Tax expenditure hit Sh316bn despite removal of reliefs

Times Tower in Nairobi, the Kenya Revenue Authority headquarters. FILE PHOTO | DENNIS ONSONGO | NMG

Tax expenditure increased to Sh316 billion in the financial year ending in June 2021 despite spirited efforts by the National Treasury to reduce claims by getting rid of unnecessary waivers.

This is a rise of Sh48.9 billion from the Sh267.1 billion that the Kenya Revenue Authority (KRA) paid out to businesses that enjoy relief on various tax heads including Domestic valued added tax (VAT), Domestic Excise duty, Personal Income Tax, Corporate Income Tax.

The jump in tax expenditures— or the value of revenue foregone by the government due to tax reliefs—comes at a time when there is debate on whether there are some businesses or individuals who have unfairly benefited from tax exemptions.

The Tax Expenditure Report 2022 reveals that Domestic VAT accounts for most of the total tax expenditure at Sh211.09 billion followed by Domestic Excise duty was Sh30.1 billion.

“A review carried out by the World Bank in 2015 on the tax incentives concluded that many had not delivered the expected impact such as lower prices for consumers or increased supply of specific products,” said the Cabinet Secretary for National Treasury Njuguna Ndung’u.

The CS said the increase in tax incentives has made Kenya’s tax system less efficient and difficult to administer, making it hard for KRA to collect taxes.

“As a result, several incentives were eliminated through the Tax Laws Amendment Act, 2020, the Finance Act, 2020 and the Finance Act, 2021,” he noted.

VAT on imported fuel had a total tax expenditure of Sh28 billion, followed by corporation income tax (CIT) at Sh21.6 billion.

Import duty reliefs were at Sh13.3 billion while those on fees and levies amounted to Sh5.55 billion.

Tax reliefs are given to encourage investment and job creation, but over time the, government says, they become obsolete.

Previous officials at the National Treasury made several attempts to reduce the number of zero-rated items including bread and maize flour, but their efforts were scuttled by the National Assembly.

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