Understanding Taxation in Kenya: A Public Perspective

Taxation plays a crucial role in the economic framework of any nation, serving as the lifeline for government functions such as infrastructure, healthcare, and education. In Kenya, tax awareness among citizens has been growing, particularly in response to recent policy changes, including the highly contested Finance Act 2023. This legislation introduced new taxation measures, affecting various sectors, including digital financial transactions, small businesses, and salaried workers.

The enactment of the Finance Act 2023 led to an immediate reaction among Kenyans, who began reevaluating their financial obligations and their relationship with the state. Many expressed concerns over the increasing cost of living and questioned whether their taxes were being used effectively. The gap between taxpayers and policymakers widened as citizens became more vocal about government accountability and service delivery. Social media platforms, community forums, and civil society organizations became focal points for discussions on tax justice and fiscal responsibility.

Fiscal Workarounds: How Kenyans Are Navigating the Tax Burden

The rise in taxation has led to the emergence of ‘fiscal workarounds’—strategic measures employed by individuals and businesses to minimize tax liability. Some of these include:

1. Shifting to Alternative Payment Methods: With increased levies on M-PESA transactions, many Kenyans have opted for cash transactions to avoid transaction fees and additional taxation.
2. Underground and Informal Economy Growth: Many businesses have resorted to operating informally to bypass tax obligations, especially those in small-scale trade.
3. Engaging in Cross-Border Trade: Some traders have explored importing goods from neighboring countries with lower tax regimes to avoid high import duties.
4. Seeking Legal Loopholes: High-net-worth individuals and businesses have sought legal means of tax optimization, such as reclassifying incomes or leveraging tax exemptions where possible.
5. Increased Use of Digital Currencies: Some Kenyans are turning to cryptocurrency transactions as an alternative to avoid taxation on digital financial services.

While these workarounds help citizens cope with the financial strain, they present a challenge to revenue collection and economic stability. The informal sector, which comprises a significant portion of Kenya’s economy, remains largely untaxed, creating a gap in projected government revenue. Moreover, the perception of unfair taxation policies encourages further non-compliance, which in turn leads to increased government borrowing and economic strain.

The Need for a Renewed Social Contract

The concept of taxation is built on the social contract—the mutual understanding that citizens pay taxes in exchange for government services and public goods. However, the increasing burden of taxation, coupled with growing concerns over corruption and mismanagement, has led many Kenyans to feel that the government is not holding up its end of the deal.

To restore trust and improve tax compliance, policymakers must consider the following:

• Transparent Use of Public Funds: A clear demonstration of how tax revenues are allocated can build confidence among taxpayers.
• Progressive Taxation Policies: Tax structures should ensure that lower-income earners are not disproportionately affected while ensuring high earners contribute fairly.
• Public Participation in Policy Formulation: Engaging citizens in tax policy discussions can foster a sense of ownership and responsibility.
• Incentives for Compliance: Offering tax reliefs or incentives for prompt tax payments can encourage voluntary compliance.
• Strengthening Anti-Corruption Measures: Addressing corruption and ensuring accountability in government spending will help taxpayers see the value of their contributions.
• Enhancing Digital Tax Infrastructure: The government should modernize tax collection methods to ensure efficiency, reduce evasion, and provide user-friendly platforms for compliance.

Conclusion

Kenya’s evolving tax landscape reflects the broader challenges of governance, economic policy, and public trust. While taxation remains essential for national development, its success relies on a fair and transparent system that fosters compliance rather than resistance. Addressing concerns surrounding taxation, engaging citizens in fiscal policy, and ensuring accountability will be critical in renewing the social contract between the government and the people. A government that prioritizes inclusivity, fairness, and efficiency in taxation will foster national cohesion and long-term economic stability.