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MPs will soon decide the fate of proposed budget estimates, with the 2024 Finance Bill introducing several tax changes that will significantly impact the ease of doing business in Kenya. While the measures aim to increase government revenue and broaden the tax base, they also pose challenges to businesses in terms of compliance, competitiveness and overall economic impact.

One of the most notable changes in the bill is the introduction of the Significant Economic Presence Tax (SEPT), which replaces the Digital Service Tax (DST). SEPT taxes non-residents earning income from digital services at an effective rate of six per cent of turnover—30 per cent of deemed taxable profit.

While the DST targeted specific digital services, SEPT has a broader scope, potentially increasing the tax burden on digital service providers. This may lead to higher costs for these providers, which will be passed on to consumers, thereby increasing the cost of digital services. This will definitely stymie the growth of the digital economy, as higher taxes will hit both providers and consumers and discourage them from engaging in digital transactions.

Further, starting on January 1, a five per cent withholding tax for residents and 20 per cent for non-residents will apply to income earned through digital platforms. While this measure aims to bring more entities into the tax net, the move will raise compliance costs for businesses operating in the digital space.

The higher rate for non-residents could make Kenya a less attractive market for international digital service providers, potentially reducing competition and innovation in the sector.  As Kenya considers leveraging the green economy, the Treasury decided that electric bicycles, solar batteries and electric buses, which were previously zero-rated, will now be subjected to 16 per cent Valued Added Tax. This change is likely to not only slow down the adoption of electric vehicles but also affect innovation in related technologies locally.

Imposing VAT on these products makes them more expensive for consumers, potentially discouraging the shift towards greener transportation options. This could have long-term environmental and economic consequences, as Kenya may struggle to meet its sustainability goals and reduce its carbon footprint.

A proposed 2.5 per cent motor vehicle ownership tax, payable when insurance is issued, will impact vehicle costs and ownership and hit the transportation sector hard. This tax adds a financial burden on vehicle owners, potentially increasing the cost of ownership. For businesses that rely on vehicle fleets, such as those in logistics and transportation, this could lead to higher operational costs. Consumers will be affected, as the increased cost of vehicle ownership will be passed on to them in the form of higher prices for goods and services.

The proposed  VAT on certain financial transactions could add to costs and affect the competitiveness of the financial sector. Higher costs will not only discourage businesses and consumers from engaging in financial activities, but will potentially reduce the overall volume of transactions. This measure could also make Kenya less attractive to international investors, who may seek more cost-effective markets for their activities.

However, the finance bill exempts the transfer of a business as a going concern from VAT. This measure simplifies business transfers, making it easier for companies to engage in mergers and acquisitions. By reducing the tax burden on such transactions, the government is encouraging business consolidation and growth, which can enhance overall economic stability and competitiveness. This exemption is likely to be welcomed by businesses looking to expand or restructure, as it removes a significant financial barrier.

Knowing our politicians, these proposals are as good as the law, so businesses must wake up, smell the coffee and strategise to help mitigate potential negative impacts and continue to thrive in Kenya’s dynamic economic environment.

— The writer is People Daily’s Business Editor