The National Treasury is proposing the introduction of more taxes as President William Ruto’s administration seeks additional revenue to fund his ambitious programmes.

In the Kenya Kwanza government’s Draft Medium-term Debt Strategy for the period 2024-25 and 2026-27, the National Treasury proposes a raft of major tax changes.

Some of the highlights of the proposed tax reviews will be the harmonisation of the country’s VAT with the East African Community member states.

Most of the EAC states have VAT at 18 per cent while Kenya charges 16 per cent.

At the same time, the National Treasury is proposing to put alcoholic beverages and cigarettes on the radar again with excise duty after a short reprieve.

The government did not impose additional taxes on the products under the Finance Act, 2o23.

Excise rate for filtered cigarettes, non-filtered cigarettes and other tobacco products will be harmonised while excise duty on alcohol will be pegged on alcohol content

Kenyans have until October 6, 2023, to submit comments on the proposals from Treasury.

Currently, taxation of alcoholic products is based on various criteria including, consumer behaviour, value of the product and the volume of consumption as well as alcohol content.

”In order to streamline the taxation of alcoholic products, over the strategy period, the government will review the basis of taxation to the alcoholic content of the product taking into consideration the harmonisation with EAC region,” the proposals read in part.

The National Treasury says in the draft strategy paper that the government will increase exercise duty on spirits and higher alcohol content products to discourage their consumption as they pose higher health risks.

”This will be informed by quantitative analysis to determine the optimal tax rate that will be applicable to each alcoholic product,” reads the draft medium-term debt strategy.

Regarding exercise duty on cigarettes and other tobacco products, the National Treasury proposes to harmonise exercise duty rate across filtered cigarettes, non-filtered cigarettes and other tobacco products.

The National Treasury says it will take into account international best practices and promote fairness.

”Given the negative health externalities of these products, the rates will be based on the extent of the externalities of these products as well as recommendations of the ongoing EAC partners states study,” the treasury says.

The government has announced plans that could see it scrap personal relief for salaried employees from the next financial year.

The proposal is contained in the Kenya Kwanza government’s Draft Medium-Term Revenue Strategy for the period covering the 2024-25 and 2026-27 financial periods.

In the draft proposals published by Treasury, the government says it will review tax reliefs with a view of eliminating those that are counterproductive.

Currently, taxpayers enjoy personal, insurance, medical, housing and relief related to persons with disability as government seeks to encourage a saving culture, boost purchase of insurance policies, increase home ownership and ease the tax burden on Kenyans.

Treasury, however, notes that the tax incentives come at cost by way of government foregoing tax revenue.

“In addition, tax incentives increase the complexity of the tax system and reduces its effectiveness as an instrument to promote equity,” Treasury said.

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It further adds that research has found that tax incentives do not necessarily influence taxpayers’ behaviour into embracing the self-improvement culture such as saving or mortgaging.

“During the strategy period, the government will review the tax reliefs with a view to eliminate reliefs that are counterproductive. However, with the removal of tax relief, the low income tax earners will be cushioned in line with the adjusted tax bands by creating a zero-rate tax band,” Treasury said.

Currently, personal relief is pegged at Sh2,400 per month (Sh28,800 per annum) while the minimum monthly taxable income is Sh24,001.

This means individuals earning less than Sh24,000 monthly (Sh288,000 per year) continue to be exempt from income tax.

The Income Tax Act provides for five tax bands on personal income.

These are Sh0-Sh288,000 per year at the rate of 10 per cent; the next Sh100,000 per year at the rate of 25 percent; the next Sh5,612,000 per year at the rate of 30 percent; the next Sh3,600,000 per year at the rate of 32.5 percent and above Sh9,600,000 per year at the rate of 35 percent.

However, Treasury has proposed to review and expand the tax bands under the draft medium term revenue strategy.

“The structure is not progressive since tax bands are not wide enough to cushion low income earners. Further, the structure increases opportunities for tax avoidance and evasion,” Treasury said.

“The government will review the structure to improve its progressivity and harmonise the income tax top rate with the corporate income tax rate during the strategy period.”

The standard corporate tax rate is 30 percent (increased from 25 per cent effective January 1, 2021).

Treasury said the Medium-Term Revenue Strategy is aimed at boosting domestic revenue which has been declining over time.

It said funds realised from the tax reforms will go towards financing government programmes for the remaining period of Vision 2030.

Kenyans have until October 6, 2023, to submit their views to Treasury on the proposals.

The Ministry of Education is in talks with the National Treasury and other stakeholders to waive part of the Sh63 billion pending bills that public universities owe.

