Tactical retreat? State back-pedals on tax, subsidy plans amid public outcry

This comes 160 days after the new administration was sworn-in after winning the hotly contested August 2022 elections on a campaign platform to grow jobs and lower the cost of living.

The government had urged Kenyans to put up with the short-term pain of scrapping some of the subsidies put in place by the previous Uhuru Kenyatta Jubilee administration while increasing taxes.

But the National Treasury has in recent weeks walked back on earlier planned stringent proposals such as ending the remaining fuel subsidy on kerosene and diesel, signalling mounting pressure on the State to ease the cost of living for Kenyans.

Last week, economic managers at Treasury acknowledged the criticism and appeared to play down the clamour for more taxes.

"We are not saying that we are going to increase the taxes," said National Treasury Cabinet Secretary Prof Njuguna Ndung'u during a public forum with the National Assembly's Committee on Finance.

"We want to lower the taxes so that we do not have incentives to avoid the tax but also try to cover as many goods and products as possible to grow tax revenues."

Kiharu MP and Ruto ally Ndindi Nyoro speaking in the same forum echoed similar sentiments.

"We have been having discussions with Treasury as a committee and one thing is clear, overtaxing Kenyans through high taxation does not necessarily translate into high tax revenues," said Mr Nyoro, who is also the chair of the National Assembly's Budget and Appropriations Committee.

"We should look at an optimal level of taxes. We do not support increasing taxes. The government can collect more revenue not necessarily by overtaxing the people already paying taxes but by getting people who are not engaged in economic activities to be engaged and in turn pay their share of taxes. When a jobless person gets a job, they will pay tax, when a business reports profit, they will pay tax."

Fuel prices

Treasury had earlier signalled a U-turn on ending the fuel subsidies amid rising pressure to bring down the high cost of living in a host of high-profile decisions.

It has, however, beaten a hasty retreat.

Treasury, in the new policy direction, revealed it would buttress the fuel prices stabilisation mechanism through legal reforms, marking a departure from an earlier plan to remove the kerosene and diesel subsidies in a bid to trim the fiscal deficit.

"In order to stabilise consumer prices against unpredictable swings in global oil prices, the government will set up a legal framework to ring-fence the Fuel Stabilisation Fund," revealed Treasury in its 2023 Budget Policy Statement published recently.

Analysts said the intention is not surprising as allowing consumer fuel prices to swing too much would damage economic confidence, with the fear of inflation slowing productivity. President Ruto scrapped the subsidies for super petrol and maize flour on September 13 and reduced those for diesel and kerosene, saying they were unsustainable. Treasury had gone on to say that it would eliminate "the remaining unsustainable and consumption-driven fuel subsidy by the end of December 2022, but will continue to offer support to agricultural production through the fertiliser subsidy programme."

The removal of the remaining subsidies would have seen the cost of diesel, which is used to power commercial vehicles and kerosene, used mainly by low-income homes for cooking and lighting, go up significantly.

Treasury has, however, been subsidising diesel and kerosene, carrying the baggage left by the Jubilee administration that started subsidising fuel in April 2021. And speaking when the Budget and Appropriations Committee met Treasury mandarins, Mr Nyoro said there is a need to prioritise an improved business environment.

"The government should target the people and businesses that are not paying by facilitating their businesses to grow and making policies that create an enabling environment for businesses to create more jobs," he said.

Some tax experts reckon that the government should consider reducing taxes to boost businesses as well as the spending power of Kenyans, a move they say can help the economy reeling from multiple shocks, including the prolonged dry spell, high energy costs and the Covid-19 aftershocks.

Treasury now appears to agree with this view, with Prof Ndung'u saying: "high tax rates will not give you high tax revenues, but if you lower the tax, you will increase acceptance and grow the tax base. We are going to rationalise the tax rates by moving into each tax instrument and try to optimise to the point where they do not distort the market as well as it does not create an incentive for you to run away from paying taxes."

