William Ruto
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A defiant president with ‘Zakayo’ moniker: Kenya’s politics of taxation

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UDA Presidential Candidate William Ruto addressing his supporters at Nyayo Stadium in Nairobi on August 6,2022 during a campaign rally.

Photo credit: Filel | Nation Media Group

Dr William Ruto rode to power by rallying “hustlers” against high taxes by then-President Uhuru Kenyatta’s administration.

In his rallies, he consistently hit out at Mr Kenyatta for “not understanding the damage he is doing to the people and the economy with these taxes he is increasing”.

He sold lofty promises of bringing down the cost of living and prioritising the needs of low-income earners. The President’s critics say he has made an about-turn on the pledges.

Dr Ruto has become the lord of taxes, earning the moniker “Zakayo” (Zacchaeus), in reference to the Biblical tax collector, who climbed a tree to have a glimpse of Jesus Christ.

Reaction to proposals in the Finance Bill, 2024 have reignited debate on tax. Opposition Azimio la Umoja One Kenya Coalition has told the President to “climb down”, but Dr Ruto appears to have no apologies for introducing taxes every year.

“I don’t mind being called names. I will continue to do the right thing for our country,” he said days ago.

The President and his allies say Kenya’s “unsustainable” debt burden is the driver of his administration’s thirst for cash, which they claim is being balanced by spending cuts and other austerity measures.

In the first Kenya Kwanza government budget that took effect on July 1, 2023, the 16 per cent value-added tax (VAT) was controversially reinstated on petroleum products.

The government also increased sales tax for small traders, significantly reduced take-home for salaried workers by introducing the much-maligned 1.5 per cent housing levy and 2.7 per cent for the Social Health Insurance Fund expected to start this July.

In the Finance Bill, 2024, the National Treasury proposes to raise tax on bread, mobile money and banking services as well as impose an annual tax on vehicles.

President Ruto defended these levies and talked of raising tax revenues as a percentage of the Gross Domestic Product to 22 per cent from the current 14.

“My drive is to push Kenya, possibly to 16 per cent this year. I want to leave it at 20 or 22 per cent over my term. It is going to be difficult and I have a lot of explaining to do. People will complain but I know they will appreciate it,” he told Harvard Business School students.

“Kenyans have been socialised to believe that they pay the highest taxes in the world but data show that as of last year, our tax as a percentage of GDP was 14. Our peers on the continent are at 22 to 25 per cent. Countries like France are at 45 per cent, others are higher.”

But Prof XN Iraki – an economics lecturer at the University of Nairobi – says Kenyans are actually being overtaxed if levies and taxes are factored into the equation. He raises queries on how the taxes are eventually used.

“What matters is what we do with that tax, not the ratio. A higher ratio is not a guarantee that tax will be prudently used. It could mean shifting money from the productive private sector to public,” Prof Iraki said.

“We should focus on growing GDP as that will mean more money to pay more taxes. One wishes the ratio goes up because we have more money and our tax rate has gone up.

"Tax is progressive. Higher tax to GDP ratio would lessen the debt burden if we reduce borrowing and raise enough tax revenues without slowing down the economic growth. We still have a deficit despite higher and more taxes.”

Mr Ken Gichinga, Chief Economist at Mentoria Economics, says the Kenya Kwanza administration is focused on taxing consumption, describing it as regressive. He says the approach by Dr Ruto has a potential of slowing economic growth, with the government not meeting revenue targets.

“If we have progressive tax system, Kenya will raise enough revenue without disrupting the economy.

"But if we have a regressive policy, we might not hit the revenue targets. It could actually cause a slowdown of the economy and increase the cost of living,” said Mr Gichinga, adding that many companies may close shop.

Regressive tax policy is consumption taxes of everyday goods.

“We need to focus on a progressive tax policy. When you get a promotion and earn a higher salary, for instance, the government will collect more revenue and it does not disrupt the worker. Focus in the developed world is creating jobs,” Mr Gichinga said.

“Once more people have income, it becomes easy to collect tax. In Kenya, unfortunately, we start with tax. It has made it very difficult for companies to operate.”

In analysing the Finance Bill, 2024, audit firm KPMG highlights the implications of the new taxes. It says they are likely to make life expensive.

The company says the introduction of the annual 2.5 per cent tax on cars was due to the increasing number of vehicles on Kenyan roads.

“It comes against the backdrop of revised insurance premium rates and high fuel prices, inevitably shoring up the cost of operating a car. This will have a negative impact on transport and logistics, which may pass the additional cost to customers and thus escalate the cost of living,” KPMG said.

On the proposed VAT on bread from zero, it says the price of the basic food item will shoot up.

“The proposal to change the VAT status of bread has found its way into previous Finance Bills. We hope the proposal will again be dropped when the Act is enacted,” says the document by the company.

The Kenya Bankers Association has appealed to the National Assembly to reconsider the proposed 16 per cent VAT on transactions, saying it would hamper financial inclusion, particularly affecting low income earners and small businesses.

“Coupled with excise duty, the total tax on financial services would reach 40 per cent from the current 15, significantly impacting affordability and accessibility,” the association said.

It expressed surprise at the bill seeking to introduce VAT on financial services, including issuing credit and debit cards, telegraphic money transfer, foreign exchange and cheque handling.

The Associated Battery Manufacturers raised concerns over the proposed tax of Sh750 per kilo of battery weight.

Guy Jack, the Group CEO, says a lead acid battery weighing 12 kilos and retailing at Sh8,500 will go for Sh17,500 once the proposal is implemented.

“This is unsustainable and will result in the destruction of the industry,” Mr Guy said.

National Assembly Minority Leader, Opiyo Wandayi, said Azimio would oppose the taxes, describing them as punitive and with a potential of hurting poor households.

“The taxes are unjustifiable. The tax base will shrink as many people will find ways of dodging taxes,” the Ugunja MP said.

“The government should have focused on spurring economic growth by supporting production, which would then enhance disposable income. The common man will suffer because the taxes will still end up in the pockets of few individuals,” he said.

There is a general feeling among Kenyans that taxes are being squandered by the political elite.