Cabinet Secretary Ezekiel Machogu said at the weekend they were gathering reports from various universities which they will then present to the relevant government agencies and other stakeholders in a team that has been formed to explore the possibility of the Kenya Revenue Authority (KRA) being allowed to waive the dues owed as statutory deductions which have not remitted such as Pay As You Earn (PAYE), the National Hospital Insurance Fund (NHIF) and pension funds which were not forwarded due to lack of funds.

Should the proposal be adopted, then the universities will be required pay off other debts such as those owed to suppliers.

Machogu said the pending bills totaling to Sh63 billion had accrued in the 32 public universities over the last six years due to inadequate funding due to decline in admissions for parallel degree programmes, through which varsities were raising their own revenues.

Machogu said that due to inadequate funding, only 68 per cent of the total funding required by public universities was disbursed in that period, leading to accumulation of debts.

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“At that time the government was using Differentiated Unit Cost (DOC), where the State would pay 80 per cent of the total cost of a course being undertaken by every student regardless of their social-economic standing and the cost of the course being undertaken,” he said.
TVETs.

Machogu was speaking when he met with the Senate Education Committee, led by Murang’a Senator Joseph Nyutu in Naivasha on Saturday.

According to him, DOC funding model for all university students did not take into account the economic and social background of learners.

However, this has been cured by the new funding model, which categorises learners into vulnerable, very needy, needy and less needy.

The new model, which was recommended and adopted by the Cabinet, is set to harmonise fees per course and address myriad fiscal challenges that have faced universities as well as Technical and Vocational Education Training institutes.

Under the new funding model, the government will cater for 82 per cent of fees through scholarships, while 18 per cent of the costs will be catered for by the Higher Education Loans Board (HELB) through loans that have been funded to the tune of Sh29 billion this financial year.

The 32 public universities (according to 2021 Ministry of Education data) were weighed down by a total debt of Sh62 billion, as at last year due to inadequate funding from the government. Some were categorised as technically insolvent.

Around 563,000 students were enrolled in public universities during the 2022/23 academic year. The number increased from roughly 562,100 enrolled at the beginning of the 2021/22 academic year.

Public universities largely rely on government subsidies to run their operations, but the high number of admissions put a financial strain on the institutions on the back of inadequate funding and delayed disbursement of money by the government.

Under the current financial year (2022/23), the National Treasury allocated about Sh80 billion) for higher education although the universities had requested for about Sh180 billion in their budget plans, which they said they needed in order to function effectively.

At the weekend, Machogu was optimistic that the new funding model will help the education sector get back on its feet, adding that the Ministry was also implementing many of the recommendations of the presidential working committee on education, which were presented to President William Ruto earlier this year and which was later adopted by the Cabinet.

He said his ministry is engaging the National Treasury to unlock delays in disbursement of funds meant for education and explore the possibility of how the government can hasten release of capitation funds to the institutions to ensure smooth continuity of learning activities.

He said the government has also reduced the cost of Technical and Vocational Education Training (TVETs) fees per student to Sh13,000, a move which has seen the enrollment triple from an initial 70,000 students to the current 300,000.

Education, national security and the Big Four agenda are among the biggest winners in National Treasury CS Ukur Yatani’s budget for the next financial year that starts on July 1.

In a move to hasten President Uhuru Kenyatta’s legacy agenda before the end of his second term next year, Yatani has increased the allocation to drivers and enablers projects of the Big Four—food security, Universal Health Care, manufacturing and affordable housing, by Sh13.8 billion.

This takes the total allocation to Sh142.1 billion from Sh128.3 billion in the current financial year ending June 30.

Education is however the biggest winner in the next financial year with a total budget of Sh503.9 billion, a Sh6.2 billion increase from Sh497.7 billion in the current financial year. Concerning the TEACHERS’ CBA 2021-2025 that should inform the July salary review, the treasury CS maintained his position.

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This, as the health sector gets a Sh121.1 billion budget up from Sh111.7 billion in the current financial year with the affordable housing programme getting an allocation of Sh13.9 billion.

Some Sh47.7 billion of the health budget will go towards providing universal health coverage which according to Yatani, will “guarantee quality and affordable health care for all Kenyans.”

Sh60 billion will go towards food security with improving livestock production, fighting desert locusts and crop diversification projects being prioritised.

To support growth of industries, Yatani has proposed a Sh20.5 billion allocation, up from Sh18.3 billion in the current financial year, as he spelled out measures to protect local manufacturers from cheap imports, among them duties of up to 25 per cent on finished goods, among them leather products.

“The implementation of “Big Four” agenda remains a high priority and critical to economic recovery. In this regard, the government will fast track implementation of programmes and projects under the “Big Four” agenda,” the CS said when he presented to the nation his Sh3.6 trillion budget, at the National Assembly on Thursday.

The country’s security budget has nearly been doubled to Sh294.5 billion from Sh167.9 billion, which Yatani says will go towards supporting operations of the National Police Service, Defence and the National Intelligence Service.

