Tax revenue is an area of growing focus in Kenya, with 2014 featuring new and increased levies, a new law covering value-added tax (VAT), enhanced compliance efforts, and strategies to move informal and unregulated activity into the formal and taxable economy. State revenue was 23.1% of GDP for both the 2011/12 and 2012/13 budgeting cycles. Tax revenues climbed, however, from 9.6% to 10.2%, according to a 2013 World Bank report on the Kenyan economy. The IMF praised tax collectors for doing a better job in its 2013 country report on Kenya, after having highlighted the need for improvement in earlier years. “The efforts to close the tax-administration gaps that emerged in 2012/13 have already started to yield significant results, and need to continue,” according to the fund’s report. “Looking forward, the tax reform agenda should focus on Customs and income taxes with the objective to remove distortions and facilitating private economic activity.”
New Vat Law
One of the chief reforms has come from the VAT Act of 2013, which came into effect in September of that year. The law is a series of small-scale changes that promise to improve efficiency, including raised rates in some areas, closed loopholes, and an end to the withholding system and remissions. The list of exempted products has dropped from more than 400 to under 100. In total these VAT reforms are expected to raise the equivalent of 0.25% of GDP in additional revenue in 2013/14, according to the IMF. Also notable was the speed with which the VAT Act was adopted and implemented. It was passed by the National Assembly on August 6, approved eight days later by President Uhuru Kenyatta, and put into effect on September 2.
Consumers felt the impact almost immediately, as prices for staple goods rose in response. Electricity is also costlier – homes consuming less than 200 KWh of power were formerly tax exempt, and those using more charged 12%. Now, all users pay 16%. Other new levies brought in 2013 include a 10% excise tax on mobile banking and other financial services, and a 1.5% import levy to finance railway development. “These measures are a step in the right direction as they rebalance tax composition away from taxation of sources of production toward taxation of consumption,” according to the World Bank’s report.
However, on a sector-by-sector basis private sector representatives, while supportive of a more comprehensive tax regime, are leery of greatly increasing the tax burden for end-users. According to statements from Bob Collymore, mobile operator Safaricom’s CEO, at the company’s annual general meeting, more than 28 shillings out of every 100 shillings charged to a telecoms customer went to the taxman, making Kenya’s telecoms taxes among the highest in the world. Collymore added, “Mobile money is still relatively new, and government should be wary of putting any additional tax burden on the customer, and in particular on the poor who rely on M-Pesa more than any other.”
The impact will be felt across several other sectors of the economy as well. In mining, the royalty rate for gold doubled to 5% in 2013, and jumped from 3% to 10% for rare-earth metals niobium and titanium. These tax hikes in the mining sector place Kenya on a growing list of countries that have sought a bigger take from its extractive industries. A survey by Goldman Sachs estimated that the average royalty rate across all types of output in 20 major mining jurisdictions rose from 3% to 4% from 2010 to 2013. In Africa, countries including Ghana, Tanzania and others have changed tax laws to boost their share of the revenue.
Real estate is another area where the tax take is on the rise, due to the likely return of a capital gains tax in Kenya for the first time since 1985. Henry Rotich, secretary of the National Treasury, signalled this intention in his June 2013 budget speech, saying profits from real estate have grown far faster than tax income from the sector, but specifics have not been announced. There are no immediate plans to apply a capital gains tax to securities in Kenya, but Paul Muthaura, the acting head of the Capital Markets Authority, said that one is likely in the long term.