M-Pesa relief as big car owners hit in Sh347bn new taxes

Treasury CS Njuguna Ndung'u at Parliament buildings Nairobi on June 13, 2024, during the budget reading.

Photo credit: Dennis Onsongo | Nation Media Group

The Treasury has removed the cap of Sh100,000 on the proposed motor vehicle tax as it races to raise an additional Sh346.7 billion from new tax measures in the coming fiscal year, even as it spared mobile money users higher excise on fees charged on transactions.

In his budget speech on Thursday, Treasury Cabinet Secretary Njuguna Ndung’u was silent on the upper limit of the tax, but maintained that the minimum amount chargeable will remain Sh5,000.

A cap of Sh100,000 was seen as favourable to owners of expensive cars valued above Sh4 million, which is the price at which the 2.5 percent levy crosses the Sh100,000 mark. The revenue push, which the Treasury hopes will result in a halving of the fiscal deficit and cut reliance on debt, is backed by higher taxes and an aggressive crackdown on tax cheats amid protests from workers, the church and industry groups over high levies.

The 2024 budget has a target of Sh2.917 trillion in tax revenue for the year starting July 1, 2024, up from Sh2.452 trillion in the current year—as per the latest available Treasury documents—which together with Sh426 billion in ministerial appropriations-in-aid (AIA) will form the bulk of financing for the Sh3.992 trillion budget.

The Treasury Cabinet Secretary, however, offered relief for mobile money users after reversing a proposal in the Finance Bill to increase excise duty on fees for M-Pesa transfers to 20 percent from 15 percent.

The reversal followed submissions by Safaricom and other telcos that the increase would hurt financial inclusion and open the door to black market money transfer options, hurting efforts to expand the tax net.

But he retained the proposal to raise the excise to 20 percent on fees charged on bank cash transfers, airtime and data purchases.

Other tax measures are the proposed increase of tax on bread, edible oils, renewable energy solutions, alcohol, and cigarettes. An eco-levy, targeting goods deemed to be harmful to the environment and ranging from Sh98 to Sh1, 275 per items, will also be imposed on goods such as mobile phones, TV and batteries.

“I propose to introduce an annual motor vehicle tax at the rate of 2.5 percent of the value of the vehicle subject to a minimum amount of Sh5,000 per annum,” said Prof Ndung’u without setting a cap as was the case in the Finance Bill that is under consideration by MPs. “I propose to retain the excise duty rate of 15 percent on fees charged on money transfer services by cellular phone service providers to benefit the retail electronic payments ecosystem.”

The new tax measures include the introduction of VAT on bread and financial services offered by banks and insurance companies, excise of 25 percent on cooking oil, higher excise on alcohol and cigarettes, and higher taxes on non-resident firms operating in Kenya. To raise the additional taxes, the minister wants to hand the KRA an additional Sh12.4 billion to pursue tax cheats, while also making it harder for those in the agency’s radar to fight tax claims.

In the Finance Bill, the Treasury has proposed that the KRA keeps 20 percent of the revenue it collects as Import Declaration Fees (IDF), allowing the agency to hire more enforcement officers and upgrade its technological capacity.

The government is targeting Sh60.7 billion in IDF in the coming fiscal year—partly by enhancing the rate from 2.5 to 3.0 percent—meaning that if the KRA hits the target it would be entitled to Sh12.4 billion.

The Bill has also sought a waiver for the KRA under the Data Protection Act, 2019 to allow the agency access to taxpayer data from processors, including banks, telcos, utilities, property registries and schools, without the need for a court warrant.

The Bill wants the systems of these data processors to be integrated with the KRA’s digital I-tax system. The plan to give the KRA unfettered access to taxpayer financial data has been criticised by legal experts, led by the Law Society of Kenya (LSK).

Businesses and individuals facing tax claims from the KRA will also be subjected to tougher rules when appealing the tax demands. The Bill has cut the period for providing information requested by the KRA during the objection hearing to seven days from 30 days. It also increases the period the taxman can use to determine the objection from 60 to 90 days.

The tax changes are expected to raise collections from excise taxes by Sh111 billion to Sh401.1 billion, income taxes by Sh232.1 billion to Sh1.33 trillion and VAT by Sh150 billion to Sh804.7 billion in the 2024/2025 fiscal year.

In his budget speech, the Treasury Cabinet Secretary said that achieving higher revenue through these tax measures will help the government cut its fiscal deficit to Sh597 billion, equivalent to 3.3 percent of GDP, from Sh925 billion (5.6 percent) in the current year.

The total revenue projection—which includes taxes, AiA and grants— has been set at Sh3.343 trillion, against an expenditure target of Sh3.992 trillion, with the resultant deficit being financed by Sh597 million in borrowing and Sh51.8 billion through grants from external partners.

To finance the net deficit, the Treasury will borrow a net of Sh333.8 billion from external lenders, and a net of Sh263.2 billion from the domestic market.

For the domestic borrowing target, this marks a sharp drop from the Sh589 billion the government is taking up in the current year.

Other than higher revenue projections, the Budget shows a slowdown in growth of expenditure compared to previous years.

In the 2023/2024 fiscal year, the country’s expenditure stands at Sh3.84 trillion, meaning that the budget for the coming year is expanding by Sh152 billion. In comparison, the budget expanded by Sh620 billion between 2022 and 2023.

Kenya’s efforts at belt-tightening come against increased pressure on the exchequer to tame the growth and cost of public debt, which doubled to Sh10.4 trillion by the end of March from Sh5.42 trillion five years earlier.

By cutting its appetite for domestic borrowing, which has been blamed for crowding out the private sector from the market, the Treasury is hoping to tame high domestic borrowing rates and boost economic growth by pushing banks to lend to the private sector.

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