Global credit rating agency, Moody’s is the latest institution to express reservations on Kenya’s proposed tax measures for the medium-term plan to 2026.
In an analysis released last Friday, the rating firm says the proposed tax measures will be met by strong political and social resistance.
The National Treasury is proposing among other things to harmonise the Value Added Tax (VAT) with Kenya’s East Africa Community peers to 18 per cent up from 16 per cent.
“Currently, the VAT rate in Kenya is among the lowest within the EAC members States. The EAC Common Market Protocol foresees harmonisation of taxes before EAC Monetary Union,” Treasury says in the draft document.
It is also planning to increase excise duty on spirits and other products with higher alcohol content to discourage consumption.
Furthermore, Ruto’s administration is proposing new taxation measures that will see schools offering more extracurricular activities forced to pay more for the services.
The government asserts that the proposal is warranted because the non-uniformity of tax exemptions on educational services in various schools arises from disparities in both fees and the range of services offered.
“Some schools provide some services that are not directly related to education. The exemption from VAT on education that include all services provided by schools create unfairness as some services like swimming when offered out of school are vatable,” reads Treasury’s MTRS.
Sugar-based non-alcoholic beverages taxes will also be reviewed under the proposed tax regime as part of the government’s mission to prevent obesity and diet-related non-communicable diseases.
It has however proposed relief to small traders who will be spared the VAT bill if their businesses do not generate Sh5 million and above.
“The country has experienced sporadic protests throughout 2023, driven in part by the high cost of living caused by elevated food and fuel prices. Although inflation has eased, an attempt to raise it further as some proposals suggest will be opposed,’’ Moody’s says.
Even if successful, the agency says the strategy would require time to facilitate the government’s access to funding and enhance its liquidity profile, which we project to remain weak in the shorter term.
It adds that proposals such as an increase in the value-added tax on fuel, will keep prices for some staple items high.
Like many other emerging and frontier markets, Moody’s says Kenya will face difficulties associated with the government’s limited capacity to enforce tax compliance because of the quality of tax administration, the large size of the informal economy and the complexity of the tax code.
The introduction of tax waivers and exemptions, as well as tax breaks or holidays to encourage investment, have contributed to Kenya’s weak track record in revenue collection.
In the decade before the pandemic, very few emerging markets were successful in raising revenue much faster than GDP growth on a sustained basis.
Even so, it says that the implementation of revenue-enhancing measures, such as those suggested in the MTRS, could eventually strengthen investor confidence and broaden Kenya’s funding options.
However, this improvement will take time, and in the interim, the liquidity profile remains weak due to tight funding conditions and significant funding needs, including the $2 billion Eurobond due in 2024.
“Even so, the government’s increasing reliance on more expensive domestic funding sources could moreover counterbalance the effects of higher revenue,’’ Moody’s says.
Moody’s sentiments mirror those of the World Bank, which has warned that additional taxes would burden households, affecting their purchasing power.
“The purchasing power of households in the medium term will be negatively affected by the proposed tax measures in the medium term strategy,” the global lender said last week.