Taxation in Kenya
Taxation in Kenya was first introduced by the Arabs who arrived in the Kenyan coast around 1498. The coastline of East Africa was part of Sultanate of Oman governed from Malindi. Each of the islands was allowed to run their own affairs and collect taxes for the Sultan. The Sultanate applied a system of taxation that was a mixture of Islamic Law as well taxation of trade. The tax system was applied as follows;
- The citizenry were taxed using the Islamic law based taxes which were zakat, jizya, sadaqa and khums in addition to customs levy, capitation tax as well as harbor fees.
- Traders were taxed by the application of a capitation tax, as well as customs. A capitation is a head tax, tax on each individual. Capitation tax was levied on each slave, on traders taking slaves out of the sultanate. This tax was first applied in 1722 by the then ruler of Oman on every slave exported by the French from his African dominions.
The first recorded treaty that involved a form of taxation in this period was in 1502. The then Sultan Ibrahim of Malindi was held against his wishes and forced to accept defeat. While being held hostage during negotiations on Vasco da Gamma’s boat, a treaty of surrender was signed with Portugal for an annual tribute of 1,500 meticals of gold. The Portuguese now took over from the Arabs. However, the violence of the Portuguese led to a complete failure to use equity in the creation and levy of taxes. There were riots punctuated with civil disobedience and widespread cases of tax evasion and avoidance.
By the end of the rule of the Arabs and Portuguese along the East coast of Africa the existing balance of taxation that was inherited by the British included a capitation tax payable per head of slave exported and customs revenue shared equally between the Arabs and Portuguese. The tax base was, however, limited to traders only.
British colonial tax policy developed mostly on the grounds that Britain needed to support its own economy by creating foreign markets and sources of raw materials for its industries, thus obtain maximum gains with minimum input. This was done initially through the Chartered company concept. British Taxes included; Hut and Poll Tax, Land Tax, Graduated Personal Tax, Income tax.
Soon after independence Kenya had income tax, corporation tax, trade taxes and excise taxes. Value-added taxes were introduced later. Sales tax was introduced in 1973 following policy change from cautionary spending to an expansionary policy in 1970/1971 by the finance ministry. The oil crisis of 1973 led to an economic shock resulting into fiscal reforms like; 20 % withholding tax on nonresident entrepreneurs, capital allowance restricted to rural investment, a new tax on the sale of property, taxes on shares, the sale of land and a custom tariff of 10% on a range of previously duty free goods. During the period 1996 to 2005, a review of tax revenue performance as well as tax design and administration changes established priorities for further tax reform.
Mobilizing additional revenue is to be a key priority, and the Government has promised to strengthen value added tax (VAT) audit functions which should lead to enhanced compliance by large taxpayers; enforce measures towards improving tax collection from rental and real estate activities; implement an automated excise tax management system to eliminate possibilities of mis-declarations in 2013/14; and make the recently-approved excise tax on mobile financial transfers operational.
The Government also plans to seek urgent approval of the new VAT bill, which should simplify and modernize the tax’s administration, and broaden its tax base by limiting zero-rated and exempt supplies.
Progress on Kenya’s structural tax reform agenda, by undertaking a comprehensive review of the Income Tax Act and the Customs and Excise Act, and by revamping the country’s natural resource tax framework is ongoing.
Kenya Revenue Authority (KRA) reaped 9.2 billion U.S. dollars in revenues for the 2012/2013 financial year, up from 8.14 billion dollars in the previous year, which represents a 13.02 percent increase. The Exchequer’s revenue was 8.7 billion dollars while revenue collected on behalf of other government bodies was 472 million dollars.