More pain as Ruto promises to increase tax

Azimio has urged Members of Parliament to reject the Finance Bill 2024, which is up for discussion, citing draconian taxation measures that will escalate the cost of living and plunge Kenyans into poverty.

This appeal follows President William Ruto’s announcement of his administration’s intention to increase taxes from the current 14 per cent to 22 per cent.

Wiper leader Kalonzo Musyoka, addressing the Azimio la Umoja Parliamentary Group in Nairobi, declared that Kenyans are prepared to protest if the government ignores their objections to the oppressive tax measures.

Kalonzo criticised the Kenya Kwanza administration’s voracious tax appetite, evident in the Finance Bill 2024, which spans from bread to Mpesa transactions and vehicle taxes, as a display of callousness and inhumanity.

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President Ruto, speaking to Harvard Business School students, reaffirmed his commitment to increasing tax revenues, which may result in additional taxes for Kenyans. He was explicit about the government’s goal to raise tax revenues as a percentage of the Gross Domestic Product to 22 per cent from the current 14 per cent.

The President’s firm stand on taxation comes days after the National Treasury made public the Finance Bill 2024, which has proposed increasing taxes on bread, mobile money and banking services as well as imposing an annual tax on motor vehicles.

“My drive is to push Kenya, possibly to 16 per cent this year. I want to leave it at 20 and 22 per cent over my term. It is going to be difficult, I have a lot of explaining to do, people will complain but I know that they will appreciate it,” he said.

“The whole principle is that you must live within your means. For about 12 years we had been running an eight percent or nine percent fiscal deficit, which means you are spending money that you are not collecting. You keep digging a bigger hole to fill the other and now we have a debt that is heading to being unsustainable.”

Despite the backlash against the tax proposals in the Finance Bill 2024, Ruto defended the necessity of these measures, arguing that Kenya has underperformed in tax collection compared to regional peers, where the tax-to-GDP ratio reaches 25 per cent in some countries.

“Kenyans have been socialised to believe that they pay the highest taxes but empirical data shows that Kenya as of last year, our tax as a percentage of GDP was 14 per cent. Our peers on the continent are at between 22 and 25 per cent, which means we are way below those of our peers. I am not comparing ourselves to OECD countries… countries like France are at 45 per cent, others are higher,” said Ruto.

Kalonzo implored Azimio legislators to uphold constitutional gains by scrutinising all bills in committees and on the House floor, warning that failure to do so could lead to public protests against the government’s heavy taxation.

He highlighted the ‘Zakayo Shuka’ call, which has resonated with Kenyans urging President Ruto to consider the plight of millions who will suffer under the proposed tax measures.

“We are asking our members to vote a big NO to the proposed amendments to the Finance Bill 2024 that is now headed to public participation since it is coming up with taxation measures that will rob citizens of the little that they have in their pockets,” he said. 

Bill rejection

Kalonzo advocated for a resounding rejection of the proposed amendments to the Finance Bill 2024, which is headed for public participation, as it threatens to deprive citizens of their hard-earned money.

According to the Organisation for Economic Cooperation and Development (OECD), Africa’s average tax-to-GDP ratio was 15.6 per cent in 2021, with Kenya falling below this average. Only a few countries exceed 20 per cent, with South Africa, Morocco, and Seychelles at 27 per cent, and Tunisia at the highest with a 32.5 per cent tax-to-GDP ratio.

Ruto emphasised his administration’s efforts to reduce loan dependency. The government plans to borrow Sh541.7 billion from domestic and foreign lenders in the next financial year, representing 2.9 per cent of GDP—a significant reduction from the previously projected budget deficit.

Ruto has called for austerity, instructing government officials to cut recurrent expenditure by 30 percent, contributing to the stabilisation of the country’s financial situation.

“When I came into office, I told everybody to tighten their belts, I am not going to preside over a bankrupt country… a country in debt distress. We have to cut our spending,” the President said.

Brink of distress

“We have pulled the country from the brink of debt distress. Our exchange rate has stabilised, fuel has come down, our interest rates are coming down… we have stabilised the country because of the measures that I have taken,” he said.

The Treasury has decreased the budget for the 2024/25 financial year due to the Kenya Revenue Authority’s revenue collection shortfall. The revised budget is Sh3.91 trillion, down from the initial Sh4.19 trillion.

He reiterated the Treasury’s strategies, which suggest that Kenyans may face more challenging times ahead. The Ministry is implementing the Medium Term Revenue Strategy (MTRS) with a target to increase the tax-to-GDP ratio to 20 per cent by the 2026/27 financial year.

The MTRS aims to enhance revenue administration efficiency, ensure tax regime equity and fairness, expand the tax base, and create a stable tax environment to attract investments.

Kenya’s tax revenue as a percentage of GDP has declined over the years, necessitating increased borrowing to cover the revenue shortfall. The Finance Bill 2024 contains measures expected to generate an additional KES 323 billion in tax revenues.

The Bill will undergo public participation, led by the National Assembly’s Committee on Finance and National Planning, with input accepted until May 28.

Proposals facing opposition include increasing the cost of bread by changing its Value Added Tax (VAT) status from zero-rated to exempt, affecting a staple breakfast item for many Kenyans.

New levies

Last year’s Finance Act reduced incomes for employed Kenyans through new levies and higher taxes, and the Finance Bill 2024 appears to continue this trend, prompting calls for belt-tightening among citizens.

Among the proposals that have been met with resistance include increasing the cost of bread, which is the only breakfast alternative that is still within reach for many.

The Bill has proposed migrating the supply of ordinary bread from Value Added Tax (VAT) zero-rated status to VAT exempt. Zero-rated supplies are cheaper as manufacturers are allowed to claim a refund on input tax while exempt supplies are not taxable and any related input tax is therefore not deductible.

Last year, the Act reduced incomes for many employed Kenyans through the introduction of such levies as the Affordable Housing Levy and higher Pay as You Earn (Paye) tax for some segments. It also had the effect of pushing up the cost of most products through such measures as higher VAT on petroleum products.

Experts note that the increase will push Kenyans to check their spending and that the government ought to have looked at the old taxes and not introduced new ones. Kenyans already expressed their dissatisfaction with government service delivery in an EACC survey saying corruption is a monster that needs to be slayed. 

Difficult cycle

“As for Kenyans, we are getting into another difficult cycle, we thought that the tax changes that were made in Finance Act 2023 would be enough because, with the measures that were introduced last year, many Kenyans are already stretched,” said Alex Kanyi, a partner at Cliffe Dekker and Hofmeyr in an interview with the Standard earlier this week.

“We are however seeing more taxes being introduced through the Finance Bill 2024. For Kenyans, it means you must tighten your belts since you will be left with less disposable income. The government should have gone through the old taxes introduced last year instead of coming up with entirely new proposals and see what did not work out instead of introducing new ones.”