Tax burden: Private sector reels under unpredictable business environment

KCB Group chief executive Paul Russo, during a recent forum attended by Investments, Trade and Industry Cabinet Secretary Lee Kinyanjui, pointed out how disjointed the budget-making process is.

Even in that meeting attended by key players in the private sector, each sector was openly pushing for favours benefiting its own industry.

“That is how the budget comes out,” Russo said. “That is actually disjointed. Instead of talking about Kenya, it depends on who argues for certain things.”

Mr Russo detailed how unpredictable the business environment is, particularly for the private sector, citing taxes - some of them mushrooming overnight.

“We know the government has to raise revenue, but I think (we need) something that is sustainable that we can see through, (something that is predictable in certain ways) would also help some of us,” he said.

The ‘something’ is the National Tax Policy, a document which was to offer businesses relief by providing them with a predictable tax environment—at least for five years.

In March 2023, President William Ruto, while addressing regional investors gathered in Nairobi for the American Chamber of Commerce (Amcham-Kenya) Summit, pronounced himself on the National Tax Policy saying it will be effective June 2023.

Then, the idea was to have a predictable tax environment for three years. “We are doing this so that you can make your investment decisions knowing exactly how the tax regime will look like for the next three years,” he said.

Yet this is the document that, despite being in existence as prepared by the National Treasury, receives little to no attention as government skirts around other issues.

This is amid concerns from the private sector about how uncompetitive Kenya is becoming for businesses, with taxes and levies being singled out as the major reason.

During his budget presentation, National Treasury and Economic Planning Cabinet Secretary John Mbadi said implementation of the National Tax Policy will be one of the government’s focuses in the 2025/2026 financial year.

“First, continue with the implementation of the National Tax Policy and Medium-Term Revenue Strategy to provide a consistent and predictable framework for tax administration,” said the CS in his speech in Parliament on Thursday.

It was the same sing-song by his predecessor, Prof Njuguna Ndung’u. The policy, as prepared by the National Treasury during Prof Ndungu’s tenure, was tabled in Parliament in April 2023 and approved and adopted in December of the same year.

State agencies

However, for businesses, little is yet to come out of the document. Instead, businesses are witnessing an increase in taxes, especially from State agencies that threaten their survival.

One such is the unique consignment reference fee introduced by Kenya Trade Network Agency (KenTrade) at a rate of Sh1,300 ($10).

At the private sector meeting, chair Agriculture Sector Network Bimal Kantaria called on the cabinet secretary to relook at this fee. The fee is levied per invoice, import declaration form (IDF), when shippers are exporting. “One of our big farms is going to pay Sh80 million to Sh100 million per year to KenTrade,” said Kantaria.

He said an earlier agreement was to pay Sh200 instead. “We are not saying stop paying taxes. We don’t mind paying that or a flat rate of Sh80,000,” he said.

According to the National Tax Policy, key challenges identified in the tax system include: growing tax expenditure estimated at 2.61 per cent of the gross domestic product (GDP) as of 2021; complexities in taxation of emerging economies such as online businesses; and low tax compliance.

The document says the policy provides specific options to address each of the identified issues. “To address unpredictability of tax rates, the policy proposes a comprehensive review of tax laws every five years,” the policy states. “On growing tax expenditure, the Policy proposes the development of a framework for the granting of tax incentives.”

The Finance Bill 2025 provides some clauses that seek to reduce tax expenditures, among them restricting the carry-forward period of tax losses to five years. Currently, this is indefinite.

New taxes

PKF in Eastern Africa Director James Mulili says one of the reasons the country experienced turbulence in 2024 over the budget period is because a majority of the new taxes that were being proposed then were on the backdrop of the Finance Act, 2023.

“It was the first time we heard of the eco-levy, the proposal to introduce a motor vehicle tax, then we had the export promotion investment levy.  You can imagine in that environment you are being bombarded with a set of almost five new taxes,” said Mr Mulili, during PKF’s pre-budget briefing held in Nairobi.

These new taxes, he noted, are being introduced so fast that even the formulators of the same laws are unable to provide regulations for implementation on time.

He cited the Digital Service Tax that was premised at 1.5 per cent, only to be replaced by the Significant Economic Presence Tax at double the rate in December 2024.

Mr Mulili noted the lack of political goodwill in the implementation of the National Tax Policy. “In my view, the benefits that are to be received from the implementation of the policy supersede the worry,” he said.

He noted the lack of political goodwill and the concern that if it is implemented, there is a possibility that the revenue targets will not be achieved.

While the Finance Bill, 2025, is being touted as a ‘no tax’ document, still, the government seeks to raise Sh30 billion on its implementation.  In the 2025/2026 financial year, the government targets to collect Sh2.7 trillion in ordinary revenue.

The tax policy document states that its implementation, done through the Medium-Term Revenue Strategy, is expected to reverse the decline in ordinary revenue as a share of GDP.

The policy points out that over the years, Kenya’s tax system has not been buoyant, adding that in principle, annual growth in tax revenue should be more than the growth in nominal GDP.

“In some years, the growth in ordinary revenue has been lower than the growth in nominal GDP, implying that revenue growth has not been consistently responsive to growth in nominal GDP,” the policy document states.