Hustler nation bid to raise more cash by inflating taxes fails poor Kenyans

It has not been getting easier for the average Kenyan hustler.

The Kenya Kwanza government has repeatedly been blamed for increasing the yoke of taxes, and the introduction of levies that Kenyans cannot keep up with.

An array of natural catastrophes, the last one a spate of flooding that killed more than 200 people and devastated livelihoods just over a month ago, have left many barely surviving.  Recent house demolitions, the perception of profligacy in the government especially following President William Ruto’s much-hyped US state visit, and a raft of tax proposals in the 2024 Finance Bill all together seem to be sapping Kenyans’ energy two years into the new administration.

Among the new proposed taxes in the Finance Bill is the highly debated motor vehicle tax, at the rate of 2.5 per cent of the value of the motor vehicle. Payable at the time of issuance of insurance cover for motor vehicles, this tax is between Sh5,000 and Sh100,000. The value of the motor vehicle, stipulates the Bill, is to be determined on the basis of make, model, engine capacity in cubic centimeters, and year of manufacture.

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“Introducing an additional tax at the point of insurance issuance imposes a financial burden on vehicle owners, and importantly transport logistics service providers who are already grappling with substantial tax credits from advance taxes,” argues Grant Thornton.

Mentoria Economics’ Chief Economist Ken Gichinga thinks it could spiral into an even bigger problem.

“There is a risk it might push people to delay renewing their motor vehicles insurance due to the additional cost. This presents huge risks, particularly when accidents occur.”

While this may appear as the main bone of contention due to how loudly contested it has been, a number of taxes in the Finance Bill have caused jitters right, left and centre.  

Gluten bread and unleavened bread, for example, have been proposed for moving from exempt to taxable, which automatically means higher costs to consumers. Transportation of sugarcane from farms to milling factories could move from zero-rated status to taxable status, therefore increasing the cost of sugar. 

Every passing year, the Kenya Revenue Authority (KRA), labours to not only widen the tax base but in its bid to collect more often loads an extra burden on compliant payers which, if unchecked, could leave many feeling disenfranchised.

Economist Billow Kerrow believes the Kenya Kwanza government has been lumping more loads on already overburdened Kenyans.

“I’m disappointed with this government because they lied to Kenyans. When they were campaigning, they told Kenyan they would reduce the taxes but upon taking power, they have been increasing taxes in every way,” he says.

This is not an isolated feeling.

With many Kenyans struggling to eke out a living, the passing of the current Finance Bill could be the straw that breaks the camel’s back.

While the current administration rode to power on a promise to promote the creative industry, there is a proposal to change VAT status, from exempt to taxable, goods imported or purchased locally for use by the local film producers and local filming agents, upon recommendation by the Kenya Film Commission, subject to approval by the Cabinet Secretary to the National Treasury.

“This change will negatively affect producers of local content in the film industry as the cost of film production will go up owing to the change of VAT status from exempt to taxable. It will also likely affect the quantity of local production,” Grant Thornton claims. Gichinga feels this could land a big blow to the government’s agenda of getting as many youth into gainful employment.

“This will affect job creation which will be a blow to the creative economy,” he says.

With a poverty rate of 38.6pc, according to the Kenya National Bureau of Statistics (KNBS), imposition of more taxes could be a damaging move for an already struggling country. Political commentators argue it could make the current administration so unpopular that it could struggle to remain in power in 2027.  

What has been on recovery following a Covid-19 imposed slowdown also seems to be threatened. As it reaches second gear following a slump in activity that started over four years ago, tourism could be slowed down yet again by a new proposal.

This proposal is to delete the VAT exemptions that had been introduced for taxable goods for direct and exclusive use for the construction of tourism facilities, recreational parks of 50  acres or more, convention and conference facilities upon recommendation by the Cabinet Secretary responsible for matters relating to recreational parks.

All inputs and raw materials, whether produced locally or imported, supplied to manufacturers of agricultural pest control products, could be changed from zero rated to exempt. Milk and cream could also suffer the same treatment.

This means that taxpayers are effectively restricted from claiming input VAT incurred on these goods, with the VAT absorbed as cost passed to the end consumer.

This despite agriculture being arguably Kenya’s most important industry. In 2023, agriculture remained the country’s dominant sector, representing 21.8 per cent of the total Gross Domestic Product (GDP).

The Bill also proposes to scrap VAT exemptions for issuing of credit and debit cards, telegraphic money transfer services, foreign exchange transactions, including supply of foreign drafts and international money orders, cheque handling, processing, clearing and settlement and the provision of financial services on behalf of another on a commission basis. They shall be chargeable at the standard rate of 16 percent.

“This will increase the cost of such services and therefore, negatively impact the final consumers. Institutions offering such services will be forced to increase the cost of accessing these financial services which were previously exempted from tax,” Grant Thornton argues.

There is a proposal to limit the VAT exemption only to insurance and reinsurance premiums, hence leading to an increased cost of insurance. VAT exemption for betting, gaming and lotteries services could be removed, with the introduction of VAT at the standard rate of 16 per cent.

The fear of incurring additional VAT by assemblers and manufacturers of electric buses, motorcycles and bicycles could send many in the industry out of business, hurting Kenya’s move to reduce carbon footprint and adopt more environmental friendly means of transport. And the internet could henceforth become less affordable to low-income households slamming brakes on Kenya’s cruise towards a digital economy.

As Kenyans incur a higher cost for sending and receiving money, particularly for smaller transactions, many could revert to using cash, therefore undoing the progress made in the past many years.

While all these could sound like a route to doomsday for Kenya, there is a smattering of good in the same Bill. The Bill, for example, proposes to increase the threshold for mandatory VAT registration from Sh5 million to Sh8 million, exempting more small businesses from VAT registration.

“This is the best take away; the increasing of the threshold of VAT registration from businesses with a turnover of Sh5 million to Sh8 million,” Gichinga says. “However, the heavy use of consumption taxes to raise revenue could have a significant damage on the economy.”

The Bill also proposes to exclude cement clinkers from excise duty. Clinker, used by cement companies as part of their raw materials, has been subject to excise duty at the rate of 10 per cent of the value or Sh1.50 per kg, whichever is higher.

If most of these proposals are passed, a leaking boat could give in and sink a little too soon, and this could be a huge tragedy for the Kenya Kwanza government.