Treasury secretary Henry Rotich is expected to hit ordinary consumers and high-income earners hardest as he unveils new tax measures to finance his Sh3 trillion budget.
Mr Rotich has largely played his hand on the VAT law where he has used the Tax Laws (Amendment) Bill, 2018 to introduce new measures expected to yield billions of shillings in new tax revenues.
He has also proposed an overhaul of the income tax regime to charge high-income earners more in a Bill he is due to submit to Parliament this afternoon.
Tax experts say excise therefore remains the one corner from where Mr Rotich can spring a surprise on Kenyans when he reads his budget speech this afternoon. This could come in the form of allowing adjustments on the tax for inflation as allowed by the law.
“He is unlikely to deviate much from the proposals he has already laid out in the Tax Amendment Bill and the draft Income Tax Bill, but he has the opportunity to adjust excise for inflation this year,” said PricewaterhouseCoopers (PwC) partner and head of tax in Kenya and East African markets Stephen Okello.
Mr Rotich is expected to present to Parliament an expanded budget of Sh3 trillion that is Sh400 billion more than last year’s Sh2.62 trillion despite concerns that the rising budget deficit is driving public debt to an unsustainable levels.
Excise (or sin) tax has traditionally hit consumers of alcoholic beverages and cigarette smokers, but the government has recently made bold steps to charge it on other products such as soft drinks, cosmetics, juice and bottled water.
But the effort suffered a major setback when the High Court quashed the gazette notice that introduced excise tax on a wider range of consumer goods – a decision that the government has challenged in the Court of Appeal.
Proposed changes to VAT law are, however, expected to hit consumers hardest because the Tax Amendment Bill has reclassified a raft of basic commodities from zero rating for VAT to exempt status.
This effectively means that manufacturers cannot recoup input VAT and will therefore pass on the cost to consumers in the form of higher pricing.
The list of goods set to cost more once the Tax Amendment Bill is passed includes flour, bread, milk, farm pest control products and liquefied petroleum gas.
The new tax measure could also affect human and animal vaccines, raw materials for pharmaceutical manufacturers and supplies to marine fisheries and fish processors.
Deloitte tax leader for East Africa Fred Omondi said Mr Rotich could choose to immediately bring on board some of the VAT changes that have been in the pipeline, including the levy on petroleum products.
High-income earners and small enterprises could also be waking up to a day of increased tax pain in which Mr Rotich may formally introduce his proposal to charge the top tax rate of 35 per cent on all income above Sh9 million per year or Sh750,000 per month.
If Mr Rotich’s proposals sail through, small businesses will be charged a presumptive tax of 15 per cent of the single business permit fee issued by a county government instead of the Sh5 million turnover tax currently being charged on revenue below Sh5 million.
Mr Omondi said import duty is another area that the Treasury is likely to target for a tax increase.
“We are likely to see an increase in import duty on some finished products as part of the effort to promote local manufacturing, which is one of the areas the government has identified as a driver of growth,” said Mr Omondi.
Kenya is a net importer of goods and the imposition of a new tax on imports or change in the tax rate would have an immediate impact on the cost of imported goods and ultimately on household budgets that are already feeling the weight of higher energy and transport costs with the continued rise in the price of oil.
Tax experts also want Mr Rotich to address the perennial budget deficit by bringing more Kenyans into the tax net, and shifting emphasis from direct to indirect taxes.
Mr Okello said that instead of raising income tax rates, the Treasury ought to increase the VAT rate to 18 per cent while reducing income tax.
Such a move, he says, would leave more money in people’s pockets and boost the economy through increased spending.
He, however, acknowledges that in cutting the budgetary allocation to the Kenya Revenue Authority (KRA) by Sh828 million, the National Assembly’s Budget and Appropriations Committee may have negatively affected the tax reform efforts.