New policy fails to deliver tax predictability, expand tax base

Kenyan businesses and households are still struggling with an unpredictable tax regime that is also heavily reliant on a small pool of taxpayers three years after it started implementation of the system. 

The National Tax Policy, whose implementation started in 2023, was expected to make taxation in the country predictable but also expand the tax base, roping in what are termed as hard-to-tax sectors including agriculture, informal sector and the digital economy. This would in turn increase tax revenues, reduce the speed of borrowing to plug in budget holes and reduce reliance on the few taxpayers.

 Implementation of the policy, however, appears slow as the government struggles to meet major targets such as growing tax revenues to hit a tax to Gross Domestic Product (GDP) ratio of 20 per cent but also tame government spending, reduce fast paced acquisition of new debt as well as increase allocation to development budget.

 Dancan Were, programme officer at the National Taxpayers Association, said the National Tax Policy has had mixed results, noting that it has increased revenues from areas such as digital economy but failed on key metrics such as tax revenue mobilisation and taming government expenditure. He also noted that there is still high unpredictability when it comes to amendment of tax laws, which has left many businesses unable to plan their investments properly and make projections in the medium and even long term.

 “Currently, the tax to GDP ratio remains between 14 to 15 per cent against the 20 per cent expectation. This means that despite the policy being in place, we are yet to get to the expected mark of 20 per cent,” said Were, who spoke at a stakeholder forum on taxes yesterday.

The East African Community’s (EAC) has a target of tax to GDP ratio of 25 percent, which the bloc notes would raise sufficient resources to support the regional development agenda

Were also noted that there has been a growth in expenditure to GDP ratio, which stood at around 2.76 per cent in 2021 but has grown to 3.3 per cent of GDP, meaning that despite the policy guidelines around the tax expenditure management, Kenya is still not where it is expected to be.

He added that there is little awareness among players in the digital economy on the nature of taxes they should pay while many in the agriculture sector, which is Kenya’s largest contributor to the economy accounting for about a quarter (22.5 per cent) of the GDP, continue to operate outside the tax net.

“One of the key recommendations from the policy was to onboard the digital economy and the other hard-to-tax sectors to the tax base,” he said. “When you look at the agricultural sector, which contributes heavily to GDP, its contribution to tax yields is still disproportionately low.”

Christine Majani, tax policy manager at the Kenya Association of Manufacturers (KAM) noted that while the National Tax Policy sets the tone for what would be an ideal tax policy for Kenya, its implementation has so far failed to meet the expectations of industries.

 “From a manufacturing sector perspective, there is a gap between the intentions of the policy and the implementation realities on the ground. There are several gaps in the implementation, predictability and consistency,” she said, noting that it had so far failed to broaden the tax base and had left “the compliant tax payers paying a disproportionately high share of tax.”

She also explained that even as the government implements the tax policy, it has not reduced instances of unpredictable review of taxes.

She cited in 2024, the first year when the National Tax Policy was being implemented, when the government proposed major tax proposals in the Finance Bill 2024 that was however withdrawn following the deadly anti-tax protests. Treasury would however follow up with the Tax Laws Amendment Act 2024, which introduced some of the taxes contained in the Finance Bill. 

Some of the taxes contained in the Act, which the President assented into law in December 2024, came into effect on January 1, 2025, making it difficult for taxpayers to be compliant and putting to test the predictability promised by the tax policy.

“The government should prioritise simplifying compliance processes… we should have a predictable, fair and supportive tax system and these reforms should support economic and investment growth,” said Majani. 

Other areas where she noted implementation of the policy had fallen short included failure to address the long-standing issue of Value Added Tax (VAT) refunds. The policy addresses the matter, even requiring KRA to pay penalties in instances it delays the payment of the funds to companies. Manufacturers pay VAT on supplies

“There is a lot of challenges in the processing of VAT refunds,” she said, noting that despite the NTP and the Tax Procedures Act requiring KRA to pay a one per cent per month interest if it delays in paying verified refunds within six months, it has not resulted in KRA acting fast on the process.

She noted that the money held by KRA in VAT refunds could have a significant impact on the economy including expansions that would create more jobs.

“These inefficiencies mean that there's lack of trust, and therefore lack of compliance,” said Majani.