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Budget Experts Warn President Ruto Against New Tax Measures

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NAIROBI, Kenya – President William Ruto’s administration has been cautioned against introducing new tax policies in a bid to improve revenue collection, with budget experts advising that such moves have repeatedly failed to achieve the desired outcomes.

In a recent report to Parliament, the Parliamentary Budget Office (PBO) noted that despite frequent changes in tax policies, the expected increases in revenue have not materialized, pointing to fundamental problems in tax compliance and administration.

“Simply introducing new tax policies does not guarantee better compliance or higher revenue,” said the PBO, led by Dr. Martin Masinde.

The team raised concerns that the government continues to miss tax collection targets, partly due to the implementation of untested tax measures.

In the fiscal year ending June 2023, the government fell short of its tax revenue target by KSh 123.6 billion, and the following year’s deficit grew to KSh 205 billion.

A significant public backlash against new taxes earlier this year, including the now-famous Gen Z protests, forced President Ruto’s government to withdraw the Finance Bill, 2024, which was expected to raise an additional KSh 344.3 billion in revenue.

Protesters rejected proposed taxes on motor vehicles and a new eco-levy on plastics, among others.

The Treasury has acknowledged issues with overtaxing a narrow segment of the population while many others contribute little or nothing.

Treasury Cabinet Secretary John Mbadi recently announced efforts to enhance tax collection by improving visibility and administration, particularly focusing on Value Added Tax (VAT).

However, the budget experts argue that improving tax administration, rather than introducing new taxes, is a more effective strategy.

They emphasize that better enforcement of existing tax laws, leveraging technology, and improving compliance would yield more reliable results.

“The loss of the Finance Bill presents the government with a unique opportunity to focus on tax administration improvements,” the PBO said. “Stricter enforcement and continuous evaluation of existing policies will address the gaps in revenue collection.”

The PBO also sounded the alarm on tax expenditures, including tax refunds and exemptions, which have grown substantially.

In 2022, tax expenditures amounted to KSh 395 billion, up from KSh 292 billion in 2021, with VAT exemptions accounting for the bulk of this increase.

Major beneficiaries of these tax reliefs, according to a report by the Kenya Revenue Authority (KRA), are large corporations and multimillion-dollar enterprises.

The rising cost of tax expenditures, particularly VAT exemptions on fuel and other goods, has put pressure on the government’s revenue base.

“The growing cost associated with these measures raises concerns about their sustainability,” the PBO noted.

The experts called on MPs to focus on improving revenue mobilization and fiscal consolidation, warning that tax amnesties pose a further risk to revenue collection by encouraging non-compliance.

“Tax amnesties undermine the overall tax compliance culture, as individuals and businesses may evade taxes, expecting future penalties and interest to be waived,” the report added.

The report also urged scrutiny of upcoming amendments to tax laws, particularly a proposal to reduce VAT to 14%, as VAT has historically accounted for the largest share of tax expenditures.

In addition to tax policy concerns, the PBO highlighted inefficiencies within government systems as contributing to revenue losses.

They noted that many county governments and state entities operate outside of the Integrated Financial Management Information System (IFMIS), complicating efforts to streamline tax collection.

Pay As You Earn (PAYE) arrears, primarily from public sector entities, currently stand at KSh 97 billion.

Experts have called for the integration of the KRA’s systems with counties and other government entities to ensure full tax compliance and address revenue shortfalls.

Additionally, they pointed to cargo undervaluation as another key issue undermining tax revenues, urging tighter controls in this area.
Anthony Kinyua
Anthony Kinyua
Anthony Kinyua brings a unique blend of analytical and creative skills to his role as a storyteller. He is known for his attention to detail, mastery of storytelling techniques, and dedication to high-quality content.

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