The National Treasury and Planning ministry has publicly released its Draft Medium-term Debt Strategy paper for the upcoming three-year period of 2024/25 to 2026/27.
The comprehensive document outlines the administration’s proposed approaches and specific measures aimed at prudently managing the country’s accumulating public debt obligations while also enhancing domestic revenue mobilization channels.
The wide-ranging draft strategy puts forward a number of significant tax policy changes and reforms across various sectors of the economy that could substantially impact companies and individuals.
The government is allowing a public comment period until October 6, 2023 for stakeholders to provide input on the proposals before finalization.
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A key tax administration proposal is to amend the Data Protection Act legislation passed in 2019 that established safeguards on access to personal and corporate data. The draft strategy calls for exempting the Kenya Revenue Authority (KRA) tax agency from the provisions of this law to remove constraints on the taxman’s ability to access taxpayer information as deemed necessary. This proposed exemption would build on the Finance Act 2023 which newly authorized the KRA to establish an integrated digital data management and reporting system on taxpayers.
In terms of consumption taxes, the draft strategy aims to raise the standard Value-Added Tax (VAT) rate applied on most goods and services up to 18 percent, bringing it on par with the prevailing rates in neighboring East African Community countries like Uganda and Tanzania. Kenya’s standard VAT rate currently stands at 16 percent. The draft also suggests broadening the VAT base by reviewing and eliminating select VAT exemptions, zero-ratings, and other preferential treatments applicable to certain goods, services, sectors, and vulnerable groups.
On a related matter, the strategy proposes expanding VAT taxation to cover non-academic services offered by schools, colleges, and other educational institutions such as catering, housing, transport, and entertainment services. The draft does not specify clear criteria for determining which education-linked services would continue to be VAT exempt.
In reviewing income tax policies, the draft strategy calls for converting the tax treatment of registered pension schemes from the current Exempt-Exempt-Taxable (EET) model to a full Exempt-Exempt-Exempt (EEE) model. This would provide a tax exemption on pension withdrawals and payments in addition to the present exemptions on contributions and investment income, removing a layer of taxes on retirees.
The draft also recommends increasing the maximum annual turnover threshold for VAT registration, which has remained unchanged at 5 million Kenyan Shillings since 2007, to enhance ease of doing business for smaller enterprises. However, this VAT threshold proposal appears to conflict with the recently passed Finance Act 2023 which lowered the separate annual turnover threshold for the presumptive turnover tax from 5 million to 1 million Shillings.
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The draft strategy resurrects the concept of a minimum alternate tax, which imposes a low rate levy on gross turnover, just months after the Tax Appeals Tribunal declared the previous minimum tax unconstitutional. The new minimum tax proposals suggest making it sector-specific and limiting the number of years any business would be subject to it.
In addressing rental income, the draft strategy proposes either raising the preferential flat rate of 7.5 percent on annual gross rental earnings below 15 million Shillings up to the standard corporate income tax rate of 30 percent or retaining the 7.5 percent rate but drastically lowering the eligibility threshold. This comes shortly after the Finance Act 2023 expanded the reduced rental tax rate to include income from commercial building rentals rather than just residential units.
To stimulate economic growth, the draft strategy advocates reducing the general corporate income tax rate from the current 30 percent down to 25 percent over the next three years, consistent with regional and global tax rate lowering trends. It also calls for another round of revisions to the personal income tax rate slab structure and brackets. However, details of whether the personal income tax rate changes would involve increases or reductions are unclear at this stage.
On excise duties, the draft puts forward bringing back higher excise tax rates on alcoholic beverages and tobacco products, after a break in excise hikes in the latest 2023 Finance Act. The strategy proposes levying excise duty based directly on alcohol content rather than using indirect measures such as volume or sales value.
In a move to expand the tax base, the draft strategy introduces a new concept of an annual Motor Vehicle Circulation Tax which would be payable alongside the mandatory third-party motor insurance coverage renewal by all vehicle owners.
The presumptive turnover tax, a minimum percentage levy on annual business permit fees aimed at small informal enterprises but which generated insignificant revenue when first introduced, will make a reappearance. However, this time in modified form by tailoring the rates based on business sector and location rather than using a national flat rate. Successful implementation will require close collaboration between the national and county governments.
In a major shift, the draft strategy proposes expanding the recently established 1.5 percent Digital Service Tax on gross transactions to apply to both Kenyan residents and non-residents, after earlier limiting it solely to non-resident digital service providers.
To simplify taxation of the predominant agriculture sector, the draft introduces a new final withholding tax collectible by farmer cooperatives and agriculture produce marketing intermediaries at a rate not exceeding 5 percent of gross value on certain produce.
As per the official justification given in the draft document, the raft of tax policy changes and reforms are primarily aimed at boosting government revenue collections, enhancing the overall equity and progressivity of the tax system, promoting broadly-shared economic development, and aligning Kenya’s tax policies closer to international and regional standards.
However, some of the specific proposals are expected to meet resistance during the public consultation period from impacted sectors and stakeholders that may view them as imposing excessive tax burdens, worsening unfairness, or detrimental to coherence and consistency in tax policy.
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