Kenya will not meet revenue goals on high taxes, don says

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Members of the National Assembly during a sitting in June last year.

A university don wants MPs to repeal all tax increases contained in the Finance Act, 2023 and those proposed in the Finance Bill, 2024 because of their negative effect.

Professor Njoroge Gitonga, an entrepreneur and former lecturer of Economics at Jomo Kenyatta University of Agriculture and Technology told MPs to delete all clauses in the Finance Bill, 2024 and repeal the Finance Act of 2023 to reverse the negative tax increases.

Appearing before the National Assembly’s Finance and National Planning Committee, Prof Gitonga said the notion that tax increases can boost tax revenue collection is false from an economic point of view and that the inverse is true.

He said the Finance Bill, 2024 proposes to further move Kenya from a low-tax environment to a high-tax one.

He said if the tax measures in the Finance Act, 2023 and Finance Bill, 2024 are scrapped, Kenya would go back to a low tax rate environment initiated by former President Mwai Kibaki and continued by his successor, Uhuru Kenyatta.

“Based on facts outlined, it is the reasoned recommendation to the committee and the government to repeal all tax increases contained in the Finance Act, 2023 and the deletion of all tax increase proposals in the Finance Bill, 2024,” Prof Gitonga said.

Revenue tax collections

“Only this way can the Kenya Revenue Authority (KRA) go back to a tax growth trajectory experienced prior to the enactment of the Finance Act, 2023.”

He said the KRA revenue performance reports from 2021 to 2024 show that out of the total revenue of Sh362 billion, Sh135 billion are the increases or decreases in new revenue tax collections from the previous financial year whereas Sh50 billion is projected to increase in the current financial year 2023/24.

“For example, Sh362 billion is the difference between the KRA collection of Sh2.199 trillion in the financial year 2021/22 and Sh1.699 trillion collected in the financial year 2020/21.

“We can all agree that between the financial years 2021 to 2024, the Executive and legislative action has resulted in significant increases in various tax rates in the Kenyan economy. The result is declining new tax revenue,” Prof Gitonga said.

He said tax rate increases do not result in tax revenue collection increases because individuals and firms will engage in skilful tax evasion, which is illegal.

Prof Gitonga said an increased tax environment will see individuals and firms adjust their consumption behaviour.

“Tax rate increases result in a negative decrease in income to both individuals and firms. This means they had less disposable income and they consume less goods and services,” he said.

“This means the gross domestic product (GDP) decreases which results in the government collecting less tax collections as evidenced in the current macroeconomic reality in Kenya.”

He said the KRA data shows that the tax increases contained in the Finance Act, 2023 have failed in increasing tax revenue collections.

Increase tax rates

Prof Gitonga told the committee chaired by Molo MP Kuria Kimani that as soon as the government began to increase tax rates after the last presidential election.

“In the financial year 2021/22, tax revenues stood at Sh1.031 trillion. In the first nine months of the current financial year, KRA collected Sh1.5 trillion. Should the government enact the tax increase proposals contained in the Finance Bill, 2024, the tax revenue collection will only be worse,” Prof Gitonga said.

He said KRA data shows that the taxman collected Sh2.031 trillion in the financial year 2021/22 which dropped to Sh1.669 trillion in the financial year 2021/22.

He said the difference is a new tax revenue of Sh362 billion. “This shows a serious financial loss the government suffered as a result of the tax hikes enacted in the Finance Act, 2023. Do note that the base increase value of Sh362 billion is held constant and therefore a minimum figure that would increase given annual economic growth rate increases,” Prof Gitonga said.

Prof Gitonga told lawmakers that the financial debt distress the government suffered and continues to suffer has arisen due to tax rate hikes contained in the Finance Act, 2023 which has resulted in KRA raising less tax revenues.