June 11, 2021 - 5 minutes read

National Treasury PS notes Post-Budget reading as captured at the KEPSA partnership with PWC and the British Chamber of Commerce Kenya (BCCK) National Budget Webinar.

By Acha Ouma
  • “We believe the policies that we have laid down will be able to keep inflation down, interest rates will be controlled, balance of payments will be also managed properly, and also the Kenyan shillings exchange rate, we are expecting it to remain stable on account of rebound on exports.” – Dr. Muia 
  • “The implication of this context from a fiscal, financial and economic perspective is that we expect the economy to recover. We are also seeing in that context elevated expenditures especially those that are aimed at combating the pandemic, both in terms of the direct ones dealing with health and the indirect ones where we help support people who are falling off.” – Dr. Muia
  • “If we look at practical measures and actions that we are proposing to support the recovery of the economy is the use ICT. We want to install what is called electronic government procurement, so that when the government is procuring, we are able to enforce local content in public procurement of goods and services and they should be very useful in terms of the business environment to support a lot of local manufacturing as opposed to importing unnecessarily.” – Dr. Muia
  • “The challenge of mobilization of additional resources demand that spending in the budget must be in significant areas with the most impact. We have a trilemma where people; want cushion from government, don’t want to pay more taxes and don’t want their government to borrow.” – Dr. Muia

“In conclusion, despite weak business environment due to Covid-19 pandemic and 10-year cycle, there is expected economic recovery both locally and globally. We also believe that government economic recovery measures will improve livelihoods of Kenyans and create jobs.” – Dr. Muia

REVENUE HIGHLIGHTS

  • The containment measures by the Government to stem the spread of the virus and save lives, adversely affected economic activities and revenue performance. 
  • To stimulate economic activities and enhance ability to respond, the Government prioritized health and social expenditures and formulated an economic recovery program targeted at reducing debt vulnerabilities through a revenue-driven fiscal consolidation with a view to stabilizing debt to GDP ratio over the medium term among other measures
  • At the Macroeconomic level, prudent fiscal, monetary and financial policies have resulted into revenue collection including Appropriation- in-Aid doubled from Ksh 900 billion in the FY 2013/14 to an estimated Ksh 1.8 trillion in the FY 2020/21. 
  • The fiscal policy supporting the FY 2021/22 and the medium-term budget is designed to support economic recovery and reduce fiscal deficit. The policy aims to mobilize revenues through the ongoing reforms in tax policy and administration. 
  • Shortfalls in revenues reflect weaker business environment and the impact of containment measures adopted in March 2020 following the outbreak of the Pandemic. The Government then, responded to the Pandemic by among others implementing tax reliefs measures in April 2020. These measures resulted in reduced collection of revenues adversely impacting the implementation of the budget. 
  • Government remains committed to reducing the level of tax exemptions to create parity of treatment while also raising more revenues to fund social programmes and reducing the fiscal deficit. 
  • The government has initiated a process of developing a National Tax Policy Framework that will not only enhance administrative efficiency of the tax system but provide consistency and certainty in tax legislation and management of tax expenditure. A draft National Tax Policy is now ready and will be shared with stakeholders and members of the public in line with the dictates of our constitution 
  • Given the performance of revenue and the available level of funding from our Development Partners, it is necessary that we strictly adhere to the expenditure ceilings as presented so as to manage and stabilise public debt. 
  • Propose to amend the Tax Procedures Act to empower the Kenya Revenue Authority seek intervention of other Agencies to facilitate compliance with the provisions of the digital service tax 
  • Propose to amend the Kenya Revenue Authority Act to increase the maximum reward to a person who provides information leading to the identification of un- assessed taxes from Ksh 100,000 to Ksh 500,000 
  • Further, propose to increase the reward to a person who provides information leading to recovery from maximum of Ksh 2.0 million to Ksh 5.0 million. This will encourage receipt of voluntary information to Kenya Revenue Authority thereby bolstering tax compliance and revenue collection. 
  • Currently, there are 549 pending cases with a revenue implication of Ksh 107.4 billion. In order to strengthen the Tribunal and allow members to expeditiously hear and conclude cases, proposed various amendments to the Act through the Tax Appeals Tribunal (Amendment) Bill, 2021 
  • The processing of applications under the EAC Duty Remission Scheme has been manual, time consuming and inefficient. In order to improve administration of the Scheme, the Government automated the process, under the Single Window System, and successfully rolled out in September 2020. 
  • To strengthen the administration of tax exemption process for Official Aid Funded projects, we have embarked on automation of the application and approval under the Single Window System and target to roll out in the next financial year. 
  • to ensure equity and fairness in taxation, proposed to align, the Income Tax Act with international best practice, through introduction of provisions to prevent tax base erosion and profit shifting as well as restrict treaty benefits to curb tax evasion and avoidance. 
  • Propose to amend the Income Tax Act to expand the definition of the term “Permanent Establishment” so as to align the Income Tax Act with the international best practice. 
  • propose to amend the Income Tax Act to align the rate of withholding tax on service fees in the extractive industry with that withheld in respect of management and professional services under the same sector. This will remove ambiguity and manipulation that result in leakage of tax revenue through re- characterization of income. 
  • Employers who engage a minimum of ten graduates from both Universities and TVET institutions will be allowed to deduct, from their taxable income, an extra fifty percent (50%) out of the cost of the apprentice emoluments. 
  • Propose to amend the Income Tax Act to replace the reducing balance method with the straight-line method which provides definite timeline for the deductions. This will provide certainty in taxation, ease tax administration and enhance compliance. 
  • Propose to replace the current thin capitalization rule that is based on debt-to- equity ratio with interest restrictions based on a ratio of earnings before interest, taxes, depreciation and amortization. Accordingly, any interest paid in excess of 30 percent of a company’s earnings before interest, taxes, depreciation and amortization will be disallowed in determination of taxable income 
  • In order to strengthen our healthcare system, make the cost of medicines affordable for Kenyans, and step up the fight against COVID-19 Pandemic, I propose to introduce VAT exemption on medicaments used in our health facilities including decongestants and food supplements. 
  • Propose to provide VAT exemption to diagnostic and laboratory reagents, including therapeutic respiration apparatus, breathing appliances, gas masks as well as medical equipment and technologies used in the provision of medical services. 
  • Propose to introduce VAT exemption on inputs used in the manufacture of medical ventilators and breathing appliances. This will enhance access to these products that are essential in management of the COVID-19 complications. 
  • Propose to amend the Value Added Tax Act, to provide for a transition for the projects that had been signed before April 2020, to enable them continue benefiting from the VAT exemption in respect of taxable goods used in the projects. This transition will expire upon completion of the said projects. 
  • Propose to re- introduce excise duty on betting at the rate of 20 percent of the amount wagered. 
  • Propose to introduce excise duty on products containing nicotine or nicotine substitutes at a specific rate of Ksh 5.0 per gram. This rate of excise duty is equivalent to the duty applicable to similar products under the Act.
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