Taxation is the main source of finances for governments across the world. It is, therefore, a key policy tool that the government uses to meet its recurrent and development expenditure. Other sources of government finance include loans, grants, fines, and fees.

Taxes, however, serve other purposes in addition to raising finances that are deployed towards the provision of public services. 

In also supports the provision of economic stimulus, shaping behaviours by either encouraging or discouraging them and redistribution of income through progressive taxation. The government continuously reviews its tax policies to align them with economic and social changes. 

The proportion of tax revenue that is collected by a country to its gross domestic product (GDP) is globally used a key metric of measuring the effectiveness of a tax system. 

Countries with higher tax revenue to GDP ratios are generally deemed to have better and more effective tax systems. The government, through the National Treasury, has made strides in improving the tax system through the digitisation of the Kenya Revenue Authority (KRA). It has also overhauled several tax laws to simplify and modernize them.

In 2013, the VAT Act which was applicable since 1990 was repealed and replaced with a new and simplified Act of Parliament. This was followed by the enactment of the Excise Duty Act in 2015 to provide for the charge, assessment, and collection of excise duty and to make administrative provisions relating thereto, and for connected purposes. 

It led to the repeal of the Customs and Excise Act. In the same year, the Tax Procedures Act was introduced to harmonise and consolidate the procedural rules for the administration of tax laws in Kenya, and for connected proposes. The Tax Appeals Tribunal Act also assented into law in 2013 with the objective of harmonising the appeals process through the establishment of a Tribunal for the management and administration of tax appeals and for connected purposes. 

Disjointed tribunals

This led to the appeal of the various disjointed tribunals and appeal committees that were previously established by various tax laws or regulations. National Treasury is on record stating that the Income Tax Act which came into force in 1974 is currently under review. 

These among other measures are meant to, among other objectives, align tax laws with emerging trends and the best global practices. The Covid-19 pandemic forced governments across the world to deploy various policy tools to mitigate the adverse effects the pandemic has posed to economies. In Kenya, the government used tax measures as part of the policy instruments that were meant to stimulate the economy.  These included the reduction in the value added tax (VAT) rate from 16 per cent to 14 per cent, reduction in the corporate income tax rate from 30 per cent to 25 per cent and the reduction of the top PAYE tax rate from 30 to 25 per cent.

The roll out of these tax measures was accompanied by other amendments that were counterproductive and put into question the long-term tax policies planning of the country. 

For instance, the country had in 2019 introduced a reduced corporate income tax rate of 15 per cent for five years for businesses operating plastic recycling plants. This was, however, repealed in April 2020 which potentially destabilised investors who had set in place plans to set up plastic recycling plants in Kenya.

— Robert Maina is a Senior Tax Manager at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.