The Medium-Term Revenue Strategy (MTRS) for the fiscal years 2024/25 to 2026/27 is a significant initiative by the Kenyan government to enhance domestic revenue collection. This strategy aims to address the declining trend in revenue as a share of GDP and to mobilize additional resources necessary for the implementation of the Government Development Agenda, specifically the Bottom-Up Economic Transformation Agenda.

Vision 2030

Kenya’s Vision 2030, launched in 2008, is a long-term development blueprint covering the period from 2008 to 2030. The Vision aims to transform Kenya into an industrialized, middle-income country providing a high quality of life to all its citizens by the year 2030. It is anchored on three key pillars: economic, social, and political.

Economic Pillar

The economic pillar aims to achieve an average Gross Domestic Product (GDP) growth rate of 10 percent per annum. This growth is essential for generating sufficient resources to meet the development targets outlined in the Medium-Term Plans (MTPs). Despite achieving remarkable growth in various sectors, Kenya’s real GDP growth has averaged 4.5 percent between 2008 and 2022, below the targeted 10 percent.

Social Pillar

The social pillar seeks to build a just and cohesive society with social equity in a clean and secure environment. This involves improving living standards, health, education, and social welfare systems to ensure inclusive growth and equitable distribution of resources.

Political Pillar

The political pillar aims to realize a democratic political system founded on issue-based politics that respects the rule of law and protects the rights and freedoms of every individual. It emphasizes good governance, transparency, and accountability in public affairs.

Implementation Through Medium-Term Plans

Vision 2030 is implemented through a series of five-year Medium-Term Plans (MTPs). The current Fourth Medium-Term Plan (2023-2027) prioritizes the implementation of the Government’s Bottom-Up Economic Transformation Agenda. This agenda focuses on sectors with the largest impact on the economy and household welfare, including Agricultural Transformation, Micro, Small and Medium Enterprise (MSME) Economy, Housing and Settlement, Healthcare, Digital Superhighway, and the Creative Industry.

Main Source of Revenue in Kenya

Kenya’s principal sources of revenue include ordinary revenue and ministerial Appropriation in Aid (A-i-A). Ordinary revenue is composed of taxes such as Personal Income Tax, Corporate Income Tax, Value Added Tax (VAT), Excise Duty, Import Duty, Stamp Duty, and Capital Gains Tax. Non-tax revenues include Immigration Revenues, Mining Royalties, Fines and Forfeitures, Traffic Revenue, Land Revenue, and Investment Income.

Revenue Performance of Kenya

Kenya’s total revenue collection has tripled from Ksh. 0.8 trillion in FY 2013/14 to Ksh. 2.4 trillion in FY 2022/23. Despite this growth, the revenue yield remains below the desired East African Community (EAC) target of 25 percent of GDP. The ordinary revenues declined from 18.1 percent of GDP in FY 2013/14 to 14.1 percent in FY 2022/23. This decline is attributed to various challenges, including the growth of hard-to-tax sectors, digital economy expansion, and increased tax expenditure.

Key Challenges and Solutions

Challenges

1. Tax Evasion and Compliance: Low tax compliance and tax evasion remain significant challenges.
2. Informal and Digital Sectors: The growth of these sectors makes taxation difficult due to their elusive nature.
3. External Shocks: Global economic downturns, such as the COVID-19 pandemic and geopolitical tensions like the Russian invasion into Ukraine, have negatively impacted revenue collection.
4. Tax Expenditure: The proliferation of tax exemptions and incentives has eroded the tax base.

Solutions

1. Tax Reforms: The MTRS proposes comprehensive reforms across all tax heads, including Corporate and Personal Income Tax, VAT, Excise Duty, and Customs Duty.
2. Enhancing Tax Administration: Measures such as modernizing KRA’s IT systems, integrating tax administration systems with other government systems, and improving taxpayer services.
3. Expanding the Tax Base: Introducing new taxes such as carbon tax, motor vehicle circulation tax, and VAT on previously exempted services like education and insurance.
4. Improving Compliance: Enhancing taxpayer education, leveraging technology for tax collection, and using data analytics to track tax evasion.

Revenue Generation and Tax Strategy

The MTRS aims to increase the tax-to-GDP ratio from 14.1 percent in FY 2022/23 to 20 percent by FY 2026/27. It also targets raising tax compliance from 70 percent to 90 percent within the same period. The strategy includes specific policy measures for different tax categories to achieve these targets.

Income Tax Reforms

• Corporate Income Tax: Reduce the corporate tax rate from 30 percent to 25 percent to encourage investment.
• Personal Income Tax: Review the tax band structure to improve progressivity and harmonize the personal income tax top rate with the corporate tax rate.

Value Added Tax (VAT) Reforms

• Review VAT Threshold: Increase the VAT registration threshold to enhance efficiency.
• Expand the Tax Base: Introduce VAT on education and insurance services.

Excise Duty Reforms

• Petroleum Products: Review excise duty on petroleum products to address environmental concerns.
• Non-Alcoholic Beverages: Base taxation on sugar content to discourage consumption and promote health.

Comparative Revenue Strategies: Kenya vs. Nigeria and Tanzania

Kenya vs. Nigeria

Nigeria, like Kenya, faces challenges in revenue collection, particularly due to its heavy reliance on oil revenues. Nigeria’s tax-to-GDP ratio is lower than Kenya’s, at around 6 percent. Nigeria has been implementing reforms to diversify its revenue base, focusing on improving VAT collection and broadening the tax base. However, Kenya’s approach in the MTRS is more comprehensive, targeting a significant increase in the tax-to-GDP ratio through both policy and administrative measures.

Kenya vs. Tanzania

Tanzania has a tax-to-GDP ratio of approximately 12 percent, which is closer to Kenya’s current level but still below the EAC target of 25 percent. Tanzania has focused on improving tax compliance and expanding the tax base, similar to Kenya. However, Kenya’s MTRS is more ambitious in its targets and includes a broader range of reforms, such as introducing new taxes and leveraging technology for tax administration.

Conclusion

The Kenya 2023 Medium-Term Revenue Strategy is a crucial step towards enhancing domestic revenue mobilization and supporting the Government Development Agenda. By addressing the challenges in the tax system and implementing comprehensive reforms, Kenya aims to achieve a tax-to-GDP ratio of 20 percent by FY 2026/27, ensuring sustainable economic growth and improved welfare for all Kenyans. Effective implementation of this strategy requires collaboration between the government, private sector, and other stakeholders.