The theme of the 2024 Budget Policy Statement (BPS) is “Sustaining Bottom-Up Economic Transformation Agenda for Economic Recovery and Improved Livelihoods.”

A key facet in mobilising revenue was the formulation and publication of the Medium-Term Revenue Strategy (MTRS) with an aim of providing a framework for tax systems reforms to boost domestic revenue.

Given this context, the government introduced the Finance Bill, 2024 (the Bill), which proposes significant changes to the tax framework aimed at among others, expanding the tax base and reforming the tax system.

However, considering the economy is already facing challenges such as inflation, unemployment, or slow economic growth, some of the proposed changes risk hurting Kenyans economically through increase in the price of commodities and the cost of doing business.

Proposed changes on the reclassification of the value added tax (VAT) status of products from zero-rated (0pc) to standard rated (16pc) and from exempt to standard rated would mean that the price of the affected supplies will increase thus directly impacting the overall household budget. As a result, consumers may experience a notable uptick in the cost of many products.

The proposed motor vehicle tax at 2.5 per cent of the value of the vehicle, dependent on the vehicle’s engine capacity and model, aims to target car owners in Kenya, and the tax would be paid at the point of the motor vehicle owners acquiring their insurance covers.

Taxpayers’ burden

However, this may negatively impact insurance penetration which is already low in Kenya and increase taxpayers’ burden who already must contend with various taxes and levies at the time of purchasing the motor vehicle, high insurance costs, high fuel costs, and its maintenance.

The Bill also proposes to impose a 25 per cent excise duty tax on raw and refined vegetable oils, which would trigger an unprecedented surge in the price of cooking oil, a staple in Kenyan households.

Furthermore, the following taxes would also be imposed: Five per cent excise duty on imported crude palm oil, 25 per cent excise duty on processed cooking oil with no offsetting mechanism, 10 per cent excise duty on plastic packaging and eco-levy of Sh150 per kilogramme or a 20-litre cooking oil jerrican.

Consequently, this would have a ripple effect on the price of other commodities such as bread which uses cooking oil during baking process and long bar soap among others. The already high cost of living will further plunge millions to financial distress, undermine the government’s efforts to promote local value addition in agribusiness and destabilise the manufacturing industry at large by putting at risk many jobs, further exacerbating unemployment.

Among employers, recent and proposed tax changes could affect them on various aspects such as employment costs, capital investments, international trade, sector-specific levies, corporate tax rates, and regulatory compliance.

The 1.5 per cent mandatory monthly affordable housing levy deduction on employees’ gross income, equally matched by the employer creates a tax burden to employers, with an increased cost of employment that may lead to potential reduction in employment opportunities. Employment costs are also bound to rise due to changes in national insurance contributions.

Sector-specific levies affect certain industries which could impact business negatively in such sectors. The amendment of various supplies’ status from exempt to taxable with the proposed tax rate of 16 per cent will require the companies providing these services to account for VAT which would have a significant impact in their operations. International trade could also be impacted due to the increased import costs tax that would increase the cost of investments.

In conclusion, to mitigate these risks, the government may consider implementing compensatory measures such as targeted social assistance programmes, tax credits for low-income earners, or phased implementation of tax increases to mitigate the immediate impact.

Additionally, public dialogue and transparency about the rationale behind tax changes can help in managing public expectations and concerns. Individuals could also consider reviewing their personal finances, consider budget adjustments, and explore ways to increase income or reduce expenses. Businesses would need to reassess their strategies, pricing, and cost structures to adapt to the new tax environment.

— The writer is a tax associate at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.