Unpacking Finance Bill 2023/24: Addressing Fiscal Sustainability Challenges and Tax Policy Reform in Kenya

Abstract

Executive Summary

Kenya's fiscal landscape has been grappling with multiple challenges, including a mounting debt burden, inefficient expenditure management, and a limited tax base. In response, the Kenya Kwanza government introduced the Finance Bill 2023, aimed at addressing these issues by implementing comprehensive tax reforms, boosting revenue generation, and advancing fiscal consolidation. The Bill contained 84 clauses, proposing significant changes such as harmonizing corporate tax rates, formalizing the informal sector, and introducing measures like electronic tax invoicing to expand the tax base. However, these proposals sparked intense public debate, with concerns raised about the potential effects on small businesses, tax compliance, and the broader economic climate, particularly in light of rising inflation, high interest rates, and a depreciating currency.

The Bill was part of the government's broader strategy to tackle Kenya's fiscal challenges in the face of escalating living costs and an underperforming tax system. The Finance Bill 2023 sought to implement structural reforms aimed at improving revenue collection and reducing the country’s reliance on domestic borrowing. Despite the potential benefits of these reforms, public discourse revealed concerns about the Bill's feasibility, especially in relation to the taxation of the informal sector, the rising cost of living, and inefficiencies in government expenditure. These issues underscored the complexity of the reforms and highlighted the need for a structured approach to tax policy.