Reflections on the National Budget

The 2023/24 budget is the current administration’s maiden budget and therefore it presents the administration’s priority reform areas, policies, and programs in pursuit of its Bottom-Up Economic Transformation Agenda. The 2023/24 budget comes against the backdrop of significant challenges. On the domestic front, the economy is experiencing significant macroeconomic challenges, including declining agricultural production, decline in consumer purchasing power due to high inflation, dwindling forex reserves, a weakening Kenya shilling, rising cost of living and an increasingly vulnerable debt position. As such, the 2023/24 budget bears the weighty responsibility of carefully balancing between the revenue and spending pressures while addressing the above domestic concerns.

Enhanced revenue targets

In the 2023/24 fiscal year, the Government aims to collect KES 2.571 trillion in ordinary revenue (of which tax revenue is KES 2.4T), representing an increase of KES 429 billion from the KES 2.142 trillion in the 2023/23 budget. To meet this target, the budget contains various tax policy and administrative measures aimed at boosting revenue collection by the Kenya Revenue Authority (KRA). Such include administrative measures to grow Value Added Tax (VAT) collections through the full roll-out of the electronic tax invoice management system (eTIMS) and extending similar invoicing requirements to Income Tax. There are also increases in taxation including higher individual tax rates of 32.5% and 35% ; increased turnover tax rates; increased VAT and excise duty rates on multiple products, most notably VAT on petroleum products; and tax base expansion into income derived from monetization of digital content as well as tax on transfers of digital assets. The budget also proposes to introduce a tax on employees towards the National Housing Development Fund. Perhaps reflecting the liquidity crunch faced by the Government, there are several proposals to bring forward the due dates for various taxes, with initial proposals seeking to collect withholding taxes within 24 hours (now revised to 5 days).

Some welcome measures that address concerns raised by taxpayers have also been put forward. Among them is the exclusion of interest on local loans from interest deduction restrictions. Others include the zero-rating of liquified petroleum gas (LPG); the proposed reclassification of exported services and transfer of a business as going concern (TOGC) to exempt supplies; the repeal of annual inflationary adjustment of excise duty rates; reduced railway development levy and import declaration fees among others. 

Impact on taxpayers

Overall, the 2023/24 budget reflects the Government’s goal to finance its policy objectives whilst enhancing fiscal consolidation. However, the dilemma that arises is whether fiscal consolidation should be driven more through containment of expenditure or through growing revenues by way of increased taxation. It is arguable that pursuit of revenue growth by increasing the tax burden on taxpayers in less-than-ideal economic conditions could have a counterproductive effect on the economy. With tax revenue growing much faster (19%) than projected GDP growth (5.3%) it is perhaps inevitable that greater pain will be felt by taxpayers.

Furthermore, some of the measures appear to place a heavier burden on a specific segment of taxpayers (read employees) thus raising questions of equity. One would ask why, for instance, tax on rental income would be lowered, while increasing tax on wage income or even increasing the rate of turnover tax; or why not look at more untapped sources of revenue such as capital gains on disposal of listed shares. The proposed abolition of waivers of penalties and interest also heralds an era of increased costs for taxpayers as it disregards the circumstances that could give rise to additional tax, which in many cases arises from differences in interpretation of tax legislation. 

Going forward, it is hoped that there will be increased focus on stimulating economic growth as a means to growing tax yield without the need to constantly increase tax rates. Empirical studies have demonstrated that higher-income countries generate higher taxes as a percentage of GDP compared to lower-income countries. This is no surprise and reinforces the need to grow the overall pie as opposed to the state slicing a bigger share of the existing pie from taxpayers who are also struggling to make ends meet.

Fredrick Omondi is a Tax and Legal Leader at Deloitte East Africa. The views presented are his own and do not necessarily represent those of Deloitte. He can be reached on fomondi@deloitte.co.ke.