Interplay between Taxation and the 2024 Budget Policy Statement in Kenya
Understanding the Budget
A budget is essentially the government’s financial plan for a specific fiscal year. The 2024 Budget Policy Statement (BPS) outlines the Government spending plans for the FY 2024/25.
The Budget Statement for FY 2024/25 will be delivered by the Cabinet Secretary for the National Treasury and Economic Planning on 13th June, 2024 in Parliament.
The Role of Taxation
Taxation is the primary source of government revenue in Kenya. It includes various tax heads such as income tax, Withholding Tax, value-added tax (VAT), excise duty, and customs duty. The Kenya Revenue Authority (KRA) is responsible for tax administration & collection thus ensuring that the government through the National Treasury has the necessary funds to implement its budget.
The 2024 finance bill that proposes various tax measures e.g the introduction of motor vehicle tax, VAT on financial services, etc which are consistent with the Medium Term Revenue Strategy (MTRS) that provides a framework for tax system reforms aimed at boosting domestic revenue collections.
The interplay between Taxation and the Budget
- Revenue estimation and allocation-The budget process starts with estimating the revenue that can be generated through taxation. This estimation guides the allocation of funds to various economic sectors .Where tax revenues fall short, the government must either cut spending or seek alternative funding sources, such as borrowing.
- Fiscal Policy and Economic Stability-The government uses fiscal policy, comprising taxation and expenditure measures, to influence the performance of the economy. During economic downturns, the government may lower taxes or increase spending to stimulate growth. A good example of this is during the COVID-19 pandemic where VAT was lowered from 16% to 14%.
Challenges and Reforms
With the ongoing Public hearing of the finance bill 2024, economists submit that the government is over ambitious with its spending and therefore recommend budget cuts as opposed to increasing taxation.
Despite the vital role of taxation in budgeting, Kenya faces several challenges in this area. Tax evasion, corruption, and a large informal sector make it difficult to collect sufficient revenue. Additionally, the tax burden is often perceived as unevenly distributed, with high taxes on formal businesses and employed individuals, while many in the informal sector pay little to no taxes.
To address these challenges, Kenya has undertaken various tax reforms. These include broadening the tax base, improving tax administration through technology (e.g., iTax system), and enhancing compliance and enforcement measures (e.g e-tims).
