Economy
President Ruto plans to impose a tax on new cars and a value-added tax if the court blocks the Finance Act
Friday, July 21, 2023
President William Ruto with Managing Director of the International Monetary Fund, Kristalina Georgieva. file image | Computers
President William Ruto’s administration has put in place a new set of taxes, including a road tax, that will be introduced in October if the Supreme Court blocks the 2023 finance bill.
In disclosures to the International Monetary Fund (IMF), the Treasury revealed that it is planning new taxes, including an automobile trading tax, an excise tax and a value-added tax (VAT), in a contingency plan to fund a Sh3.68 trillion budget if the now-pending tax-raising measures hit a snag in court.
A motor handling tax is a form of road tax that motorists pay to use public roads.
It can be calculated based on several factors, including vehicle value, engine, and seating capabilities.
is reading: The KRA will allow used car importers to defer taxes
The Treasury has committed to presenting a “package of legislative changes” to parliament by the end of October to ensure the government reaches its regular revenue target of Sh2.57tn in the current financial year and avoids further debt.
“The authorities are ready to adopt contingency plans that could include new measures for value-added tax and excise tax. They intend to present these contingency measures to parliament by the end of October 2023 to support confidence in fiscal consolidation and continue to reduce debt-related vulnerabilities in Kenya,” says the IMF.
Any shortfall in tax revenue relative to program objectives will be offset by additional tax policy measures.
The Treasury Department says the changes will include, but are not limited to, adopting an auto trading tax and reducing the interest income tax credit.
The treasury adds that the measures could include simplifying the ratio of value-added tax allocation to permitted inputs for value-added tax on exempted supplies to align it with international practices and reducing value-added tax exemptions by the end of this month.
The Treasury’s promise to the International Monetary Fund may mean that Kenyans will have no escape route from the looming tax pain that includes doubling the value-added tax on fuel by 16 per cent.
Duties and VAT are considered consumption taxes, which means they will hit more taxpayers.
Regular revenue accounted for 71.9 percent of Kenya’s budget in 2011/12 but this has been declining.
Taxes funded only 56.8 percent of the 2021/22 budget, forcing the government to resort to more debt.
Kenya’s debt reached Sh9.63 trillion in April.
The disclosure comes against the backdrop of a fresh wave of street protests over the high cost of living and unpopular taxes that have disrupted business activities in Kenya’s major cities, including Nairobi, Kisumu, Kisii, Nakuru and Mombasa.
The International Monetary Fund has asked the Roto administration to stick to its tax measures and not be affected by the street protests.
The lender, in the document released on Wednesday when the new wave of protests began, rates the potential for political risk as “moderate” and also notes that if the risks crystallize, the impact on the economy will be “moderate”.
“Unrest could re-emerge in relation to protests over the rising cost of living, the need to increase taxes and the electoral process supported by the political opposition,” says the IMF, adding that the policy response by the government should be “commitment to reforms under the programme.”
The Kenya Revenue Authority (KRA) said last week that it raised Sh2.166 trillion in the fiscal year ending in June against a target of Sh2.273 trillion, leaving a deficit of Sh107 billion.
This could tempt the Treasury Department to take tax measures to boost the chances of hit-target taxes in the current fiscal year.
The International Monetary Fund says in its latest review that Kenya has met the conditions for approval of $1 billion (Shs141.8 billion) in financing and should not compromise on the agreed position, which includes eliminating subsidies and introducing new taxes to reduce the country’s dependence on debt.
Kenya has secured $415 million (Sh 58.8 billion) in payments under the Expanded Fund Facility and the Expanded Credit Facility, programs designed to support the economy and boost its foreign exchange reserves.
The IMF’s fifth review also awarded Kenya $551 million (Sh78.13 billion) as part of a flexible 20-month arrangement under the Resilience and Sustainability Facility.
The IMF disclosures reflect the position taken by Kenya’s Kwanzaa administration, which has pledged to press ahead with its tax measures such as a housing tax of 1.5 percent on the gross salary of workers and doubling the value-added tax on petroleum products to 16 percent, as contained in the now-suspended Finance Act 2023.
The pending law also increased the sales tax on small and medium-sized businesses from one percent to three percent and imposed a digital asset tax.
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Last month, the Supreme Court stopped implementing the finance law and referred the matter to the Chief Justice, but the Energy and Petroleum Regulatory Authority (EPRA) ignored it and introduced a 16 percent value-added tax in its price review.
Chief Justice Martha Comey appointed a three-judge panel to hear the case that challenges implementation of the 2023 Treasury Act.
Busia Senator Okiya Umtateh, who filed one of the petitions against the Finance Act, applied for the power regulator’s citation for contempt of court.
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