President William Ruto's government is not likely to achieve its development expenditure targets due to steadily declining revenue despite the rollout of a raft of tax reforms in the country.

At the moment, revenue collections are yet to fully recover to pre-pandemic levels, as indicated by the 2024 Macro Fiscal Analytic Snapshot - Kenya report by the Institute of Public Finance (IPF).

"Revenue performance for FY2022/23 was below target, resuming a long-term trend of underperformance against original estimates," noted Bernard Njiri, Senior Research Analyst at IPF during the report launch.

Revenue performance below IMF projection

Analysis from the institute shows that revenue collection has lingered for several years under 18 percent of Kenya's GDP, a level last achieved in FY2018/19 just before the onset of the Covid-19 global health pandemic.

The International Monetary Fund (IMF) puts Kenya's tax revenue performance at 25 percent of the GDP, implying that the taxman is currently grappling with strategies to bridge a gap of 11.5 percent of Kenya's GDP.

IPF noted that for the 2022/23 fiscal year, underperformance in revenue collection may be partly attributable to a lull in business activities as a result of the General Election, which often comes along with lax enforcement measures.

At the moment, income tax and value-added tax (VAT) remain Kenya's primary sources of revenue, accounting for 6 percent and 3.9 percent of GDP, respectively.

Current projections indicate that Kenya expects revenue to reach 19 percent of GDP by FY2025/26, a level not achieved since 2014/15.

Policymakers are relying on a series of measures to achieve this target, including the recent doubling of VAT on oil products from 8 percent to 16 percent and the rollout of additional tax bands targeting highly paid executives.

Other tax measures that the government is relying on include the tripling of turnover tax to 3 percent, the upward revision of excise duty for certain goods, and the introduction of an export and investment promotion levy on some imports.

Furthermore, the taxman has placed a high premium on the controversial Housing Levy, which is currently in limbo following a decision by the Court of Appeal to hold the High Court judgment that declared the levy unconstitutional.

The Housing Levy, payable by both workers and employers at the rate of 1.5 percent of their gross pay, was a significant tax measure by President Ruto to finance his signature social housing program.

The uncertainty surrounding Kenya's revenue collections is also compounded by a lack of clarity on how the government plans to roll out its maiden Medium-Term Revenue Strategy (MTRS), an initiative poised to raise an additional 5 percent of GDP in revenue by 2026.

According to IPF's Senior Research Analyst Bernard Njiri, MTRS "does not include a breakdown of the revenue impact of each of the proposed measures, making it difficult to track progress in their implementation."

Some of the proposed measures in the MTRS include reducing the rate of corporate income tax from 30 percent to 25 percent to align Kenya's charge with global standards, as well as decreasing the VAT standard rate to 14 percent from the current 16 percent by FY2026/27.

From left: IPF Head of Research and Capacity Strengthening, Ruth Kendagor, Institute of Public Finance (IPF) CEO, James Muraguri and KEWOPA Executive Director, Mercy Mwangi and IPF Country Lead and Head of Programs, Daniel Ndirangu display the newly launched Macro Fiscal Analytical Snapshot Report in Nairobi today. The report highlighted that Kenya risks missing its economic growth targets as the country grapples with high debt distress.

Read also: IMF raises queries over Kenya’s revenue shortfall

 

Targeting 'hard-to-tax' sectors

 

"The government also proposes to introduce VAT on education and insurance services, an increase in excise duty on fuel products, and a motor vehicle circulation tax," notes IPF's 2024 Macro Fiscal Analytic Snapshot report.

 

"The MTRS further sets out ideas for addressing 'hard-to-tax' sectors of the economy that act as a drag on revenue growth, such as the informal sector, the digital economy, and the agriculture sector."

 

Also exacerbating Kenya's revenue collection woes is a number of tax incentives that continually erode Kenya's tax base. IPF notes that "revenue foregone increased from 2.4 percent of GDP in 2021 to 2.9 percent in 2022, despite commitments to reduce such exemptions."

 

Experts at IPF add that for Kenya to register an increase in revenue collections, the government should drastically cut the number and scope of tax exemptions in its plan.

 

Across the counties, analysis shows that the devolved units continue to underperform, collecting just 66 percent of the target revenue in FY2022/23. Data shows that only Kitui, Lamu, and Kirinyaga hit their revenue target in the year under review.

 

"In 2022/23, services in the counties almost came to a halt following delays in the disbursements of grants. ...It remains crucial for counties to step up their revenue mobilization efforts," the report, prepared in partnership with Oxford Policy Management and Bill & Mellinda Gates Foundation, notes.

 

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