The government of Kenya has defended the recent move by the country's National Treasury to introduce new taxation measures.
The National Treasury, through the 2024 Tax Procedures (Amendment) Bill, aims to increase revenue by broadening the tax base to include ride-hailing, food delivery, and freelance services which is currently 1.5% to 6%.
The Kenyan Treasury, is proposing a new 6% tax on foreign-owned digital service providers like Uber, Bolt, Glovo and Jumia operating within the country by replacing the existing Digital Service Tax with "Significant Economic Presence Tax".
While local companies are exempt as they already pay corporate income tax, this new tax is likely to increase costs for consumers and impact revenue/profitability for the companies.
Additionally, Kenya's National Treasury has announced plans to reinstate a five percent withholding tax on interest earned from infrastructure bonds (IFBs) with maturities of at least three years, marking the first time since their launch in February 2009 that IFBs will be taxed.
This proposal, outlined in the Tax Laws (Amendment) Bill, 2024, awaits approval from Parliament and reverses the previously tax-free status that has made IFBs a popular investment vehicle for financing government infrastructure projects.
Currently, IFBs represent over 35 percent of net domestic debt, with significant holdings by commercial banks, nonbank investors, and a modest portion held by non-residents.
Government Spokesperson Dr. Isaac Mwaura, in a Press release on Monday, November 11, stated that the new tax proposals are part of the measures aimed at expanding the East African Country's tax base.
As detailed in the document, many Kenyans and foreigners in the digital space were currently not paying taxes despite earning an income.
Therefore, their inclusion in taxation, will not only expand the tax base but also help the government raise more revenue.
“The proposed laws seek to expand the digital tax base, including services like ride-hailing, food delivery, freelance, and professional services under the definition of a digital marketplace,” read the statement in part.
“This move is essential in ensuring that digital service providers fairly contribute to the economy.
On the other hand, the government explained that digital taxation was a global practice, hence the need to make new laws targeting foreigners in the space.
“A tax will be levied on income derived from services provided by non-resident entities operating in Kenya’s digital marketplace. This ensures that foreign digital businesses contribute at fair rates and aligns Kenya’s tax system with global best practices,” Mwaura added.
Government Spokesperson Isaac Mwaura said the proposed tax reforms are aimed at fostering sustainable growth while ensuring Kenyans’ quality of life improves without disproportionately overburdening them.
“These bills were subjected to extensive public participation, giving Kenyans a platform to express their views and propose recommendations,” Mwaura said.
The proposed amendments are set for debate in the National Assembly in the coming days.
However, The Parliamentary Budget Office (PBO) has cautioned the Kenyan government against introducing new taxes and levies, stating that this approach will not necessarily lead to higher revenue collections.
Despite missing revenue targets by Sh205 billion in the previous fiscal year and Sh123.6 billion the year before, the government continues to propose new taxes as a means to increase revenue.
The PBO argues that there is a fundamental problem, noting that simply introducing new tax policies does not guarantee better compliance or higher revenue and further recommends that the government prioritize alternative approaches to revenue enhancement.
The PBO recommends focusing on improving tax administration through better enforcement of current policies, enhanced data analytics, and increased use of technology to simplify tax processes and improve compliance.
The think tank also suggests fully integrating the KRA system with counties and other national government entities to seal revenue leakages and enable efficient collection of taxes like Pay-As-You-Earn (PAYE).
The body, reminds the Govt that the key to increasing tax collections lies in creating an efficient and transparent tax system, rather than relying on the introduction of new taxes whenever the government requires additional revenue.