Government Reintroduces Key Tax Measures from the Finance Bill 2024 Amid Public Concerns

As the government reopens the tax reform discussion, it is evident that the abandoned Finance Bill 2024 is far from over. This time, the Ministry of Treasury has repackaged and introduced eight tax measures previously scrapped due to widespread public disapproval. These measures are now consolidated into three separate bills: the Tax Laws (Amendment) Bill, 2024, the Tax Procedures (Amendment) Bill, 2024, and the Public Finance Management (Amendment) Bill, 2024. The reintroduction of these measures, while aimed at improving revenue collection and bridging a significant fiscal deficit, has again sparked public debate about the impact of new taxes on an economy strained by the high cost of living.

Background on the Finance Bill 2024 and Its Controversy

The Finance Bill 2024 was initially rolled out with a suite of tax reforms that the government claimed would support economic development and enhance the revenue base. However, this proposal was met with significant public backlash, driven by concerns that the new taxes would worsen the economic hardships facing many Kenyans. Eventually, the Finance Bill was withdrawn, leaving a budget deficit estimated at Ksh.346 billion. The Treasury’s recent announcement of revised tax measures seeks to rectify this deficit and uphold the objectives of the repealed bill, albeit through a more transparent and phased approach.

Key Tax Measures Making a Comeback

The eight tax measures that are poised for reintroduction cover a range of areas, from digital marketplace expansion to pension contributions, signaling a more expansive approach to revenue collection. Treasury Cabinet Secretary John Mbadi has positioned these measures as essential for economic recovery, but the effectiveness of these proposed taxes will depend largely on public acceptance and the government’s capacity to implement them without adding undue pressure on the population. Below is a closer look at each of these key measures and what they entail.

1. Expansion of the Digital Marketplace Tax

The digital economy has grown significantly in recent years, with many Kenyans relying on digital services for income, transportation, and business operations. To capitalize on this growth, the Tax Laws (Amendment) Bill, 2024, includes provisions to bring a wider array of digital operators into the tax bracket. The measure extends to platforms offering ride-hailing, food delivery, professional services, freelancing, and rentals.

By capturing these revenue streams, the government aims to broaden its tax base. However, this proposal also raises concerns over how these taxes might impact small business owners and freelancers who rely heavily on digital platforms. The Treasury has indicated that this measure is part of a broader strategy to align digital taxation with global standards, which is essential for fair competition and economic equity. However, there remains a question of how effectively this tax will be enforced and what compliance measures will look like for digital entrepreneurs and freelancers.

2. Introduction of a Minimum Top-Up Tax

Another significant proposal is the introduction of a minimum top-up tax on multinational corporations operating in Kenya. This tax would ensure that companies with annual consolidated turnovers exceeding Ksh.100 billion are subject to a minimum tax rate of 15%.

This measure aligns with global trends where countries are imposing minimum taxes on multinationals to prevent tax evasion and ensure these entities contribute to local economies. While the government anticipates that this tax will level the playing field between local and multinational firms, critics argue that it could dissuade foreign investment, particularly at a time when economic recovery is fragile.

3. Increase in Pension Contribution Limits

The Tax Laws (Amendment) Bill proposes to increase the allowable pension contribution from Ksh.240,000 to Ksh.360,000 per year, equating to Ksh.30,000 per month for both employers and employees. This measure is designed to encourage more substantial retirement savings by adjusting the cap to match current living costs and inflation.

For employees, this increase represents an opportunity for greater savings, but it also raises questions about the capacity of lower-income earners to meet these higher contributions. Employers may face additional costs, potentially leading to adjustments in wage structures or hiring practices.

4. Withholding Tax on Goods Supplied to Public Entities

In a move aimed at regulating the taxation of goods supplied to public entities, the new tax measure proposes a withholding tax rate of 0.5% for resident individuals and 5% for non-residents on goods supplied to government offices. This rate is a reduction from the 3% originally proposed in the Finance Bill 2024.

While this measure could streamline tax collection on government-related supplies, suppliers, especially small-scale businesses, may feel the financial burden of an upfront tax deduction. It remains to be seen whether the lower rate will alleviate some of this pressure or create further complications for suppliers working within tight margins.

5. Introduction of the Economic Presence Tax

Replacing the previously proposed Digital Service Tax, the Economic Presence Tax is aimed at non-resident individuals who earn income through the digital marketplace. The new rate, set at 6%, is a significant increase from the earlier 1.5% and applies broadly to foreign-based digital operators earning from Kenyan consumers.

The Treasury’s rationale is to ensure tax fairness and align Kenya’s policies with international digital tax standards. However, foreign companies might opt to adjust their service costs, passing the additional tax burden onto Kenyan consumers. Additionally, the measure raises questions about enforcement, especially regarding non-resident entities with limited physical presence in Kenya.

6. Infrastructure Bonds to Be Taxable

Historically, infrastructure bonds in Kenya have attracted investment due to their tax-free interest status. Under the new tax plan, however, a 5% tax on interest earned from infrastructure bonds is proposed for resident investors, with foreign investors remaining exempt.

While this tax could generate much-needed revenue, it risks dampening local investor enthusiasm for infrastructure bonds, potentially impacting the government’s long-term infrastructure goals. Balancing the need for infrastructure funding with the potential deterrent effect of taxation will be critical in this case.

7. KRA PIN Requirement for Remote Workers

The proposed Tax Procedures (Amendment) Bill mandates a Kenya Revenue Authority (KRA) PIN for Kenyans working remotely outside the country for Kenyan employers. This provision is intended to ensure that all remote workers pay tax, aligning with global trends as remote work grows.

This measure could enhance revenue collection, yet it may introduce additional administrative hurdles for Kenyan employers who engage remote employees. Compliance might also be challenging, particularly for freelancers and contractors who operate independently.

8. Tax Deductibility for Affordable Housing and SHIF Contributions

A positive provision for taxpayers, contributions to the Affordable Housing Levy and Social Health Insurance Fund (SHIF) will now be tax-deductible, allowing individuals to claim insurance reliefs. This deduction could lower taxable income, offering some reprieve to Kenyans struggling with high costs of living.

The deductibility aspect might incentivize participation in these programs, enhancing affordable housing efforts and healthcare coverage. Yet, there is skepticism over whether this measure will translate to meaningful financial relief, as only a fraction of income will qualify for deductions.

Implications and Public Reaction

Public reaction to these reintroduced tax measures remains mixed. While some citizens acknowledge the importance of addressing the budget deficit and supporting economic recovery, others fear that the increased tax burden will compound existing financial hardships. The Ministry of Treasury has taken a more proactive approach this time, publishing a two-page explainer in local dailies to clarify the rationale and anticipated benefits of these measures, likely a lesson from the backlash faced by the Finance Bill 2024.

Conclusion

The reintroduction of these tax measures underscores the government’s commitment to pursuing fiscal consolidation and closing the budget deficit. While the Treasury has emphasized the benefits of these reforms for economic growth, the impact on citizens and businesses, particularly in an already strained economy, cannot be overlooked. The government must carefully consider implementation strategies and prioritize transparency and dialogue to mitigate any public unrest and foster acceptance.

As Parliament deliberates on these bills, the outcome will set a precedent for how Kenya navigates the balance between revenue generation and citizen welfare.