Nairobi — The government is collecting a shrinking share of taxes from its expanding economy, with the National Treasury warning that the country's tax-to-GDP ratio has fallen sharply over the past decade, raising fresh concerns over tax compliance, sectoral exemptions and the sustainability of public finances.
Treasury Principal Secretary Chris Kiptoo told Members of Parliament that tax revenue as a percentage of gross domestic product has declined to about 14.4 per cent, down from nearly 18 per cent in 2013 and 2014, reversing gains made in the early years after the launch of devolution.
The decline, they said, is being driven by widespread tax non-compliance, generous tax incentives granted to various sectors, and the limited taxation of agriculture, which contributes about 22 per cent of the economy but generates relatively little tax revenue.
"Ordinary revenue as a percentage of GDP has been declining, and this is attributed to compliance gaps, tax expenditures and sectors that contribute significantly to GDP but remain lightly taxed," PS Kiptoo said during National Assembly leadership retreat.
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Although total revenue collections continue to rise each year, Treasury noted that the growth rate of revenue has slowed, meaning tax collections are not keeping pace with the expansion of the economy.
PS Kiptoo pointed out that the situation highlighted the widening the gap between government spending needs and available resources.
The shrinking tax share comes at a time when the government faces mounting debt repayment obligations.
Treasury estimates that nearly half of ordinary revenue in the 2025/26 financial year will be consumed by Consolidated Fund Services, which include interest payments on domestic and external debt as well as pensions.
A decade ago, only about 16 per cent of ordinary revenue was used for such obligations, leaving more room for development spending and service delivery.As a result, development expenditure has declined sharply.
Treasury data shows that the share of the budget allocated to development has fallen from about 28 per cent in the 2016/17 financial year to roughly 11 per cent today, with recurrent costs such as salaries, debt servicing and administrative expenses taking up an increasing portion of the budget.
One of the major contributors to the revenue gap, according to Treasury, is the scale of tax incentives and exemptions granted to investors and specific industries.
Treasury estimate that cumulative tax expenditures now amount to about Sh500 billion, reducing the tax base significantly.
While incentives are meant to attract investment and create jobs, critics have long questioned whether many of the exemptions deliver commensurate economic benefits or simply erode revenues without improving productivity.
Treasury also pointed to agriculture as a major untapped source of revenue. Despite accounting for more than a fifth of the economy and employing a large share of the population, most agricultural activities remain outside the formal tax system.
The political sensitivity of taxing farming activities has historically made reforms in the sector difficult, leaving the burden of taxation concentrated on formal workers and consumers through income taxes and value-added tax.
This concentration of the tax burden has become increasingly controversial, particularly among young people and urban workers who bore the brunt of proposed tax increases in the 2023 /2024 and 2024/2025 Finance Bill, sparking nationwide protests that forced the government to withdraw several revenue-raising measures.
Treasury acknowledged that the protests disrupted its fiscal consolidation plans and contributed to the government missing some deficit reduction targets. However, officials said the pressure on public finances has only intensified, making it even more urgent to expand the tax base rather than increase tax rates.
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Under the National Tax Policy and the Medium-Term Revenue Strategy, Treasury says it is now focusing on simplifying tax laws, improving compliance and strengthening enforcement by the Kenya Revenue Authority, including through digital systems and data integration.
PS Kiptoo said their long-term objective is to reduce tax rates, including potentially lowering VAT from 16 per cent to 15 per cent and adjusting income tax bands, but only if the tax base can be significantly widened.
"You cannot reduce rates without expanding the base, yet on the expenditure side, the demand for roads, water, health and education continues to rise," PS Kiptoo said.
In parallel, the government is seeking alternative financing models to reduce pressure on the budget, including public-private partnerships for commercially viable infrastructure projects and the establishment of a National Infrastructure Fund to mobilise private capital.
