Kenya's economic growth for the current fiscal year has dropped by half a point to 4.5 per cent, according to the World Bank in its Kenya Economic Update report.
In the report launched on Tuesday, May 27, the global lender cited high levels of debt, high lending rates and a decline in private sector credit. Although Kenya’s public debt remains at high risk of distress, with interest payments absorbing about a third of tax revenue, the bank stated that certain reforms could strengthen its fiscal sustainability.
As such, the Public Finance Review (PFR) has outlined several fiscal policies that could enhance Kenya’s tax system to turn around its economy, including the exclusion of capital gains for various sectors.
To strengthen the efficiency of tax incentives, PFR recommended Capital Income Tax (CIT) exemptions for collective investment schemes and from capital gains tax.
One of the measures recommended by the global lender was removing capital gains exemptions on transfers to immediate family members.
Companies with a 100 per cent family shareholding could also benefit from the proposed exemption, as well as private residences occupied for three years, and any capital gains realised as a result of internal group restructurings.
Additionally, the PFR recommended that Kenya repeal the exemption on dividend payments made by special economic zone (SEZ) enterprises. If implemented, the global lender projected that Kenya could add 1 per cent to
The PFR also recommended adjusting rates for top and bottom docile earners to reduce the average PIT rates and levies on lower earners to contribute up to 0.2 per cent more to the economy.
Phasing out mortgage interest rate deductions could add 0.05 per cent more, while aligning capital income tax (CIT) rates more closely with Personal Income Tax (PIT) rates and implementing a single tax rate of 15 per cent on dividends could also see a positive impact on the economy.
Another recommendation made was to capture the value of real estate through improving coverage of properties and making improvements to the area-based valuation methodology of the ground rent calculation, strengthening enforcement and communications and raising rates at the national level.
At the county level, the report proposed updating and simplifying the property rate's legal system, streamlining and standardising valuation methodologies, investing in property tax administration systems and also raising rates.
Other tax measure recommendations were taxing more on products harmful to Kenyans, recommending introducing a carbon tax on fuel at the point of entry and recycling revenues, as well as raising excise taxes on alcohol, tobacco, and sugar.
Lastly, the report proposed registering all VAT taxpayers on e-TIMS, automating exemptions, and expanding the scope of the eCitizen platform to strengthen tax compliance.
