Why Kenya wants to cut VAT and Corporate Income tax
Treasury Cabinet Secretary John Mbadi.
The government plans to slash the rates of two key tax heads in a move it hopes will boost revenue collection through increased economic activity.
Treasury Cabinet Secretary John Mbadi on Monday revealed plans to reduce the rate of Value Added Tax (VAT), which is paid by the person who consumes taxable goods and services, from the standard rate of 16 percent to 14 percent.
Corporate income tax, which is levied on profits made by companies, will be cut from 30 to 25 percent, Mr Mbadi said.
“In the medium term, we want to reduce tax rates. We are not thinking of increasing tax rates,” said Mr Mbadi when he launched the budget-making process on Monday.
“We are going to reduce VAT in the medium term from 16 percent to about 14 percent. We want to reduce other taxes including corporation tax from 30 to 25 percent and even pay as you earn.”
In the recent past, the business community has argued that high tax rates have made their products uncompetitive.
Consumers, who pay VAT or sales tax, will be the biggest winners if the government cuts the VAT rate.
Mr Mbadi did not give a timeline for the proposed changes, although Treasury had promised to "review the VAT rate downwards" in the 2023 Medium Term Revenue Strategy, to be implemented between July this year and June 2027.
In the medium-term strategy, the government proposed to reduce corporation tax for local companies from 30 percent to 25 percent. Non-resident companies pay corporate tax at 37.5 percent.
Mr Mbadi said the cuts were aimed at mobilising more domestic revenue, which would in turn boost economic growth.
“In this respect, the National Treasury has developed the Medium-Term Revenue Strategy to enhance domestic revenue mobilisation over the medium term,” said Mr Mbadi on Monday when launching the budget for the financial year starting July next year.
“The Strategy will guide Tax Administration to improve efficiency in the administration of tax laws, create tax rates that will enhance compliance and build the tax base.”
The last time Kenya reduced VAT was during the pandemic to help households and businesses cope with the adverse effects of the pandemic, which had left millions unemployed after businesses closed.
