The National Assembly recently adopted and approved a report tabled on the floor of the house by its Departmental Committee on Finance and National Planning (the Committee) on the consideration of the Draft National Tax Policy (the Report). It should be recalled that the Draft National Tax Policy (the Draft Policy) was tabled before the National Assembly on 27th April 2023, following which the National Assembly undertook public participation and invited different stakeholders for engagement. The Draft Policy was intended to guide the progressive development and administration of Kenya’s tax system to facilitate adequate revenue mobilisation for the implementation of the government’s programs. The tabling of the Report by the Committee came against the backdrop of the publication of the Draft Medium-Term Revenue Strategy for the Financial Years 2024/2025 to 2026-2027 (the Draft MTRS) by the National Treasury. Please see our comments on the Draft MTRS here.
Following submissions from key stakeholders, the Committee noted that Kenya’s tax policy structure is flawed because it lacks vital policy facets like a risk management framework, an implementation framework and delineable policy action and outcomes. Additionally, the Committee also noted that some of the proposals in the MTRS are misaligned to the Draft Policy.
In summary, the key recommendations from the Report included:
- the establishment of a progressive income tax band structure to ensure that the marginal income tax rate is not higher than the corporate income tax rate;
- a review of the current tax structure for pensions to transition from an Exempt-Exempt-Tax (EET) taxing method (under which both pension contributions and pension fund income are exempt from taxation whereas pension withdrawals are subject to a graduated tax structure) to an Exempt-Exempt-Exempt (EEE) pension taxing method (under which all pension withdrawals are tax exempt but exempt pension contributions are restricted to a threshold);
- a review of the current Capital Gains Tax (CGT) framework to adopt the indexation method of calculating CGT to ensure a change in property value due to inflation is factored in;
- a review of the preferential corporate income tax regime to ensure that any preferential income tax rate granted is not lower than fifty per cent (50%) of the standard corporate income tax rate. It is noteworthy that currently, the only preferential corporate income tax regime is available to entities in Export Processing Zones (EPZs) and Special Economic Zones (SEZs). SEZ entities which have become quite popular have a corporate rate of tax of ten per cent (10%) for the first ten (10) years of operation, fifteen per cent (15%) for the next ten (10) years of operation and then the standard thirty per cent (30%) thereafter. It is also noteworthy that the Draft Special Economic Zones (Amendment) Bill, 2023 proposed by the Ministry of Investments, Trade and Industry proposes to exempt SEZ entities from corporate income tax for the first ten (10) years. By this recommendation, the minimum corporate income tax for SEZ entities will be fifteen per cent (15%);
- the introduction of a single Gross Gaming Rate in the gaming, betting and lotteries sector. Currently, the gambling and betting industry in Kenya is heavy-laden with numerous tax obligations including corporate income tax at thirty per cent (30%), excise duty at twelve point five per cent (12.5%) of the amount wagered, withholding tax on winnings at twenty per cent (20%) and betting tax at fifteen per cent (15%) of gaming revenue;
- a review of the current excise duty regime to introduce an optimal excise duty rate which is to be reviewed once every three (3) years to cushion taxpayers from the challenges within the current system stemming from the continuous incremental changes on excise duty;
- a proposal to introduce multiple Value Added Tax (VAT) rates to cushion the economy against global shocks. Notably, only recently, the VAT on fuel which was previously at eight per cent (8%) was increased to a single rate of sixteen per cent (16%). The proposal to introduce multiple VAT rates is indicative of the inconsistency of government policy but this should be viewed in the wake of harsh economic realities faced by Kenyans;
- a proposal to ensure that levies charged to support local manufacturing remain unchanged for at least five (5) years to ensure certainty of tax laws;
- the harmonisation of the National Tax Policy with the Draft MTRS to obviate inconsistencies;
- the use of alternative strategies to tax informal sectors, specifically the use of electronic payments to ensure there is a money trail as well as possibly requiring businesses to withhold taxes at source when making payments in hard-to-tax sectors;
- the establishment of an efficient funding structure to ensure settlement of approved tax refunds within six (6) months. Currently, whereas the Tax Procedures Act requires refunds to be paid within six (6) months of the ascertainment of the refunds, there is a huge backlog of tax refund claims; and
- the establishment of an eligibility criteria to determine eligibility for tax incentives.
We analyse some of the key recommendations in further detail below.
| Tax Issue | Recommendation | Our Comments |
| Income Tax | The Report recommended that a progressive income tax band structure should be established to ensure that the marginal income tax rate is not higher than the corporate income tax rate. | This move is intended to mitigate the tax burden on individuals who currently bear a higher tax burden than corporates since income tax on individuals is imposed on gross income whereas that of corporates is on gain. Additionally, the current marginal income tax rate of thirty-five per cent (35%) is higher than the corporate income tax rate of thirty per cent (30%). |
| Preferential Corporate Income Tax | The Report recommended that the preferential corporate income tax regime should be reviewed to ensure that any preferential corporate income tax rate granted is not lower than fifty per cent (50%) of the standard corporate income tax rate. | In the Draft MTRS, the government had proposed that it would gradually phase out preferential corporate tax rates which apply to specific investment sectors to bring all companies within the same standard corporate tax bracket.
