Which way for Treasury with proposed changes to Finance Bill 2024?
By Cynthia Kamau, June 25, 2024The 2024 Finance Bill outlines several changes that will have implications on tax collection in Kenya.
With a target of Sh3.3432 trillion in revenue, the concerns about the potential economic impact of the Bill on Kenyans are valid, especially in the context of existing challenges such as inflation, unemployment, and slow economic growth. Kenya Revenue Authority’s (KRA) successful collection of Sh2.17 trillion in tax revenue for the financial year ended June 2023, with a 6.7 per cent growth, indeed shows a positive trajectory in tax collection efforts.
The committee on finance and national planning has made several recommendations to the proposals contained in the Finance Bill, 2024.
Some of them entail a rejection of proposals that were meant to raise additional revenue such as the motor vehicle circulation tax, VAT and excise duty on certain goods and services among others. These recommendations will leave the National Treasury with a budget hole which require some interventions to be able to raise the earlier planned tax revenue. Notably, the committee has proposed a revision of the commencement dates for certain tax clauses in the Finance Bill.
By adjusting the effective date of these clauses to begin a month earlier, from September 1, 2024, to August 1, 2024, the KRA is positioned to capitalise on an additional month of tax revenue collection within the fiscal year.
This approach is a tactical adjustment that can make a significant difference in the overall revenue without altering tax rates or introducing new taxes, thereby minimising the immediate economic impact on taxpayers.
The proposed decision to tax only income-generating creative works is a targeted approach to refine the tax base within the creative sector.
By focusing on income-generating works, the KRA can more effectively target its resources towards those areas of the creative sector that have the potential to contribute significantly to tax revenue while also supporting the growth and development of the creative sector in Kenya.
It’s a balanced approach that recognises the unique nature of creative work and its contribution to the economy. The proposed imposition of withholding tax on interest from short-term securities is meant to encourage long-term investments while also securing a consistent stream of government revenue. By taxing short-term securities more heavily, investors may be incentivised to opt for longer-term investments, which are typically more stable and can contribute to a more secure financial market.
Withholding tax on interest from these financial instruments provides the government with a predictable and steady source of revenue, which can be factored into budgetary planning with greater certainty.
This move can potentially broaden the tax base by capturing revenue from a sector that may have been less taxed previously, thus contributing to overall tax revenue without increasing rates across the board. The strategic adjustments to excise duty rates and exemptions are an important part of KRA’s approach to enhancing revenue collection. By altering excise duty rates or exemptions, the government can influence the competitiveness of local industries.
For example, reducing excise duty on locally manufactured goods can make them more competitive against imports, potentially boosting domestic production and sales. However, changes in excise duty could impact consumer behaviour and business activity, which in turn would affect the volume of taxable transactions.
Higher duties may lead to reduced consumption of certain goods, while lower duties may encourage increased consumption. The government must therefore carefully balance the rate adjustments to ensure they do not stifle consumption or business activity to the point where tax revenues decline.
The decision to increase Import Declaration Fee (IDF) and Railway Development Levy (RDL) is another of the KRA and Treasury’s broader attempts to enhance revenue collection.
While this move is expected to have a direct impact on increasing government revenue, it also carries potential implications for the economy.
An increase in the IDF and RDL is likely to raise the cost of importing goods into Kenya which could improve the country’s trade balance.
The adjustment of the Eco Levy to concentrate on imported finished products while safeguarding local manufacturers is another strategic decision to balance revenue generation with the support of domestic industries.
By focusing the levy on imported finished products, the government can create a more favourable environment for local manufacturers. This can encourage local production, potentially leading to job creation and economic growth within the country.
However, the revenue generated from the Eco Levy would depend on the volume of imported finished products. If imports remain high, the levy could be a significant source of revenue. However, if the levy leads to a reduction in imports due to higher costs, the immediate revenue from the levy might decrease. Overall, the changes to the Finance Bill 2024 seeks to strike a balance between the government’s need for revenue and the economic well-being of its citizens and businesses.
The various measures proposed aim to create a tax environment that is conducive to growth, equitable, and sustainable, while also ensuring that the tax system is fair while also taking into account the potential adverse effects on consumers and the affordability of essential goods and services.
— The writer is a tax associate at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.