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Parliamentary Budget Office warns govt against imposing new taxes

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The PBO warned that the Treasury’s ambitious revenue goals may not be achievable through new taxes alone, especially given recent missed revenue targets.

The Parliamentary Budget Office (PBO) has cautioned the government that imposing additional taxes and levies on Kenyans may not lead to increased revenue.

The warning comes as the government plans to revive previously rejected tax measures after public protests in June.

In a report analysing the 2024-25 budget, the PBO warned that the Treasury’s ambitious revenue goals may not be achievable through new taxes alone, especially given recent missed revenue targets.

“Despite the country witnessing annual changes in tax policies over previous years, these have not always translated into higher revenue collections,” the PBO noted, pointing to a need for alternative approaches.

“Simply introducing new tax policies does not guarantee better compliance or higher revenue,” reads the report.

For the fiscal year ending in June 2024, the Kenya Revenue Authority (KRA) missed its revenue target by Sh205 billion, a shortfall that has grown since the previous fiscal year.

This was despite the introduction of new levies like the 1.5 per cent housing tax and increased excise duty rates, among others.

The PBO highlighted that the revenue target for the current fiscal year, Sh2.6 trillion, appears overly optimistic.

New Treasury proposals

Despite widespread concerns, the government has continued proposing new taxes, as highlighted by the Treasury's recent efforts to reintroduce items from the rejected Finance Bill, 2024.

In the Treasury’s latest proposals, previously debated measures were revived, including increased excise duty on alcoholic beverages and a hike in the railway development levy from 1.5 to 2.5 per cent, expected to affect import costs. New taxes were also proposed, including a five per cent tax on infrastructure bonds and income tax for ride-hailing and food delivery services.

Former Treasury Cabinet Secretary Njuguna Ndung'u recently expressed caution about high tax rates, advising his successor, John Mbadi, to consider optimising tax tools rather than solely increasing rates.

"We need to run away from this notion that high tax rates will raise high tax revenues. The reality is the opposite," Ndung'u said adding that targeted strategies could expand the tax base without disrupting the informal sector.

The PBO has recommended alternative approaches to improve revenue, including enhanced enforcement of current tax laws and leveraging technology for better compliance.

“The government should prioritise alternative approaches to revenue enhancement over new tax proposals, including closely monitoring current tax administration systems and ensuring their full implementation and effectiveness,” the PBO advised.

To strengthen revenue collection, the PBO urged KRA to digitalise and modernise tax processes, suggesting that increased use of data analytics and automation could improve tax compliance.

It also added that the electronic tax invoice management system could help raise annual revenue by an estimated Sh312 billion. The report pointed out that the previous manual system hindered transaction tracking and encouraged tax evasion.

The PBO also highlighted significant challenges to revenue collection, such as the undervaluation of imports, which has led to lower-than-expected customs duties. To counter this, the PBO recommended implementing customs declarations for imports and strengthening partnerships with key trading countries for better valuation accuracy.

It also observed that public entities owe KRA Sh97.8 billion in unpaid PAYE taxes, an issue that could be addressed through improved coordination between national and county government entities. Additionally, tax disputes have led to Sh313.4 billion in unresolved cases between KRA and various companies, underscoring a major gap in revenue realisation.

The PBO however raised concerns over the government’s tax amnesty program, which has collected Sh44 billion by waiving penalties and interest on tax debts. While this has helped bring in arrears, the PBO warned that extending amnesty could risk encouraging tax evasion if businesses expect future waivers.

It reiterated that sustainable revenue growth will depend less on new taxes and more on a streamlined and transparent tax system, one that leverages technology and encourages compliance without frequent policy changes that burden citizens and businesses.

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