In late March, President William Ruto made some key tax pronouncements in his speech at the American Chamber of Commerce (AmCham) Business Summit.
Most elements of the speech are expected to feature in the Finance Bill 2023 as part of tax reforms.
In a Cabinet meeting the President chaired on April 27, additional proposals were made to bolster the Bottom-up Economic Transformation Agenda (BETA) and spur growth.
From both, some of the major proposals that the public ought to look out for in the Finance Bill 2023 include the exemption of liquefied petroleum gas (LPG) from value-added tax (VAT), import declaration fees and railway development levy, reassessment of digital service tax framework, exemption of tea purchased from factories or auction centres for export from VAT, the adoption of a consistent national tax policy, the introduction of excise duty on imported fish and furniture, solving delays in tax refunds, scrapping of VAT on exported services and the introduction of one-year amnesty on penalties and interest for accrued tax debts.
These proposals have implications for all taxpayers should they be enacted into law.
Currently, LPG is subjected to taxes at the rates of eight per cent on VAT, declaration fees and railway development levy.
The proposal to exempt LPG from these taxes and levies would significantly make cooking gas affordable to Kenyans.
Additionally, the move will likely reduce the destruction of forests and the use of biomass fuel. This will pave the way for increased clean domestic energy consumption in Kenya.
Digital service tax, which is charged on the income derived or accrued in Kenya from services offered in a digital marketplace — a platform that allows for direct interactions between sellers and buyers of goods and services.
The tax, which took effect on January 1, 2021, is charged at the rate of 1.5 percent of the total transaction value.
If passed into law, it implies that Kenya would abandon a unilateral approach and align with the Organisation for Economic Co-operation and Development’s (OECD) Inclusive Framework centred on a two-pillar solution.
If this proposal is implemented, the challenge of tax avoidance by multinationals will be addressed effectively.
Under the first pillar, the primary aim is for large corporations to reallocate a portion of their taxable profits to market jurisdictions.
The second pillar imposes a minimum corporate income tax of 15 percent.
President Uhuru Kenyatta’s administration was hesitant on backing the OECD framework because it would have resulted in the abolition of the digital service tax yet there was no guarantee of collecting more taxes from the OECD regime.
Exemption of tea purchased from factories or auction centres for purposes of export from VAT
The proposal to exempt tea purchased from factories or auction centres for export from VAT is likely to be counterproductive as the factories cannot claim the input VAT for processing the tea.
The factories will be forced to find a way to either absorb the cost or pass it on to tea importers.
President Ruto and US Ambassador Meg Whitman also emphasised the need for a consistent national tax policy at the AmCham Business Summit.
This comes against the backdrop of numerous concerns from both investors and taxpayers regarding different tax regimes that impede business in Kenya.
Introduction of excise duty on imported fish and furniture
The introduction of excise duty on imported fish and furniture is likely to be one of the features of the Finance Bill, 2023. This is likely to promote the local fish and furniture industries if implemented.
It is however not clear if the local market is big enough to support the current demand for fish and furniture in Kenya.
Local traders who were importing fish and furniture will be impacted negatively and the prices are likely to go up if the introduction of the excise duty is not implemented progressively.
Solving delays in tax refund
Constant delays in refunding verified tax claims is a challenge that the National Treasury has constantly grappled with.
To solve this issue, President Ruto announced in March that starting from June 2023 all verified claims of tax refund will be payable within 6 months.
To demonstrate his commitment to resolving this problem, he further stated that in cases where a refund has not been made by the Kenya Revenue Authority (KRA) within the 6-month period, taxpayers would have the right to offset their claims against future tax liability without making further applications to KRA.
Since no techniques were provided on how this proposal would come into force after it is approved into law, all stakeholders will have to await the Finance Bill, 2023 to understand it in full terms.
The effect of tackling delays in tax refunds would be highly beneficial to taxpayers, especially corporations that are owed large tax refunds by KRA.
Scrapping of VAT on Exported Services
President Ruto also remarked in his speech at AmCham that the introduction of VAT on exported services by the Finance Act, 2022 had rendered the country uncompetitive and constantly hindered investors from making Kenya their regional services hub.
To this extent, he stated that VAT on exported services will be removed from the end of June 2023. This scrapping of this tax is also likely to feature in the Finance Bill 2023 and will be subjected to public participation and consequent approval from Parliament.
It is possible that the implementation of this proposal may take the form of an exemption of VAT as opposed to zero-rating.
If this proposal is passed into law, there is a likelihood that it will impact the Kenyan business environment positively by attracting numerous investments in the services industry.
Amnesty on penalties and interest for accrued tax debts
In recognition Kenya's tax debt portfolio which currently stands at Kshs. 1.5 trillion, the Cabinet proposed for a one-year amnesty to be introduced on penalties and interests.
This proposal is aimed at reducing the growing tax debt. It is also fashioned as a mechanism for encouraging tax debtors to come forward and make payments.
We will wait to see if this will be couched in the same way as the Voluntary Tax Disclosure Program which comes to an end this year.
Conclusion
The current administration is aiming to attract business investors to the country and improve the economic outlook.
To achieve this, numerous tax proposals are likely to feature in the Finance Bill, 2023.
While there exists a lot of enthusiasm regarding some of the recent pronouncements, some challenges are likely to arise especially with proposals such as the review of the DST framework.
The government is also struggling to pay foreign debt, settle pending bills, pay salaries to civil servants and disburse money to counties.
While the measures that have been announced are welcome, we expect some new taxes to be introduced or exemptions to be removed so that the government collects significant revenue to support its ambitious budget for 2023/2024.
We encourage everyone to be on the lookout for the Finance Bill 2023 and to participate effectively in the process that will change Kenya's tax landscape for the next government's fiscal year which commences on 1 July 2023.
Mr Kanyi is a Partner at Cliffe Dekker Hofmeyr (incorporating Kieti Law LLP) and Mr Otieno (trainee advocate).
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