In the face of growing economic challenges and heightened public demand for solutions to alleviate financial strain, Treasury Cabinet Secretary John Mbadi has introduced a reform strategy aimed at reshaping Kenya’s economic framework.
The proposed Tax Laws (Amendment) Bill 2024 outlines a series of measures designed to provide immediate financial relief to citizens, enhance government revenue, and pave the way for long-term economic sustainability.
This follows huge street protests by the youth in July over the Finance Bill 2024 that forced the government to withdraw.
Kenya’s economy has grown at a rate of 5.6 percent in recent years. However, CS Mbadi argues that this progress has not translated into significant improvements for many Kenyans, particularly in terms of employment opportunities.
To address this, he emphasises the importance of increasing the country’s growth rate to 8 percent per year, with a focus on industrial expansion and job creation. The manufacturing sector, in particular, is seen as a key pillar for reducing Kenya’s reliance on imports and fostering sustainable employment.
Mbadi advocates for targeted support for sectors like agriculture and services, which can be engines for inclusive and balanced economic growth. By bolstering these industries, Kenya can create more job opportunities and reduce the unemployment rate, which remains a pressing concern for the youth.
The government is also pushing for innovative solutions to address Kenya’s growing housing deficit.
During the Big5 Construct Kenya exhibition in Nairobi, Public Works Principal Secretary Joel Arumonyang reaffirmed the government’s commitment to promoting sustainable construction practices and affordable green housing.
He emphasised the need for industry regulators to update building codes, ensuring they incorporate energy efficiency standards.
Public-private partnerships are expected to significantly address the housing gap, with the government targeting the construction of 200,000 units annually. A central aspect of the new reforms is a focus on broadening Kenya’s tax base without overburdening ordinary citizens.
Currently, Kenya’s tax-to-GDP ratio stands at around 14.5 percent but Mbadi’s goal is to increase this figure to 22 percent over time. To achieve this, the government plans a gradual rise in the ratio, with an initial target of 17 percent followed by a move to 19 percent.
The ultimate aim is to reduce Kenya’s dependence on foreign loans and direct more funds toward domestic development.
Mbadi clarifies that the goal is not to increase tax rates for the average citizen but rather to overhaul the tax system to make it more efficient and aligned with international standards, particularly in the growing digital economy.
Business owners can rest assured that the government intends to maintain Kenya’s competitive edge while fostering a conducive environment for local businesses to thrive.
One of the most significant changes proposed in the Tax Laws (Amendment) Bill 2024 is the replacement of the existing Digital Service Tax with the Significant Economic Presence Tax.
This new tax will impose a 6 percent levy on non-resident companies operating in Kenya’s digital space, such as ride-hailing platforms, food delivery services, and freelance marketplaces.
The move seeks to ensure that global digital giants contribute fairly to Kenya’s revenue, given the growing role of these platforms in the economy. This shift not only aims to level the playing field between local and foreign companies but, also positions Kenya to tap into the booming digital economy.
By adjusting the tax framework, the government hopes to attract more investment while ensuring that foreign players pay their fair share. The Bill also introduces measures designed to increase disposable income for employees and enhance long-term financial security.
One such change involves revising allowable deductions for contributions to the Social Health Insurance Fund, Affordable Housing, and post-retirement medical funds.
Additionally, the Bill proposes to replace the existing Affordable Housing Relief with a simpler, more effective deduction to increase the financial benefits to employees.
For retirees and individuals saving for the future, the bill suggests exempting income from registered pension funds and gratuity payments from income tax, providing greater financial security.
This exemption also applies to early withdrawals under specific conditions, such as for medical emergencies or after at least 20 years of contributions to the scheme.
To alleviate the impact of inflation on employees, the bill proposes significant updates to tax-free allowances. Non-cash benefits, such as housing allowances, will increase from $276 to $461, while meal allowances will rise from $369 to $461
Gratuity payments will also see an increase, with tax-free limits rising from $1,845 to $2,768. These adjustments are aimed at cushioning employees against the rising cost of living, ensuring that they have a higher standard of living despite inflationary pressures.
Another key component of the reform package is the reclassification of agricultural inputs and raw materials, such as fertilizers and pest control products, to be exempt from tax.
This move is expected to reduce the costs for farmers, who have long faced high input costs that reduce profitability. By lowering the cost of production, the government aims to stabilize food prices and improve food security, benefiting both farmers and consumers alike.
To drive large-scale infrastructure development, the bill proposes tax exemptions for contractors, consultants, and employees involved in grant-funded projects.
This policy is designed to reduce financial barriers for international investors and experts working on crucial infrastructure projects.
By removing the tax burdens on these partnerships, the government hopes to attract more foreign investment, which is essential for meeting Kenya’s infrastructure needs.
With Kenya’s credit market currently constrained, Mbadi highlights recent interest rate reductions as a positive development that should ease access to credit for both businesses and households.
Lower interest rates are expected to stimulate private-sector borrowing, which had previously been limited due to high borrowing costs. This shift is anticipated to promote business growth, investment, and overall economic activity.
To combat corruption and wasteful government spending, the Bill introduces measures like e-procurement and zero-based budgeting, which require each department to justify its budget requests thoroughly.
This approach ensures that public funds are spent effectively and that taxpayers’ money is used responsibly within a financial year. As Kenya faces budgetary constraints, Mbadi has also championed the use of Public-Private Partnerships (PPPs) to fund large-scale infrastructure projects.
Despite public concerns over private sector involvement, Mbadi argues that PPPs are necessary to finance major initiatives that Kenya cannot afford to undertake alone, such as expanding Jomo Kenyatta International Airport and improving transportation infrastructure.
The Tax Laws (Amendment) Bill 2024, if passed, promises to provide much-needed financial relief to Kenyans, support local businesses, and attract foreign investment.
By implementing these reforms, the government aims to create a more balanced tax system, reduce reliance on foreign loans, and boost economic resilience. The proposed changes reflect a forward-looking vision for Kenya’s economic future—one focused on growth, transparency, and sustainability.
