Winners and losers in President Ruto tax trade-off plan

Protesters during an anti-Finance Bill demonstration along Kenyatta Avenue, Nairobi on June 18, 2024.  

Photo credit: Evans Habil | Nation Media Group

MPs have proposed an increase in fuel, import and rail development levies as well as higher excise duty on gambling to compensate for giving up a raft of controversial taxes on bread and cars in this year’s Finance Bill.

The National Assembly Finance and Planning Committee’s proposal will give the Treasury a soft landing from the loss of potential revenue worth billions of shillings due to the reversal of new and enhanced tax measures.

The reversed measures include a 16 percent value-added tax (VAT) on bread, a 2.5 percent motor vehicle annual tax that was to be placed on insurance as well a higher excise duty on cash transfers and imported sweets.

A proposed tax on goods that degrade the environment will also be amended to apply only to imported goods to encourage local manufacturing and higher duties on cooking oil, motorcycles and agriculture pest control manufacturing inputs eliminated.

The committee, which is chaired by Molo MP Kuria Kimani, instead wants the Treasury to raise the Import Declaration Fee (IDF) to 3.5 percent from 2.5 percent, citing a need to reverse the loss of Sh10 billion annually as a result of last year’s cut in the fee to 2.5 percent from three percent.

“The proposed increase of IDF to 3.5 percent would therefore help to restore the performance of this tax head in line with projected budget estimates for 2024/25 fiscal year,” said Mr Kimani.

“To help raise sufficient funds to maintain and repair roads across the country the committee recommends an increase of the (road maintenance) levy pursuant to Section 3 of the Road Maintenance Levy Fund Act.”

The committee is backing a request made to MPs last week by Roads and Transport Cabinet Secretary Kipchumba Murkomen to have the levy raised from the current Sh18 to Sh25 per litre of fuel. Mr Murkomen told MPs that increasing the levy will raise its collection to Sh115 billion annually, up from the current Sh84 billion.

The Roads and Transport Ministry has also argued that the levy has not been reviewed since 2017, despite the increase in petroleum fuel prices per litre in Kenya over the years.

The committee has also called on the Treasury to raise the Railway Development Levy (RDL) from the current 2.5 percent, adding that the additional money collected should go towards the development of an electric light rail system in Nairobi. In the 2022/2023 fiscal year, the RDL raised Sh29.64 billion, according to Treasury disclosures.

The Finance Committee is also backing an increase in excise charged on betting, and the imposition of the Export and Investment Promotion Levy on leather products, imported footwear, denatured ethyl alcohol, ceramic sinks, and wash basins and fully built imported motorcycles to boost revenue.

The major tax proposals in the Finance Bill were dropped after a Tuesday morning meeting between ruling Kenya Kwanza coalition lawmakers and President William Ruto on a day of public protests that saw hundreds of picketers arrested.

Dr Ruto last month defended the proposed taxes, saying the country must be financially self-sustaining. OnTuesday, the President did not speak or react during the briefing that announced the U-turn.

Since coming to office in 2022, Dr Ruto has introduced several new and unpopular taxes intended to ease the pressure on the country’s national public debt

But critics of the unpopular taxes fear they will stifle economic growth and lead to job losses.

The committee said that the revenue target for the upcoming fiscal year remains the Sh3.343 trillion that Treasury Cabinet Secretary Njuguna Ndung’u outlined in his budget speech last week.

This means that the committee expects the enhanced taxes to fully cover the expected loss of revenue from the deleted Finance Bill clauses.

Failure to raise alternative revenue would have left the Treasury facing a bigger budget deficit than the Sh597 billion stated in the budget, forcing it to increase its borrowing at a time when it is under pressure to cut expenditure on public debt and free up funds for development spending.

The committee now expects the Finance Bill to raise an additional Sh302 billion in taxes in the 2024/25 fiscal year. Prof Ndung’u meanwhile said in his budget speech that ordinary revenue would go up by Sh346.7 billion, but his total included both the Finance Bill and custom measures that are not under the consideration of the committee.

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

In addition to the direct tax measures in the Finance Bill, the revenue push was also expected to be driven by enhanced administrative measures at the Kenya Revenue Authority (KRA), including giving the taxman leave to access taxpayer data from processors such as banks, telcos, utilities, property registries and schools without the need for a court warrant.

The Finance Committee has, however, rejected the proposal, terming it unconstitutional and saying that that Section 51 of the Data Protection Act outlines the circumstances under which exemptions might apply.

Legislators are due to debate the Bill starting Wednesday, with a vote scheduled for Monday.

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