Finance Bill 2024: Why Kenyans may not be off the hook just yet

Despite the rejection of the Finance Bill 2024 by Kenyans and its eventual withdrawal by the government, Kenyans might not be off the hook yet.

The government could still explore ways of introducing new or additional taxes, levies, and fees through the review of other laws, something that the National Treasury Cabinet Secretary nominee John Mbadi said he would look into if he got the job.

In withdrawing the Finance Bill 2024, the government noted this would result in a Sh344.3 billion revenue gap, money that was expected to be raised through the tax measures contained in the bill.

The government has drawn up a Supplementary Budget that factors in the absence of a Finance Bill this year through cutting overall spending as well as increasing the fiscal deficit, which means it will also have to borrow more than it had expected.

In the Supplementary Budget, the Treasury reduced the overall budget to Sh3.87 trillion from Sh3.99 trillion, a 3.1 percent reduction. The biggest change has been the reduction of development expenditure by Sh122 billion, which is expected to hurt new and ongoing development projects.

The fiscal deficit has also increased to Sh761 billion (4.2 percent of GDP) from Sh597 billion (3.3 percent of GDP). This will largely affect domestic borrowing, which Treasury expects to increase to Sh404.6 billion from an earlier Sh263.2 billion. The government expects to borrow the balance of Sh356.4 billion from foreign lenders.

The Supplementary Appropriation (No.2) Bill was passed by the National Assembly on July 31 and forwarded to President William Ruto for assent.
“The (Supplementary Appropriation) Bill has been necessitated by the need to realign planned expenditures to the revised fiscal framework,” explained Treasury in reference to the new budget that factors in the Sh344.3 billion revenue shortfall it faces following the rejection of the Finance Bill 2024.

“While it could be prudent to reduce expenditures by the amount equivalent to the anticipated revenue shortfall of Sh344.3 billion, this was not tenable given the delicate balance between austerity measures and cushioning the livelihoods of the people and the economy. In this regard, the bill seeks to create a balance by reducing recurrent expenditure while safeguarding critical essential expenditure in the agriculture, health, and education sectors, among others.”

And while the government has attempted to reduce expenditure, these reductions are not adequate and it might still evaluate the possibility of tax hikes.

John Mbadi, the Treasury CS nominee who has for years taken on the government for imposing punitive tax measures on Kenyans, on Friday told Parliament’s Committee on Appointments that he would try to salvage certain aspects of the Finance Bill 2024.

In the job interview, he said there were good provisions in the Finance Bill 2024 that should not be allowed to get lost and that the government had an opportunity to bring back specific amendments but through proper processes, including public participation.

“The problem we had was that the public felt they were not listened to,” he said, adding that the tax amendments that Mbadi also pointed out that in any given year, the Finance Bill tends to amend a few tax laws, something that can also be done by introducing amendment bills to the specific laws. He, however, appeared cautious, noting he would try to bring the non-contentious issues, perhaps not to antagonize Kenyans whose anti-tax protests forced President Ruto to withdraw the Finance Bill 2024.

“We have about five or six legislations that the Finance Bill usually amends. If I am approved, this house should help me bring these legislations specific to these statutes," he said.

“I believe the good provisions that have been lost in the Finance Bill, which are not contentious, can be brought as specific amendments with proper public participation.”

Analysts last week told The Standard that while the government’s best bet was brutal cuts in non-essential expenditure, it would likely gravitate towards innovative ways to increase tax revenues.

Ken Gichinga, Chief Economist at Mentoria Economics, said to navigate the impact that the absence of a Finance Bill has on revenue raising, the government will need to be innovative in introducing other revenue-raising measures as well as looking into ways to reduce pressure on government revenues.

“From a revenue-raising perspective, the government will need to be quite innovative to be able to get some revenue and in a way that is not overbearing to the public because part of the reason we are in this situation is because of approaches that have been overbearing to the public and have been rejected,” said Gichinga.

“One could argue that there is also a need to seal revenue leakages as well as relook certain tax exemptions… it will mean going through with a tooth comb to be able to get additional areas to increase revenues. If you look at counties in terms of their own source revenue, it has been low. So assisting counties in building their own source revenue so that it can ease pressure on the resources available.”

Nikhil Hira, partner at Kody Africa LLP, said one of the best options the government has would be to significantly cut expenditure. In the Supplementary Budget, Treasury has cut overall spending by 3.1 percent, which could be inadequate to plug the Sh344 billion hole that the rejection of the Finance Bill 2024 has created.

“The obvious option that the government has is to cut expenditure,” said Hira, adding that one of the other options that Kenya has would be to borrow, which could be difficult considering its debt levels and also recent sentiments from the market.

In the new budget, the fiscal deficit has expanded to Sh761 billion from Sh597 billion when it had factored in the revenues that it would get from measures proposed in the Finance Bill. Hira, however, noted that it would be difficult to borrow, which might mean the government having to grapple with higher interest rates when borrowing. This considers factors such as the downgrade of Kenya’s rating by Moody's, the global rating agency, in early July following the withdrawal of the Finance Bill.

“The other option is that to finance all this, they will have to borrow, and that is not as easy as it used to be, especially after Moody's gave a negative rating on our debt. That means it's more difficult to get debt and as it is, we are heavily indebted,” said Hira.

“The support from the market may also not be as easy because even recently the government has issued Treasury Bonds and the subscription has been nowhere near where they were expecting. I think the appetite to lend to the government is also down.”

Hira also noted that the government might try to amend certain laws and review certain laws in the coming months as it tries to raise revenues. He noted that in doing this, it would need to tread cautiously and not anger Kenyans, whose protests have resulted in the current predicament.

Former President Uhuru Kenyatta’s regime introduced the Tax Laws (Amendment Bill), 2020, which reduced a number of taxes aimed at cushioning Kenyans against the harsh impact of the Covid-19 pandemic.

The law reduced such taxes as corporation tax to 25 percent, pay-as-you-earn to 25 percent, and scrapped Paye for people earning less than Sh24,000 per month. These were however reversed in January 2021 through another tax laws amendment bill. President William Ruto might introduce such a bill but with the aim of increasing certain taxes or fees and levies.

“One of the options that the government has is to do what President Uhuru did in 2020 when Covid-19 hit us and issue a tax laws amendment bill. Even then, the government has to be careful because it cannot introduce everything that was in Finance Bill 2024 because that was the big issue that the Gen Z had,” he said.

“Tax laws amendment bills were issued in both years (2020 and 2021) and made changes in the excise duty act, the VAT act, the income tax act, and the miscellaneous fees and levies act. That is definitely a possibility… they will have to issue some measures.”

In his push to increase tax revenues, CS nominee Mbadi noted that a lot of focus will be on reforming the Kenya Revenue Authority (KRA). “The solution should be targeting the tax collector. KRA is like a cow that we milk without feeding. The system KRA is using at the moment needs re-engineering,” Mbadi said.

“We must reform KRA. Without that, we are not going to succeed in revenue mobilization. I will sit down with KRA as my first task.”

The taxman has perennially missed tax collection targets, which has been attributed to a mix of factors including a tax base that does not capture many individuals and businesses, especially those operating in the informal sector.

Over the financial year to June 2024, KRA collected Sh2.407 trillion, an 11.1 percent increase compared to the previous year. It, however, missed the revenue collection target that had at the start of the financial year been set at Sh2.787 trillion but was reviewed downwards to Sh2.54 trillion in the second supplementary budget that was passed in June, late in the financial year.