But how realistic are these pronouncements by Treasury that it could lower taxes for Kenyans?

Alex Kanyi, a tax expert and partner at Cliffe Dekker Hofmeyr's (CDH) Kenyan operation noted that the government has limited options insofar as revenue raising is concerned, especially considering the obligations that need financing.

Without a substantial widening of the tax base, Treasury might have to hit Kenyans with more taxes.

"There are different obligations that the government needs to meet and you have to consider this against revenue collection, which is already short of the target for the year, and it has to look for funds to meet its needs. For that reason, I highly doubt whether we will see a reduction in taxes. I anticipate an increase in taxes to deal with gaps and commitments that government already has," he said. "There is also the ambitious tax collection target of Sh3 trillion over the 2023/24 financial year and a further Sh4 trillion within the first term of this government. Unless you effectively widen the tax base, the only other option that the government is left with is to increase taxes."

Mr Kanyi said the informal sector offers an opportunity to widen the tax base. This, he noted, could be actualised through the use of data that county governments have on small businesses that they licence.

"The missing link could be information. This could be done through collaboration between the counties and the national government. The county governments already have information on the people they issue licences to. In instances where not everyone pays for the licences, you have to have people matching to the ground to see who is operating," he said, adding that the government could also bring into the tax loop smallholders using data collected when undertaking such exercises as distribution of subsidised fertiliser.

"The government has been collecting information about the farmers and other than using this information to do such things as distribute fertiliser, that information could be also useful to understand the farmers, how much they are making and whether the government can get tax out of them." Kunal Ajmera, the chief operating officer at Grant Thornton, a consultancy firm, agreed that raising taxes might not have the intended impact of increasing revenues and that the government should instead focus on growing the tax base.

"Kenya has some of the highest tax rates in the world. Our income tax brackets have pretty much stayed the same since early 2000," said Mr Ajmera.

Tax-linked price rises are being witnessed in all sectors of the economy as the Kenya Kwanza administration seeks to double tax revenues during its first term in office.

The quest to double tax revenues over the next few years might mean a further squeeze on the current pool of taxpayers as the Kenya Revenue Authority (KRA) races to meet the targets.

This is already evident, with the recent hikes in some taxes that have resulted in an uproar among businesses and consumers. "While no revision has taken place in our tax brackets, the countries world over are lowering the tax rates and enabling people to save and spend more. In a recent budget announced in India, all personal income up to 700,000 Indian Rupees, that is approximately Sh1.1 million per annum was tax exempted," said Ajmera.

"Reducing marginal tax rates to spur economic growth is a commonly used policy with the notion that lower tax rates will give people more after-tax income that could be used to buy more goods and services."

Reduced unemployment

Additionally, Mr Ajmera said, reduced tax rates may boost savings and investment, leading to further production and reduced unemployment as it leads to higher disposable income, allowing the consumer to spend more, and increase the Gross National Product (GNP)

"While we have a considerable debt burden, which necessitates government to raise adequate revenue for repayment, the increasing tax burden is not an optimal solution. Focus has to be on incentivising investment, creating demand and spurring growth. The tax base has to be widened," he said in an interview.

Nikhil Hira, a tax expert and business partner at Kody Africa LLP, noted lowering certain taxes could help boost tax collections as businesses and traders move higher volumes on account of lower market prices.

He added that the government should also focus on bringing into the tax bracket the jua kali sector (informal sector), which has always been cited as key in growing the number of taxpayers, but the option has never been seriously looked into.

"I don't think more tax is a solution. I believe reducing rates, at least a little, may be the better way to go. Often, this does result in more tax. The issue is the jua kali sector. It accounts for a lot of our workforce and maybe many don't have to pay tax," he told The Standard in a recent interview.

"Those that do are not being pursued. One solution could be to allow them to do business in a specific place with a modest fee. Maybe not raise much but it is a start. This happened in Kenya in the early nineties."