Kenya stands at a pivotal moment as it considers the Finance Bill 2024, a proposal that has sparked debate over its potential to derail the nation’s progress toward a sustainable future. The government’s intention to generate revenue through new taxation measures must be balanced against the need to maintain momentum in green initiatives, especially in light of the draft Kenya Green Finance Taxonomy (KGFT). This article delves into the key issues, proposes alternatives, and justifies a more climate-conscious fiscal policy.

Taxation and renewable energy

Current issue: The Finance Bill proposes limiting VAT exemptions on specialised equipment for solar and wind energy projects to those already under construction. This policy change threatens to increase costs and deter future investments in renewable energy.

Proposed solutions:

• Retain the existing VAT exemption for all specialised renewable energy equipment.
• Gradually phase out the exemption over a period, focusing first on less critical equipment.
• Implement targeted incentives such as tax credits, accelerated depreciation, or feed-in tariffs.

Rationale: Promoting renewable energy is crucial for Kenya’s international climate commitments and its target of 100% clean energy by 2030. A thriving renewable energy sector can create jobs, stimulate economic growth, and reduce reliance on fossil fuels. Maintaining tax incentives aligns with global best practices and supports the objectives of the KGFT by facilitating green project financing.

Taxing green bonds

Current issue: The Bill suggests taxing interest income from Green Bonds issued after July 1, 2024. This move could dissuade investment in green projects and stymie the growth of Kenya’s green bond market.

Proposed solutions:

• Continue exempting interest income from Green Bonds from taxes.
• Phase in taxation gradually, with increasing rates over time.
• Offer alternative incentives like tax credits or guarantees.

Rationale: Tax benefits for Green Bonds are essential for attracting private capital to climate-friendly projects. Globally, many countries provide such incentives to remain competitive in the green finance landscape. Taxing Green Bonds contradicts Kenya’s net-zero emissions commitment and could undermine the KGFT’s goals of promoting sustainable finance.

E-mobility and zero-rated status

Current Issue: The Bill proposes eliminating the zero-rated VAT status for electric bicycles, solar and lithium-ion batteries, and electric buses. This would increase their costs and hinder the adoption of e-mobility solutions.

Proposed Solutions:

• Preserve the zero-rated VAT status for all e-mobility goods.
• Introduce tax credits for buyers or subsidies for building charging infrastructure.
• Invest in expanding charging infrastructure.

Rationale: Encouraging e-mobility is vital for reducing emissions, improving air quality, and meeting Kenya’s climate goals. The e-mobility sector can spur job creation and economic growth while reducing fossil fuel dependence. Removing tax incentives could compromise Kenya’s leadership in sustainable transportation, contrary to KGFT’s aim of supporting green transportation projects.

Plastic Recycling and VAT Exemptions

Current Issue: The Bill seeks to remove VAT exemptions on equipment for plastic recycling plants, increasing setup costs and potentially discouraging investment in this crucial sector.

Proposed Solutions:

• Maintain or enhance VAT exemptions for plastic recycling equipment.
• Provide targeted subsidies or grants to offset equipment costs.
• Explore public-private partnerships for leveraging private sector resources and expertise.

Rationale: Plastic recycling is fundamental to reducing waste, promoting a circular economy, and mitigating environmental damage from plastic pollution. Tax incentives can encourage investment in recycling infrastructure, generate jobs, and support sustainable development. Eliminating these exemptions contradicts Kenya’s sustainability goals and the KGFT’s objectives of fostering sustainable waste management practices.

Broader implications for green finance

The Finance Bill’s proposed tax changes have broader implications that could undermine Kenya’s burgeoning green finance ecosystem. They contradict the draft KGFT’s objectives by potentially:

• Discouraging Green Investment: Increased costs for green projects might deter investment, hindering the transition to a low-carbon economy.
• Hampering Sustainable Finance Growth: Removing incentives could slow the development of green financial products and services.
• Incentivising Harmful Investments: Higher costs for green projects might inadvertently make environmentally harmful investments more attractive.

Kenya’s Finance Bill 2024 presents a critical juncture for the country’s sustainable development journey. The proposed tax measures threaten to undermine progress in renewable energy, e-mobility, and plastic recycling, contrary to the draft KGFT’s aims. By considering alternative approaches, such as maintaining or gradually phasing out existing incentives or introducing targeted support mechanisms, the government can ensure fiscal policies that align with Kenya’s climate goals. This balanced approach will foster a sustainable and prosperous future for all Kenyans.