Kenya will remove a range of tax exemptions including for oil and gas exploration as it seeks to make up for revenue lost to the impact of the coronavirus crisis, its finance minister said on Thursday.
As well as a drop in tax collection caused by the COVID-19 pandemic, the East African nation also cut the corporate and personal income tax rates in April to boost demand and help firms keep workers on their payrolls.
The tax exemptions amounted to 535 billion shillings ($5.03 billion) – 6% of GDP – in 2018, which is considered one of the highest levels in the world, the government says.
“Whereas these tax incentives are well intended, they have limited the capacity of Government to fund critical expenditures,” Finance Minister Ukur Yatani told lawmakers while presenting the 2020/21 (July-June) budget.
Nikhil Hira, a tax consultant at Nairobi law firm Bowman’s Coulson Harney LLP, criticized the move.
“We need to get rid of some of them (tax exemptions)… but this is not the right time,” he told Reuters, citing the role they could play in kick-starting economic growth after the pandemic.
Growth is projected to drop to 2.5% this year, from a pre-pandemic forecast of 5.4%, Yatani said.
He set a budget deficit of 7.5% of GDP, saying the crisis had upset the government’s plan to reduce borrowing.
The East African nation had pledged to cut its deficit to 4.9% of annual economic output, but a locust invasion, the coronavirus and floods forced it to ditch the plan.
“Our concern is that weaker growth than that outlined today, or slower revenue momentum, could easily see upward pressure on the outlined fiscal deficit and borrowing requirement,” said Razia Khan, head of research for Africa at Standard Chartered.
In neighboring Uganda, the government will rely on more external financing to weather the crisis, while Tanzania has already sought debt relief from G2O nations, their respective finance ministers said.
The East African Community trade bloc presents its national budgets on the same day but Rwanda failed to present its spending plans, citing the pandemic.
“This year every country will read its budget at its convenient time not the same day as usual due to COVID-19,” said Uzziel Ndagijimana, Rwanda’s finance minister.