Finance Bill: Unpredictable tax regime is a turnoff for investors in Kenya

 

The Finance Bill 2024 has sparked lots of conversations across the country. More than ever, Kenyans are paying keen attention to the country’s fiscal structure and key processes, a testament to improved civic participation or perhaps consciousness from suppressed disposable incomes. More of the latter, I opine.

The Bill is not short of gains and losses, particularly for the private sector. Crucially, similar to previous finance bills, the cloud of an unpredictable tax regime still hangs over our economy.

The Medium Term Revenue Strategy (MTRS) 2023 - 2027 released by the National Treasury last September was much welcomed by the private sector as it painted a picture of the future, a step closer to predictability. However, some gains of MTRS have been eroded by the haphazardness of some clauses in the Finance Bill 2024.

The Kenya National Chamber of Commerce and Industry (KNCCI) is at the forefront of trade promotion and facilitation through trade missions and expos, locally and abroad.

As we travel the world connecting our members to business opportunities and promoting Kenya as a premier investment destination, we are often reminded of the unpredictability of our tax regime by potential investors. It sits high in the list of cons on their investment matrix as they are not able to confidently make projections on their returns.

No investor is willing to commit their time, skill, or capital to a venture that in a year or two might be significantly affected by a tax component(s) or worse, run out of business.

Locally, we are increasingly hearing from our members concerns over making long term investments particularly in sectors that are prone to suffer from the uncertainty of our tax regime such as manufacturing, gaming and betting, among others.

According to the KNCCI Quarterly Business Barometer that measured expectations of business in the second quarter of 2024, unpredictable regulatory environment ranked second on the list of factors expected to negatively affect the performance of businesses in this quarter.

The unpredictability is demonstrated in Finance Bill 2024, in more ways than one. First, it seeks to abandon the Digital Services Tax (DST) and adopt the Significant Economic Presence Tax. DST, a tax payable on income derived or accrued in Kenya from services offered through a digital marketplace, has only been in effect for the last 40 months and the bill not only proposes a change of name but also rate; a 300 per cent hike in the effective rate.

Second, since 2016, the import declaration fee (IDF), charged on all goods imported into the country for home use, has been dancing from two per cent to 3.5 per cent of customs value. The Finance Bill 2024 proposes a hike from the current 2.5 per cent to three per cent.

In our experience facilitating investment processes, we have seen some models where investors have to work with the worst case scenario; sometimes an IDF rate of five per cent as they just can’t place where the government will put the rate in the succeeding financial years.

Third, while the proposed amendment on the Affordable Housing Act 2024 offers some relief to Kenyans, one cannot help but ask about how soon the amendment is coming considering that it’s been less than two months since the Act was passed. Were these pieces of legislation well thought out? How do these quick amendments reflect on the stability of our laws and policies?

The government targets to grow the contribution of manufacturing from the current seven per cent to 15 per cent by 2027. However, our tax regime has in recent years worked against this target. If you are a manufacturer of excisable products, you have had to deal with a 24-hour excise remission window in the current financial year.

The proposed amendment to change the 24 hours to five working days does not solve the cash flow constraint and administrative burden that manufacturers are grappling with. In practice, by the 8th day of effecting the proposed amendment, manufacturers will still be remitting excise every day.

To add salt to the injury, the Bill seeks to prevent manufacturers from offsetting excise paid in import of raw materials with that of finished products, further straining their working capital. How then do we expect manufacturing to prosper when every year there is a clause(s) in the finance bill that intends to run you out of business.

More than ever, Kenya needs a comprehensive tax policy to guide the introduction and amendments of tax laws. This will give predictability to our tax regime and boost investor confidence, unlocking foreign direct investments.