Nairobi — Kenya's tax laws are set to be reviewed once every five yours under a proposed National Tax Policy which is seen as part of reforms seeking to grow revenue and promote predictable tax environment for business to operate.
The National Treasury has decried that Kenya's revenue yield is still below the desired East African Community target of 25 percent of GDP with the ordinary revenue as a percentage of GDP declining over the last ten years from a high of 18.2 percent in the FY 2013/14 to 13.8 percent in the FY 2020/21.
The new provision under the draft policy is aimed at getting rid of the unpredictability nature of tax policies which is seen as a hindrance to the country's attractiveness to investors.
"To provide a reasonable degree of predictability on tax rates and tax bases, the Government will undertake stakeholder engagement before undertaking any amendment of the tax laws. The analysis should consider the impact of the proposed changes on tax revenue, development, investment, employment, and economic growth," the draft policy reads in part.
This will be a change from the current regime where taxes are frequently amended through the Finance Act, the Government for instance in 2018 halved VAT on petroleum goods and a week ago, it similarly slashed VAT LPG gas by 50 percent.
But the Ukur Yattani office now argues that the the 8 percent VAT rate for petroleum products creates undue advantages over other goods which are subjected to 16 percent VAT.
"In the year 2020 there are two general rates of VAT: 8 percent for petroleum products,16 percent for other goods/services and 0 percent for exported goods. The rate on petroleum goods creates undue advantages over other goods," Treasury outlined this as part of its challenge," the policy reads.
In its proposal, Treasury wants to eliminate multiple rates and subject all goods be taxed to 16 percent rate with the preferential rate not be lowered below 12 percent.
"There shall be a single general rate for VAT and where a preferential rate is granted, it shall not be lower than 25 percent of the general rate," the draft policy read.
This, according to treasury will minimise the high VAT tax expenditure incurred by the Government which is estimated at 2.2 percent of GDP as well as create a fair regime.
Kenya's revenue performance, according to the Government is also being impacted by the expanding informal sector which is hard to tax, low tax compliance and complexity in taxing emerging digital economy.
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Tax incentives such as tax exemptions, tax deductions, allowances, tax deferral, and concessional tax rates were also listed as hinderances to revenue collection "as it erodes the tax base and causes the Government to forego tax revenue estimated at 2.96 percent of GDP as of 2020 compared to 2.9 percent average for African countries."
"Although the incentives are aimed at promoting investments and providing relief to the low-income earners and vulnerable groups in the society, it impacts negatively on revenue mobilisation and implementation of the national development programmes," the 46-page document read.
But the Government now wants to create a criterion for granting tax incentives taking into consideration the costs and benefits of the incentives and also ensure that incentives provided to specific sectors have a sunset where possible.
