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DealMakers AFRICA Q2 2020

Averting a crisis:
Analysis of the finance act, 2020

by Nikhil Hira and Alex Mathini

The Finance Act, 2020 (the Act) was assented to by President Uhuru Kenyatta on 30 June 2020, setting the stage for the annual tax season, and other changes aimed at raising additional revenue for the financial year 2020/21. The Act has been enacted at a time where economic activity is depressed, jobs have been lost and the country’s economy is expected to contract and, according to the IMF, move into a recession due to the COVID-19 pandemic. Further, the Act comes at a time when Kenya is attempting to avert a public debt crisis that is the result of long-term aggressive borrowing on expensive terms with little to show for it, and against concerted efforts by the Cabinet Secretary of the National Treasury (CS) to steer the ship towards fiscal consolidation.  

The theme for this year’s budget was “Stimulating the Economy to Safeguard Livelihoods, Jobs, Business and Industrial Recovery”, although the provisions contained in the Act appear to seek to bridge revenue shortfalls. Notably, in what was his maiden budget speech, the CS stated that the Treasury had projected tax collections amounting to KES1.6 trillion that would be driven by, among other things, the rationalisation of incentives that apparently cost the exchequer about KES535 billion in forgone revenue. Based on the recently published statements of actual revenues collected by the government as at 29th May 2020, the Treasury is unlikely to meet its originally set target collection of KES1.8 trillion, subsequently revised to KES1.4 trillion, as the current collections stand at about KES1.3 trillion – a significant difference of KES100 billion. 

Considering that we are yet to reach the peak of the pandemic, and that there is a possibility of a second wave that would likely slow down and affect the economy further, it is peculiar that the Treasury expects increased tax collections largely from the tax changes proposed under the Act and previous legislation passed this year. Aside from rationalising exemptions and incentives, some of the anticipated revenue drivers under the Act are: the minimum tax (KES21 billion), reclassification of VAT status of taxable supplies (KES8 billion), repeal of deductible expenditures (KES3 billion) and the Digital Services Tax (KES2 billion).

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The Act appears to be underlined by the need to avert a looming fiscal crisis by bridging all avenues (including perceived) of revenue losses for the exchequer at the expense of eroding tax incentives and benefits that would otherwise, among other things, form part of the backbone for the post-pandemic economic recovery phase for the country. We may need to adopt a wait-and-see approach as to whether the revenue projections tied to the tax changes under the Act will live up to the Treasury’s expectations, although in the current economic climate, this seems unlikely. 

Hira is a Director and Mathini a Partner with the Tax Practice at Bowmans Kenya. 

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