The annual finance bill usually amends the primary tax laws – the Income Tax, Value Added Tax , Excise Duty, Tax procedures, Miscellaneous Fees and Levies, and Stamp Duty Acts.
The changes are often driven by the practical outcomes of tax administration, both from the tax authority and tax practitioners, including disputes that arise in these processes. This latter fact elicited a recent click bait of a headline in a leading daily - “how KRA fights triggered fresh taxes in finance bill”.
Listening to most commentary and debate on the finance bill, I am struck by three things. First, the predominant focus on the finance bill at the expense of all the other critical budget steps that come before and alongside it.
Second, there is no mention of the many amendments that improve the position of the tax payer. Third, some people argue as though we live in the world by ourselves.
The finance and appropriation bills are the last step in the annual budget cycle. The latter is the expenditure side. Discussions start the previous November with sector hearings on the resource envelope.
The resulting budget policy statement receives little public attention. The same fate meets the budget review and outlook paper that comes before it, and the debt management paper that comes after.
Many 2026 proposals improve the situation of the tax payers. The amendment to section 11 of the income tax act replaces the old provisions with a simplified version, preventing double taxation of trust income. As things stand now, such income can attract tax at the trust level, and then again at the beneficiary level.
The proposed new section 6b provides that non-residents with rental income pay taxes just like residents do, creating fairness.
The clarification that the 10 percent deduction for industrial buildings is an annual straight-line allowance removes the confusion that it is a one-time deduction. The improvements to the eighth schedule ensure that when two non-residents transfer Kenyan based assets, they pay taxes.
The bill proposes the removal of penalties and interest caused by errors in the KRA’s electronic systems.
But it is the proposed pre-populating of tax returns that has many talking. Yet this is a rather positive and best practice step. Tax authorities should tell you what they already know. Such proactive provision of data improves compliance. The authority should not wait for you to make a mistake and then pounce.
Another proposal generating debate is section 52b on filing deadlines. At a symposium last week, a panelist made the most passionate presentation, arguing it is unfair to reduce the filing deadline from six to four months, (and one month for nil returns), after the financial year end.
As an investor, I asked in return, how long do you want to wait after the financial year end, to know if you made profit? We want to know as soon as possible, the audience said. In addition, if you truly had nil income in the last financial year, why should it require six months for you to determine? The audience laughed and chuckled.
A quick word on the global context. In the 90s and early 2000s, it was believed that democracy and free trade would lead to higher standards of living. But this was not to be. Instead, incomes in many economies of the industrial West begun to stagnate, while in the East, particularly India and China, millions were rapidly moving from poverty to the middle class.
The search for culprits led the UK to leave the European Union in a huff that shocked the World, and the triumph of populism in many countries. It led to tariff wars. It led to shooting wars in Ukraine and Iran.
These have created more instability in the global economy, including high energy prices, adversely affecting small open economies such as ours.
In discussing fairness of the tax system, consider this. We have 22.58 million personal identification numbers (PINs), covering individuals (20.16 million), companies and other organisations (1.02 million), and students in tertiary institutions (1.4 million).
But only 7.8 million (34.5 percent) pay tax in one form or another, leaving 14.78 million non-payers.
In the last few months, 100,000 first time payers have paid Sh7.8 billion in taxes. Simple math shows that if everyone who should comes on-board, we will generate an additional Sh1.2 trillion, which would fully cover the projected 2026/27 budget deficit. Now, would that not be fairer?
Ndiritu Muriithi is an economist and partner at Ecocapp Capital. He is also the chairman of KRA and former governor of Laikipia County. Email: [email protected]
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