Kenyans to Pay More in Taxes as Govt Seeks Funds to Pay Debts, Salaries

Kenyans are bracing for even tougher times after the government increased its spending plan in the current financial year, which will mean higher taxation and borrowing.

Acting National Treasury Cabinet Secretary Ukur Yatani tabled the initial supplementary estimates for the 2019/20 fiscal year in parliament requesting the National Assembly to approve additional funding of Ksh86.6 billion ($866 million). This will increase this year's budget by 2.8 per cent to Ksh3.13 trillion ($31.3 billion) from Ksh3.04 trillion ($30.4 billion).

The amount includes a Ksh1.86 billion ($18.6 million) bailout for the troubled State-owned Consolidated Bank, to pay off creditors' dues estimated at Ksh1.7 billion ($17 million), including interest charges for the three months that the lender had extended repayment period of the seven-year loan. The money had been withdrawn earlier from the Consolidated Fund.

The Kenyan Constitution under Article 223 gives the National Treasury powers to spend money that has not been appropriated in circumstances where the amount allocated in the Appropriation Act is insufficient or a need has arisen for which no amount has been appropriated by that Act.

Under this provision the National Treasury can authorise withdrawal from the Consolidated Fund and seek parliamentary approval within two months after withdrawing the money.

"The National Treasury has approved expenditures amounting to Ksh1.86 billion ($18.6 million) under Article 223. These have been included in the fiscal year 2019/2020 Supplementary Estimates No. 1," said Mr Yatani.

The National Treasury recently warned that implementation of the current budget faces serious challenges largely due to declining revenue collections and increased demand for additional funding to meet priority expenditures.

Kenyans are currently weighed down by the high cost of living and repayment of the government's huge debt currently estimated at over Ksh6 trillion ($60 billion) with over 20 per cent of tax revenues going toward servicing this debt.

"The implementation of the 2019/2020 budget continues to face various challenges. These include the recent drought and floods in some parts of the country, under performance of projected revenues and the increased demand for additional funding for emerging priority expenditures," said Mr Yatani.

Tax base

On November 7, President Uhuru Kenyatta assented to the Finance Bill 2019 introducing new taxes and increasing tax rates on some items in an attempt to deal with the growing budget deficit.

Tax experts at the Kenyan-based KN Law LLP said the Finance Act (2019) focused on widening the existing tax base and increasing revenue collection against the back drop of widening budget deficit and rising public debt.

Among key sectors targeted with new taxation measures include businesses whose annual turnover does not exceed Ksh5 million ($50,000), which will be taxed three per cent of the gross income while importers will be charged a railway development Levy of two per cent from 1.5 per cent on all imported goods except raw materials and intermediate goods.

The government has also brought the supply of goods and services in the digital economy in the tax net and increased excise duty on motor vehicles of cylinder capacity exceeding 1,500cc to 25 per cent from 20 pe rcent.

Excise duty on motor vehicles with compression-ignition internal combustion piston engine (diesel or semi-diesel) of a cylinder capacity exceeding 1,500cc has been increased to 35 per cent from 20 per cent

So far, the Kenyan parliament has endorsed a proposal by the National Treasury to increase the country's debt ceiling to Ksh9 trillion ($90 billion) in the current 2019/2020 fiscal year.

However, the country's higher level of debt, together with rising reliance on non-concessional borrowing, have raised its fiscal vulnerabilities and increased interest payments on public debt to nearly 20 per cent of the collected revenues.

Its public debt service-to-revenue ratio increased from a low of 16.5 per cent in 2012 to 35.8 per cent in 2017, 30.5 per cent in 2018 and is expected to increase to 33.4 per cent in 2019 compared with the International Monetary Fund threshold of 30 per cent.

Kenya's economic growth slowed to 5.6 per cent during the second quarter (April-June) of this year compared with 6.4 per cent in the same period last year with the poor performance of several key sectors such as agriculture, manufacturing and transportation stifling the overall growth, according to data from the Kenya National Bureau of Statistics.

Kenya's revenue collection during the first quarter (July-September) of the current 2019/2020 fiscal year recorded a shortfall of Ksh84.6 billion ($846 million) comprising an underperformance of ordinary revenues by Ksh60.2 billion ($602 million) and the ministerial Appropriation in Aid of Ksh24.4 billion ($244 million).

Interestingly, a total of Ksh312 billion ($3.12 billion) was spent by government ministries, departments and agencies during the same period of which a huge chunk of it amounting to Ksh224.1 billion ($2.24 billion) was used on salaries and government operations with only Ksh88.1billion ($880 million) channelled to development.

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