The 2022 Tax Expenditure Report was released by the National Treasury with the goal of promoting data accessibility and transparency while providing information for tracking and analysing tax expenditures. Tax expenditures are utilised to accomplish particular policy goals by enacting targeted preferential tax measures that benefit a chosen sector or group of taxpayers.
The report takes into consideration different tax heads with the objectives of estimating tax expenditure for various tax heads, presenting tax expenditure data, improving the transparency and accessibility of information on national tax expenditures, and facilitating tax expenditure monitoring and review.
Personal Income Tax (PIT)
The tax base for taxation is the remuneration paid to an employee or an individual. The report considers the following as benchmarks:
- Contributions to a pension scheme and social security fund;
- Tax reliefs; and
- Income paid to diplomats and privileged persons.
Reliefs from tax obligations are provided to taxpayers as a kind of tax expenditure so as to promote saving, promote property ownership, and lessen the tax burden. The relief includes; insurance relief, relief related to persons with disability (PWD), and mortgage relief among others.
The report indicates that tax expenditure related to personal income tax stood at Ksh 5.31 billion in 2021, an increase from Ksh 4.77 billion in 2020. From 2017 to 2020, the Personal income tax expenditure as a percentage of GDP has been rising slowly. Nonetheless, it decreased to 0.044 in 2021. Tax Expenditure for House Ownership Savings was zero in 2021 as a result of the Finance Act of 2020’s policy change, which eliminated the tax relief for contributions to HOSP (Home Ownership Savings Plans). This would have meant that there shouldn’t have been any tax expenditure in 2021 since the policy reform got rid of the HOSP.
Corporate Income Tax
The general corporate income tax rate which is currently 30% for Kenyan incorporated companies and 37.5% for non-resident corporate bodies serves as the benchmark for corporate income tax. The report treats preferential tax regimes as a feature of the taxation system for corporate entities; because they are regarded as the benchmark for the report, and therefore were not considered as a tax expenditure.
These specific regimes include:
- Companies located in EPZ for which the corporate income tax rate is 0% for the first ten years and 25% for the next ten years after which 30% rate applies.
- Companies located in Special Economic Zones (SEZ), for which the corporate income tax rate is 10% for the first 10 years of operation and 15% for the next 10 years after which 30% rate applies.
iii. Companies newly listed on any approved securities exchange are subject to a reduced tax rate of 25% for 5 years following the listing. The reduced rate is only applicable to companies listing at least 30% of their issued share capital.
The report further deemed any deduction greater than 10% for investments as a tax expenditure while 10% is considered the benchmark since investment deductions are ingrained in all tax systems as a universally accepted accounting principle and a best practice on a global scale. The total CIT expenditure stood at Ksh 21.6 billion in 2021, a decline from Ksh 22.6 billion in 2020. However, total CIT expenditure increased from Ksh 17.1 billion in 2017 to Ksh 22.3 billion in 2018. Since 2017, the percentage of GDP devoted to corporate tax expenditures has been changing. From Ksh 22.6 billion (0.21% of GDP) in 2020 to Ksh 21.6 billion (0.18% of GDP) in 2021, the expenditure decreased.
Value Added Tax
The general rate for goods and services is 16%; the rates for petroleum products and zero-rated supplies are 8% and 0% respectively. Standard rates of either 16% or 0% on domestic VAT, which are primarily applied to exports, serve as the benchmark tax system. The benchmark unit of taxation is the final consumer of taxable goods and services. The VAT Act, 2013, however, includes some exempt products and services in the First Schedule and zero-rated goods and services in the Second Schedule that are regarded as a baseline but not as tax expenditure.
The report considers the revenue forfeited because of tax exemptions and zero-rating for some goods and services that are intended for domestic use as tax considered as expenditure in relation to VAT. Compared to Ksh 172.54 billion (1.61% of GDP) in 2020, tax spending related to domestic VAT grew to Ksh 211.09 billion (1.74% of GDP) in 2021.
Only zero-rated supplies for local consumption were taken into account for calculating the zero-rated domestic VAT spending for the 2022 report, as opposed to the 2021 report, which took both zero-rated supplies for local consumption and exports into account. From 2017 through 2020, the amount spent on VAT as a proportion of GDP decreased; however, in 2021, the amount slightly increased. The tax expenditure grew by 0.13 percent from 1.61 percent of GDP in 2020 to 1.74 percent of GDP in 2021.
The top 10 sectors that significantly increased domestic VAT expenditure for both zero-rated and exempt supplies were also reviewed in the tax expenditure report. These are: Banking and insurance activities saw an increase of 60% and accounted for 33.8% of the overall tax expenditure. The sector ICT sector came in second, contributing 15.5% of the overall VAT spending and rising by 31%. Moreover, the manufacturing sector rose by 27% and contributed 10.3% of the VAT exempt expenditure and finally the sector of retail and wholesale business generated 8.5% but had a 15% contraction.
The reports shows that alcoholic and non-alcoholic beverages provided to DEFCO, as well as locally built automobiles and motorbikes, were exempt from the calculation of tax expenditure for domestic excise tax. Analysis shows that tax expenditure related to domestic excise duty declined from Ksh 48.4 billion in 2017 to Ksh 31 billion in 2021. Since Keg beer accounts for the largest portion of all domestic excise duty spending, the decline in tax expenditure is blamed for the downward trend. The amount of domestic excise duty taxes as a share of nominal GDP has been progressively declining. The percentage of GDP dropped from 0.57 in 2017 to 0.256 in 2021.
The assessment of tax spending for the different tax heads indicates a downward trend in expenditure over the last five years. Compared to Ksh 357.8 billion in 2017, Ksh 356.5 billion in 2018, and Ksh 299.5 billion in 2019, the overall tax expenditure in 2020 was Ksh 267.1 billion. Nevertheless, in 2021 it was Ksh 316.0 billion, up Ksh 48.9 billion from the previous year. This is attributed to changes in tax laws, such as the gradual elimination of provisions affecting tax expenditures that change the structure of the income tax, such as the tax rate and allowable deductions.
The report recommends that the government should aim at eliminating redundant tax expenditures and enhance those intended to promote investments.