Since gaining independence in 1963, Kenya has made significant progress in developing its tax system. The government introduced various laws to broaden the revenue base, including legislation on income tax, sales tax (later replaced by value-added tax), excise duty, and customs duty. However, the efforts to modify these rules and expand the tax base have been inconsistent, occasionally impeding economic activities in the country.

Despite continuous efforts by the Kenyan government to reform the tax system, several challenges persist, resulting in underperformance in terms of tax revenue collection by the Kenya Revenue Authority as a percentage of the country’s GDP. The Covid-19 pandemic further compounded these issues by increasing living costs, affecting businesses, and reducing tax revenues.

In response to these challenges, the National Treasury drafted a National Tax Policy in 2022 with the objective of establishing an equitable and efficient tax system that promotes fairness in tax administration and fosters a stable economic environment. The draft policy underwent a public participation process and an updated version was presented to Parliament on April 27, 2023, by the leader of the majority party. This policy aims to address current issues faced by Kenya’s tax system, such as the significant untaxed informal sector, unpredictable tax regulations, and substantial tax expenditures. It also outlines the coordination and implementation process, as well as the roles and responsibilities of various stakeholders involved in its execution.

Kenya has faced challenges in ensuring coherence and reform in its tax policies due to the absence of a specific document on tax policy. To tackle these issues and enhance revenue mobilisation, the introduction of the National Tax Policy (NTP) is a significant step.

Highlights of the National Tax Policy

The National Tax Policy (NTP) has set forth various objectives to strengthen domestic resource mobilisation, aligning with the government’s Bottom-Up Economic Transformation agenda and promoting inclusive growth. A key focus of the policy is to enhance the efficiency and effectiveness of the tax system in order to generate higher revenue. By improving tax collection mechanisms, the government aims to ensure a sustainable and robust financial base for implementing developmental initiatives.

The NTP acknowledges and addresses the challenges that the tax system faces. These challenges include the increase in tax expenditures, complexities associated with taxing emerging sectors like online businesses, low levels of tax compliance, difficulties in international taxation, and delays in the resolution of tax disputes. The policy seeks to tackle these issues through targeted strategies and reforms.

One of the primary goals of the NTP is to boost tax revenue. It aims to achieve this by providing clear guidelines for granting tax incentives and ensuring consistency in future tax law amendments. The policy also emphasises the importance of efficient information gathering and sharing to enhance tax administration. Timely tax refunds, addressing complexities in tax legislation and administration, and involving public participation in policy formulation and implementation are additional objectives of the NTP.

Recognising the challenges posed by the large informal sector, the NTP proposes measures to improve tax compliance in sectors such as property transfers, agriculture, and the informal economy. These measures include implementing educational programmes, enhancing registration requirements, and fostering collaboration between the national and county governments. By doing so, the policy aims to increase tax revenues and create a more inclusive and transparent tax system.

The NTP also highlights the importance of effectively managing tax expenditures. It acknowledges that tax incentives and exemptions can have adverse effects, such as economic inefficiency, inequity, and reduced revenue generation. To address these concerns, the policy recommends conducting thorough reviews of existing tax expenditures, establishing a framework for granting tax incentives, maintaining comprehensive records, regularly reassessing incentives, and implementing a monitoring and evaluation framework. These steps aim to improve the management of tax expenditure and ensure its alignment with desired objectives.

In response to the digital transformation of the economy, the NTP places significant emphasis on leveraging technology to detect and enhance compliance with emerging digital transactions. It suggests conducting regular reviews of the tax regime for the digital marketplace, aligning tax laws with evolving technologies, and fostering collaboration with relevant stakeholders. By doing so, the policy aims to adapt the tax system to the rapidly changing digital landscape, ensuring its effectiveness in capturing tax revenues from digital activities.

Conclusion

Through the implementation of the NTP, Kenya embarks on a transformative journey towards a tax system that is not only robust and responsive but also stands as a beacon of fairness, transparency, and support for the nation’s economic growth and development. This policy sets the stage for comprehensive reforms and advancements in Kenya’s taxation regime, addressing critical areas such as revenue mobilization, tax expenditures management, digital economy taxation, and targeted tax improvements.

The NTP’s commendable focus on predictability in tax rates and bases, inclusive stakeholder engagement, and regular reviews showcases a commitment to adaptability and alignment with emerging trends and government priorities. By embracing these principles, Kenya aims to foster an environment where taxpayers can plan effectively and contribute meaningfully to the nation’s progress.

However, the true measure of success lies in the effective implementation, monitoring, and evaluation of the NTP. Overcoming resistance in taxing the informal sector and ensuring consistent application of tax incentives are paramount challenges that require diligent attention. Moreover, addressing complexities within the tax legislation and fostering collaboration among stakeholders will be essential for achieving the desired outcomes.

To maintain its relevance and effectiveness, the NTP must remain dynamic, subject to regular reviews, and adaptable to emergencies or changing economic conditions. By embracing a proactive approach that welcomes adjustments when necessary, Kenya can ensure that the policy evolves in lockstep with the country’s needs and aspirations.