Assessing Kenya’s tax to GDP ratio

There is a national debate on Kenya’s historical performance on tax collections as a percentage of the GDP. PHOTO | SHUTTERSTOCK    

By ROBERT MAINA More by this Author

There is a national debate on Kenya’s historical performance on tax collections as a percentage of the

Gross Domestic Product (GDP). The general perception is that we are punching below our weight. The Government has embarked on a tax reform agenda as spelt out in the Medium-Term Revenue Strategy (MTRS) that is geared towards increasing domestic revenues.

The strategy is expected to yield additional resources that are critical to delivering the promises that the current administration made under the Bottom-up Economic Transformation Agenda.

The MTRS is set to be rolled out over a three-year period running from financial year 2024/25 to 2026/27. The East African Community (EAC) targets a tax-to-GDP ratio of 25 percent and the government aims to achieve this by 2030. Over the three-year strategy period, the government targets to grow ordinary revenue to GDP ratio by five percent through a mix of administrative measures and tax policy changes.

According to MTRS, Kenya’s ordinary revenue as a percentage of GDP decreased from 18.1 percent in the financial year 2013/14 to 14.1 percent in 2022/23. This was attributed to, among others, adverse effects of Covid-19, an increase in tax expenditure and low tax compliance.

Notably, the Kenya Revenue Authority (KRA) has over the years implemented an array of fiscal policies and administrative measures to increase tax collections. These measures have yielded significant results with revenue collections growing in the last five years from Sh1.58 trillion in 2018/19 to Sh2.166 trillion in 2022/23. This represents a growth of 37 percent equivalent to Sh586.259 billion in the last five years.

According to the Economic Survey, Kenya’s GDP, which is the sum of all finished goods and services produced in the country in a specific period, had equally grown in the last five years except for 2020 when the economy decelerated by 0.3 percent.

In 2022, services accounted for 55.1 percent of the GDP, the agricultural sector accounted for 21.2 percent of the GDP, industry accounted for 17.7 percent while other sectors accounted for 6.1 percent of the GDP. Additionally, the formal employment sector accounted for 17.1 percent of total employment with the informal employment accounting for 82.9 percent of total employment.

Despite the significant growth in revenue collections over the years, Kenya’s tax to GDP ratio has been deemed to be below the expected average for peer countries. According to the OECD, the tax-to-GDP ratio in Kenya decreased by 0.6 percentage points from 15.8 percent in 2020 to 15.2 percent in 2021.

The average tax to GDP ratio for the 33 African countries as reported in the Revenue Statistics in Africa publication remained unchanged over the same period at 15.6 percent. It also provides that the highest tax-to-GDP ratio reported for Kenya since 2000 was 17.5 percent in 2017, with the lowest being 12.5 percent in 2002.

According to the OECD, in Africa, the average relative contribution of the various tax heads to the overall tax collections is as follows; personal income tax (17pc), corporate income tax (19pc), social security contributions (8pc), taxes on goods and services other than VAT (24pc), Value Added Tax (28pc) and other taxes account for four percent.

In 2021, Kenya’s collections from the various tax heads were as follows; taxes on goods and services other than VAT (32pc), VAT (24pc), personal income tax (22pc), Corporate income tax (11pc), social security contributions (2pc), and other taxes accounted for approximately 10pc.

Additionally, Kenya's non-tax revenues amounted to 2.3 percent of GDP. This was lower than the average non-tax revenues for the 33 African countries (5.8 percent of GDP).

By and large, the agricultural sector likely makes minimal contribution to tax collections relative to the sector’s contribution to the GDP.

This is because a large proportion of the sector is small-scale with most farmers engaging in subsistence farming and very minimal commercial farming activities.

The government should consider Kenya’s unique economic structure when rolling out the MTRS to strike a healthy balance between growth in tax collections and supporting economic growth. This will ensure that the goose that lays the golden eggs continue to lay them while at the same time supporting the growth of all sectors to increase their contribution to the national tax kitty.

Maina is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.