The proposed allocations include Sh119.8 billion for defence, Sh42.5 billion for the National Intelligence Service, Sh110.6 billion for policing and prisons services, Sh10.7 billion for leasing of police motor vehicles and Sh1.0 billion for Police Modernisation Programme.

The government will spend Sh310.7 billion in enhancing infrastructure, one of the biggest beneficiaries in Yatani’s spending plans, with the Jubilee government taking pride in completed and ongoing roads, ports and rail projects.

In the current financial year, it had planned to spend Sh362.7 billion in energy, infrastructure and ICT.

“Our investment in the expansion of road networks, railways, seaports, airports and energy has enhanced domestic and regional connectivity, boosted rural productivity and reduced urban congestion,” Yatani noted.

The energy sector has received an allocation of Sh71.9 billion, Sh11 billion more from Sh60.3 billion.

According to Yatani, expansion in energy generation and connectivity has seen  7.5 million households connected to the national grid,  a threefold growth compared to 2.3 million households in 2003.

Meanwhile, counties are looking at a bigger spending plan next financial year as allocation to the devolved units increases to Sh409.9 billion from Sh369.9 billion in Yatani’s current financial year budget.

The huge allocations in the country’s biggest spending plan is expected to be funded by both taxes and borrowing with the Kenya Revenue Authority expected to collect Sh1.78 trillion in ordinary revenues.

Total revenue projections for the financial year, including Appropriations-in-Aid and grants is 2.1 trillion.

Recurrent expenditures will amount to Sh2 trillion or 16.2 per cent of GDP.

On the other hand, development expenditures including foreign financed projects, allocation to Contingencies Fund and conditional transfers to county governments are projected at Sh669.6 billion.

“This funding is expected to accelerate completion of ongoing critical infrastructure projects in the country,” CS Yatani said.

All jobless Kenyans, whether educated or not, are set to benefit a new government plan. The national treasury has plans to introduce unemployment insurance fund (UIF), which will cushion jobless Kenyans during these harsh economic times.

In this new development, Kenyans holding jobs will be obligated to remit a two percent tax from their incomes to go direct to UIF so as to cushion the jobless Kenyans.

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This is just one of the post COVID-19 economic recovery strategies proposed by the National Treasury. It is going to result to increased taxation for employed individuals, who already have other statutory deductions.

“The government will establish a UIF to cushion workers in financial distress by providing them with short-term relief when they become unemployed, or are on unpaid leave or unable to work because of illness,” said the National Treasury.

“The amount of contribution to the fund will be two per cent which include; one per cent paid by employees from salaries and another one per cent paid by the employers.”

Additionally, UIF will get ksh. 300 million from the ministry of planning spread across two financial years. Those who will be eligible for the tax will be both formally and informally employed Kenyans, who as per the current KNBS data stand at 15.9 M

It is projected that the UIF will solve Kenya’s endemic unemployment rate, which has been seriously hiked by the COVID-19 pandemic that has seen over 2 million Kenyans lost their jobs.

If these proposals are approved, Kenya will join other countries that are currently having a similar programme. In the US for instance, unemployment insurance funds give unemployment benefits to eligible persons who lose their jobs. The self employed and those who resigned from their jobs or were sacked are deemed ineligible.

Jobless persons will at least have some capital for their start ups.

The national treasury has plans to introduce unemployment insurance fund (UIF), which will cushion jobless Kenyans during these harsh economic times.

In this new development, Kenyans holding jobs will be obligated to remit a two percent tax from their incomes to go direct to UIF so as to cushion the jobless Kenyans.

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This is just one of the post COVID-19 economic recovery strategies proposed by the National Treasury. It is going to result to increased taxation for employed individuals, who already have other statutory deductions.

“The government will establish a UIF to cushion workers in financial distress by providing them with short-term relief when they become unemployed, or are on unpaid leave or unable to work because of illness,” said the National Treasury.

“The amount of contribution to the fund will be two per cent which include; one per cent paid by employees from salaries and another one per cent paid by the employers.”

Additionally, UIF will get ksh. 300 million from the ministry of planning spread across two financial years. Those who will be eligible for the tax will be both formally and informally employed Kenyans, who as per the current KNBS data stand at 15.9 M

It is projected that the UIF will solve Kenya’s endemic unemployment rate, which has been seriously hiked by the COVID-19 pandemic that has seen over 2 million Kenyans lost their jobs.

The national treasury however did not offer additional details including the eligibility criteria for beneficiaries and the duration of the cushioning.

If these proposals are approved, Kenya will join other countries that are currently having a similar programme. In the US for instance, unemployment insurance funds give unemployment benefits to eligible persons who lose their jobs. The self employed and those who resigned from their jobs or were sacked are deemed ineligible.

The big question however remains. Will the UIF serve the right persons and purposes?