,” the policy reads.
In its proposal, the Treasury wants to eliminate multiple rates and subject all goods to a rate of 16%, with the prime rate not to be lowered below 12%.
“There will be a single general rate for VAT and where a preferential rate is granted it will not be less than 25% of the general rate,” the draft policy states.
This, according to the Treasury, will minimize the high VAT tax expenditure incurred by the government, which is estimated at 2.2% of GDP, and create a fair regime.
Kenya’s revenue performance, according to the government, is also affected by the expansion of the informal sector which is difficult to tax, weak tax compliance and the complexity of taxing the emerging digital economy.
Tax incentives such as tax exemptions, tax deductions, allowances, tax deferral and preferential tax rates have also been listed as impediments to revenue collection “because they erode the tax base and force the government to forgo tax revenue estimated at 2.96% of GDP as of 2020 compared to the average of 2.9% for African countries.”
“Although the incentives are aimed at promoting investments and providing relief to low-income people and vulnerable groups in society, this has a negative impact on revenue mobilization and the implementation of national development programs,” the report said. 46 page document.
But the government now wants to create a criterion for granting tax incentives taking into account the costs and benefits of the incentives and also ensuring that the incentives given to specific sectors have an expiration where possible.