This recommendation proposes that the National Tax Policy should be aligned with the economic development agenda. |
| Pension | The Report recommended that the current tax structure for pensions should be reviewed to transition from an Exempt-Exempt-Tax (EET) taxing method to an Exempt-Exempt-Exempt (EEE) pension taxing method.
Additionally, it also recommended that inflation adjustment should be introduced in pensions to promote a review of the amount of pension contributions every five (5) years to keep pace with inflation, the contributing tax burden and other payroll-related levies that individuals bear. |
This recommendation aligns with the Draft MTRS which proposes to change the taxation of pensions to an Exempt-Exempt-Exempt (EEE) pension taxing method. Currently, under the EET method, both pension contributions and pension fund income are exempt from taxation whereas the pension payments are taxed. The MTRS has proposed to transition to an EEE method which proposes to make withdrawals from pensions exempt from tax, and this is irrespective of the taxpayer’s age. |
| Capital Gains Tax (CGT) | The Report recommended that the current CGT framework should be amended by adopting the indexation method of calculating CGT to ensure the change in property value arising from inflation is factored in. | This recommendation is intended to ensure that CGT is imposed only on actual gains from the disposal of property by adjusting the costs of an asset by the rate of inflation. This would be quite a welcome change. |
| Gaming, betting and lotteries | The Report recommended that the different taxes that apply to gaming, betting and lotteries should be consolidated into a single Gross Gaming Rate.
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This recommendation is in line with the Gaming Control Bill, 2023 which has proposed to introduce a single Gross Gaming Rate to mitigate the excessive tax burden that gaming, betting and lotteries operators have to bear. The implementation of this proposal would result in the consolidation of the taxes that apply to the gaming sector into a single rate. |
| Excise Duty | The Report recommended that the current excise duty regime should be reviewed to set excise duty at an optimal rate which will be reviewed once every three (3) years.
It also recommended that the optimal rate should be based on studies conducted by the Kenya National Bureau of Statistics and that the National Assembly should undertake public participation before approving the optimal rate. Additionally, it also recommended that the excise duty imposed on products should not, at any time, exceed the optimal excise duty rate. |
This recommendation is intended to promote certainty and predictability in the imposition of excise duty. Currently, the government has incrementally changed excise duty rates depending on its expected revenue collection targets. This proposal is welcome since it will ensure more certainty in tax laws, and it will also provide criteria for including and excluding essential items listed in the Second Schedule of the Excise Duty Act and the period within which such items are to remain listed. |
| Value Added Tax (VAT) | The Report recommended that multiple VAT rates should be introduced to cushion the economy against global shocks.
Additionally, it also proposed that the National Tax Policy should permit the use of VAT exemptions to incentivise investment as well as to cushion Kenyans from global shocks. |
This recommendation is intended to mitigate the effects of the economic global downturn on different products by allowing selective alteration of VAT rates to keep up with global trends.
Notably, only recently, the VAT on fuel which was previously imposed at eight per cent (8%) was increased to a single rate of sixteen per cent (16%). The proposal to introduce multiple VAT rates is indicative of the inconsistency of government policy in the wake of harsh economic realities faced by Kenyans. |
| Miscellaneous Fees and Levies | The Report recommended that the levies charged to support local manufacturing remain unchanged for at least five (5) years to ensure certainty.
Additionally, it also required that the imposition of any levy should be preceded by a comprehensive economic impact assessment. |
This recommendation is intended to promote certainty and predictability of tax laws to foster economic growth and incentivise investment.
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| Hard to Tax Sectors | The Report recommended that the National Tax Policy should be expanded to subsume a framework for the informal and agricultural sectors. Specifically, it recommended that hard-to-tax sectors should promote the use of digital/electronic payments to ensure a digital trail thereby making it easier to track payments.
Additionally, the Report also recommended that withholding tax should be introduced in hard-to-tax sectors by requiring businesses to withhold taxes at source when making payments. |
This recommendation is intended to incorporate the hard-to-tax sectors within the National Tax Policy and to develop comprehensive strategies to address the unique challenges that bedevil taxation of these sectors.
Notably, the Draft Policy identified the agricultural and informal sectors as challenging to tax. Additionally, the Draft MTRS recognised the digital sector as a hard-to-tax sector. |
Conclusion
Overall, the Report recommended other additional tax administrative measures intended to promote efficiency in tax monitoring, tax collection and processing of tax refunds. Some of these recommendations include the harmonisation of the National Tax Policy with the Draft MTRS to obviate existing inconsistencies, the use of alternative strategies to tax informal sectors, the establishment of an efficient funding structure to ensure settlement of approved tax refunds within six months and the establishment of the eligibility criteria to determine eligibility for tax incentives.
Following the tabling of the Report, the National Assembly approved and adopted the first-ever National Tax Policy on 6 December 2023. Accordingly, we anticipate that the National Treasury will commence the implementation of the National Tax Policy and the incorporation of its proposals into Kenya’s mainstream legislative tax framework.
