The Treasury has intensified its pressure on Parliament to adopt punitive tax measures contained in the draft finance bill, saying it will help narrow Kenya's budget deficit and reduce the desire to borrow.
Principal Treasurer Chris Kipto said the higher taxes and new taxes proposed in the bill were needed to control rising public debt levels and support economic growth.
“We need to increase our revenues to avoid dependence on borrowing. We have no room to take on more debt as that will worsen our situation,” Dr Kiptoo told the Finance and Planning Committee on Tuesday night before stepping back to write its report.
“We need to increase our revenues and reduce expenses in order to live within our means. We must mobilize strong revenues in terms of tax collection.
Kenya plans to reduce its budget deficit for the fiscal year starting in July, while also trying to maintain growth-supporting spending, such as on infrastructure projects.
This is in line with plans to shift to a balanced budget within three years.
Over the past decade, the country has run widespread fiscal deficits to finance a range of ambitious infrastructure projects, but this stance almost backfired when markets began to doubt the government's ability to repay debts.
The Treasury is seeking to collect an additional Sh323 billion in taxes in the financial year starting in July, with the measures drawing sharp criticism from political opponents, the church, labor and industrial groups.
Dr Kipto told the committee that rejecting the tax measures would increase Kenya's budget deficit and put the country on a collision course with the International Monetary Fund.
The Treasury struck a deal with the International Monetary Fund, which recently provided billions of shillings in financial aid to Kenya, to reduce the country's debt exposure by raising taxes and cutting spending.
“The law requires that the best debt we can sustain is 55 percent. When we were coming to Parliament to demand a change in the law, our vote was 67 percent,” Kiptoo said.
Aside from spending cuts and shrinking the budget deficit, President Willia Ruto's government, which took power in 2022, has also imposed new taxes, angering some individuals and groups who have challenged the tax measures in court.
In the fiscal year starting in July, the government plans to spend Sh3.92 trillion, with a large portion of the budget earmarked for recurrent spending on items such as paying salaries and fueling cars.
Development spending will take another Sh687.9 billion while Sh446.1 billion has been allocated to counties.
To fund this budget, the Treasury has given the Kenya Revenue Authority (KRA) a tax collection target of Sh2.91 trillion, up from Sh2.45 trillion for the current financial year ending this month.
This leaves the Treasury with a budget gap of Sh514.7 billion that will be filled through borrowing from foreign and local creditors.
The fiscal deficit has been narrowed significantly from the current Sh908.6 billion contained in the second mini-budget.
The Treasury defended the additional taxes and expanded tax base, saying Kenya's debt situation could worsen in the medium term.
“Our ability to take on more debt is not sustainable, so we have to increase revenues and reduce expenses. Any additional accumulation of debt will mean that we will not have fiscal space,” Dr. Kipto said.
To collect the additional taxes, the treasury has come up with various controversial amendments through the Finance Bill 2024.
These proposals, including a 2.5% car tax, a 16% value-added tax on banking and a new environmental tax, have sparked a storm from the business community, consumers, NGOs and churches.
There is also a proposal to impose a value-added tax on bread and a 25% excise duty on raw and refined vegetable oils.
The majority of Kenyans and interest groups who appeared before the Finance and Planning Committee called for the rejection of the new taxes.