In an attempt to bolster government revenue and address fiscal challenges, the Kenyan government recently proposed a raft of changes in the Finance Bill 2023, which saw an introduction of new taxes and levies starting in July.
As part of ongoing tax changes, starting today, the sale of online content, music, ebooks, videos, animations, illustrations, social media accounts, and cryptos, among other digital assets, will attract a 3.0 per cent tax.
Imported clinker – the raw material used in the manufacture of cement, finished iron and steel, will come get into the country with a 17.5 per cent Export and Investment Promotion Levy.
Even while the cost of paper has been high in recent times, imported paper and bags will start attracting a 10 per cent export levy making them even more expensive. However, this strategy may have unintended consequences as Kenyans seek alternative methods to avoid taxes.
According to predictions by micro-lending firm Jijenge Credit Ltd, Kenyan workers are expected to face decreased bargaining power because of high unemployment rates as companies come to terms with the new normal. The firm suggests that employers may shift towards hiring contract workers instead of permanent employees.
Economist and CEO of Jijenge Credit Ltd, Peter Macharia, says the tax hikes will trigger a radical evaluation of employment contracts.
“What you will see as some of the taxation measures begin to take effect this month, is a radical evaluation of employment contracts between employers and their staff,” offered Macharia.
While these adjustments seem financially advantageous for employers, they may undermine the stability of the labour market and exacerbate existing unemployment challenges.
The rise in contract workers may lead to a lack of investment in skills development and reduced loyalty among employees, further hindering productivity and economic growth.
Another noticeable trend in response to increased taxes is the preference among companies and shops to be paid through cash or alternative means such as sending money through M-Pesa rather than using the Till Number system. By opting for M-Pesa, businesses hope to circumvent potential tax obligations and minimize their exposure to tax audits.
The Till Number system, widely used for digital payments in Kenya, enables businesses to receive payments directly into their bank accounts, making transaction records easily accessible for taxation purposes.
However, the tax hike has prompted businesses to explore alternative payment methods, such as the Send Money option in the M-Pesa menu, which can be more difficult for tax authorities to trace.
This shift may pose challenges for the government’s efforts to accurately assess and collect taxes, potentially leading to a decline in tax revenue.
The widespread adoption of M-Pesa has revolutionised financial transactions, particularly in the informal sector, enabling individuals and businesses to conduct transactions quickly and efficiently.
However, the increased reliance on Till Number for tax avoidance purposes may undermine the government’s ability to accurately gauge economic activity and taxation levels. “You cannot keep increasing taxes when everybody else is crying, the government needs to minimize what it is taking from us,” said immediate past Kenya Association of Manufacturers Chairman Mucai Kunyiha during a past industry meeting.
The increased taxes have also significantly impacted the oil industry, with a reported drop in demand for oil products in place. Consumers, burdened by higher taxes, are now more cautious with their spending, resulting in decreased purchases of oil.
This decline in demand has adversely affected oil marketers, leading to reduced sales and potential financial challenges for the industry.
Furthermore, the decrease in oil consumption could have broader economic implications. Lower demand for oil affects related sectors, such as transportation and manufacturing, and can hamper overall economic growth.
As the world transitions towards cleaner and renewable energy sources, the decline in oil demand should serve as a wake-up call for the government to diversify its energy mix and invest in alternative sources such as solar, wind and geothermal power.
This transition can not only reduce reliance on fossil fuels but also create new job opportunities and stimulate economic growth.
Its long-term implication, Macharia says, this may lead to reduced contributions to the Kenya Revenue Authority (KRA) which is keen to finance a Sh3.6 trillion budget for a country spending in excess of Sh1.5 trillion on recurrent expenditure alone.
The Finance Act 2023 was passed by President William Ruto on June 26, 2023, with most of the changes taking effect from July 1, which is the Government’s fiscal year, while a few will be effective from September 1 and January 1, 2024.
To mitigate the negative consequences of tax avoidance and ensure fairness in the tax system, the Kenyan government needs to take several proactive measures including reviewing and simplifying the tax structure, strengthening tax enforcement, promoting tax education and awareness, encouraging voluntary compliance and strengthening the formal economy.
The high taxes have also pushed people to run their businesses online from the safety of their homes denying the government license revenues. Online businesses are also harder to tax since some of the bank accounts are foreign and more challenging to trace than in traditional banking systems.
The urge to avoid taxes has also seen some traders use crypto payments which are yet to be fully incorporated into the tax system due to the multiple cryptocurrencies involved and weak regulation systems that make them hard to track.
