Know the Kenyan Finance Bill 2024 - Summarized

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💭Introduction - A call for thought;

The Kenyan Finance Bill 2024 has been introduced to overhaul the country’s tax system to enhance revenue collection and improve compliance. However, the proposed changes have sparked widespread concern due to their potential negative impacts on the economy, businesses, investors, and citizens. This article provides a detailed overview of the bill's key provisions, examines the potential adverse effects, and presents a critical analysis of its broader implications.

Key Provisions of the Finance Bill 2024

Motor Vehicle Tax

The bill proposes a new motor vehicle tax of 2.5% on the value of vehicles, payable when acquiring insurance coverage. The tax ranges from a minimum of KSh 5,000 to a maximum of KSh 100,000 depending on the vehicle's value. Exemptions include ambulances and vehicles driven by government officials and diplomatic personnel【KPMG East Africa】【Kenyans.co.ke】

Significant Economic Presence (SEP) Tax

This tax replaces the Digital Service Tax (DST) and imposes a 30% levy on the deemed taxable profit for non-residents earning from digital marketplaces. This aims to capture more revenue from global digital businesses operating locally【TPA Global】【Tuko.co.ke】

Minimum Top-Up Tax

A 15% tax on multinationals with an effective tax rate below this threshold ensures that large corporations contribute a fair share of tax. This aligns with global trends toward minimum tax payments by multinational enterprises (MNEs)【TPA Global】【Tuko.co.ke】

VAT Changes

The bill proposes removing VAT exemptions on various financial services, including credit and debit card issuance and foreign exchange transactions, which will now be subject to a 16% VAT. Additionally, the VAT registration threshold will be raised from KES 5 million to KES 8 million, reducing the compliance burden on smaller businesses【Kenyan Wall Street】【Tuko.co.ke】

Excise Duties

Excise duty on money transfer services will increase from 15% to 20%. Additionally, a 20% excise duty will be introduced on services provided through digital platforms by non-residents【Kenyan Wall Street】【Tuko.co.ke】

Withholding Tax Adjustments

New withholding taxes will be applied to goods supplied to public entities, with rates set at 3% for resident suppliers and 5% for non-residents. Digital content and services will face a 20% withholding tax for non-residents and 5% for residents【TPA Global】【Tuko.co.ke】

Environmental and Infrastructure Levies

An eco-levy will be introduced to address the environmental impacts of certain products. Interest income from infrastructure bonds will become taxable for residents【KPMG East Africa】【TPA Global】

Negative Effects on the Economy

Increased Cost of Doing Business

The removal of VAT exemptions on financial services will increase operational costs for banks and other financial institutions, leading to higher charges for consumers and businesses. Higher excise duties on money transfer and digital platform services will further increase the cost of doing business, potentially discouraging investment and expansion【Kenyan Wall Street】【Tuko.co.ke】

Investor Confidence

The introduction of new taxes, such as the SEP tax and Minimum Top-Up Tax, may deter foreign investment. Multinational companies might perceive Kenya as a less favorable investment destination due to the increased tax burden. The complex and unpredictable business environment can make investors wary of committing to long-term investments in the country【TPA Global】【Tuko.co.ke】

Higher Cost of Living

The new taxes on financial services, motor vehicles, and essential goods will likely lead to price increases, burdening consumers already struggling with high living costs. The removal of VAT exemptions on essential items like bread and higher excise duties on telecommunications services will disproportionately affect low and middle-income households, reducing their disposable income and purchasing power【Kenyan Wall Street】

Unemployment and Informal Sector Impact

Small and medium-sized enterprises (SMEs), which are major employers in Kenya, may struggle with the increased tax and compliance costs, potentially leading to business closures and job losses. The requirement for SMEs to integrate electronic tax invoice management systems (eTIMS) with penalties for non-compliance could be particularly challenging, given their limited resources and technical capacity【Tuko.co.ke】

Policy and Regulatory Challenges

The increased complexity and compliance burden of the tax system could lead to higher administrative costs for businesses and the Kenya Revenue Authority (KRA). The expansion of KRA's powers to demand eTIMS integration and data protection exemptions might raise privacy concerns and resistance from businesses and the public【Kenyan Wall Street】

Economic Informalization

The increased tax burden may push more businesses and individuals into the informal economy to avoid taxation, undermining the government’s efforts to broaden the tax base and improve tax compliance【Tuko.co.ke】

Reduced Consumption and Investment

Higher taxes on goods and services can lead to reduced consumer spending, which is a key driver of economic growth. Lower disposable incomes and increased living costs may slow down economic activity. Additionally, reduced foreign and domestic investment due to the higher tax burden can lead to slower economic growth and fewer job opportunities【Kenyan Wall Street】【Tuko.co.ke】

Fiscal Deficit and Public Debt

Despite the revenue-raising measures, the projected fiscal deficit remains significant, indicating ongoing challenges in balancing the budget and managing public debt. Continued high deficits can lead to increased borrowing costs and reduced fiscal space for development projects【KPMG East Africa】

Conclusion

The Kenyan Finance Bill 2024, despite its revenue-raising intentions, poses significant risks to economic growth, investor confidence, and the financial well-being of citizens. The increased tax burden and regulatory complexity could exacerbate existing economic challenges, particularly in the context of high unemployment and a struggling economy. Policymakers should reconsider these measures and seek more balanced approaches that support economic growth and social well-being without imposing excessive burdens on businesses and citizens. Comparing Kenya and the US economy, which is a grown economy is where our policymakers make a grievance mistake. Basically, if it moves, they tax it!.

Citations

**Rodgers Munene**​​

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