The following are the highlights of the Kenyan budget presented to parliament by finance minister Musalia Mudavadi on 18 June 1996.

  • Economic performance continues to improve
  • Inflation contained at single digit level
  • Personal tax lowered
  • Taxation of interest, dividend and royalty income varied
  • Corporate tax rates unchanged
  • Payment of instalment tax brought forward
  • Filing in instalment tax return forms abolished
  • Limit in qualifying capital expenditure on passenger cars increased
  • Tax treatment of NSSF changed significantly
  • VAT top rate reduced to the standard rate
  • VAT base widened further
  • Payment of VAT brought forward
  • Prices of petroleum products increased
  • Top customs duty rate reduced by 5%
  • Miscellaneous registration and licence fees increased
  • Minimum capital requirement for banks increased
  • Treasury Bills to be traded at the NSE
  • General insurers deposit with CBK increased to KShs. 4 Million
  • Value of professional indemnity for brokers increased to KShs. 4 Million

This budget commentary is a review of 1996/97 National Budget presented to Parliament by Hon. Musalia Mudavadi, EGH., MP, the Minister for Finance on 18th June 1996. This was his forth Budget speech since he became the Finance Minister, and the second since the publication of Sessional Paper No.I on Recovery and Sustainable Development to the year 2010 within the structural adjustment framework.The economic background against which the Budget was presented is more resurgent with real growth led by the private sector within competitive markets. Thus, it is now clear that consistent adjustments coupled with stable macroeconomics framework is likely to lead to higher economic growth. However, growth in a market economy is a result of sustained private productive investment. This indeed forms the theme of the year’s budget which is “Macroeconomics Stability for Investment and Growth.”As the Minister emphasised in the last budget, the Government has continued with fiscal and monetary disciplinary measures and has not wavered from the programmed restructuring of the economy. The theme is therefore fitting. What the economy requires now is consolidation of the structural adjustments and a stable macroeconomics framework that would allow for more efficient mobilisation of savings and increased private sector investment. Thus, the private sector is expected to appreciate this policy direction and take full advantage of the free market economy through increased investments.

In the previous budget statements, the Minister had stressed the importance of economic stability and poverty alleviation. Whereas there has been achievements on economic stability, poverty seems to be increasing.As spelt out in the current Kenya’s Policy Framework Paper on Economic Reforms 1996 – 1998, prepared by the Government of Kenya in collaboration with the International Monetary Fund and the World Bank in February, 1996, the Government recognises the fact that the country faces a major challenge in reducing unemployment and poverty. The number of people unemployed is currently more than two million and at least ten million people are living in poverty. In addition, about half a million people will enter the labour force each year over the next decade. To achieve significant reductions in unemployment and poverty, the economy will to grow on average by over 6 percent a year for several years. It will also be imperative that the Government places increased emphasis on social services an adequately targeted interventions in favour of the poor. With this general policy statements, the Minister pronounced the following short term specific policies.Fiscal PolicyThe main aim if the fiscal policy is to tighten government spending and improve on tax collection in order to encourage growth by ensuring economic stability and releasing more resources to the private sector. These policies include:-making Kenya Revenue Authority more efficient and effective;
imposing cost saving measures through contracting out public services to the private sector; and
limiting the recurrent expenditure strictly to the provisions approved by Parliament.These seem positive policies, and with the short experience Kenya Revenue Authority has shown, so far, adherence to them, will achieve the objectives set.

Expenditure Priority PoliciesThe expenditure priority will be in:security, social services, infrastructure, agricultural development and environmental protection;ensuring that all public sector projects pass more stringent tests of economic viability than in the past;alleviating employment through targeted programmes;creating employment through provision if credit to small scale enterprises;in education; decentralising financial responsibility and giving complete authority over school fees to educational institutions; andin agriculture; phase out subsidised elements, and organise research and extension work increasingly on cost-sharing.These are sound policies and the Government has to adhere to them. Experience has so far shown that this is a vulnerable area, especially where expenditure is concerned. Alleviation of poverty, though highly recognised, there does not seem to be very tangible solutions. The suggested targeted programme to the tune of 160 Million Kenya pounds and micro-enterprise credits are too small to address the 10 Million people currently living in poverty. It is time, targeted programmes on social dimensions of development are supplemented with intensified social services that the poor need most and the concern for income distribution within the economy. In the long run however, poverty will be alleviated through participatory growth by the poor.The Minister, however, did not come up with clear cut agricultural policies, and yet this is an area that would more likely address poverty more effectively, as most of the poor line in the rural areas.

Financial PoliciesThe financial sector was among the first to be liberalised, and so far it has stabilised. The following short term policies are intended to consolidate the gains earned so far. They include:continuation with the current anti-inflation policies with vigour;introduction of purchase agreement facilities for Government facilities and the use of brokers to trade in Treasury Bills;tightening prudential controls to ensure adequate reserves provision by commercial banks; andamendment of the Insurance Act to strengthen the financial soundness of the industry.Stability in the financial sector is critical for increased investment by the private sector. These are therefore welcome policies. The trading in Treasury Bills at NSE should enhance this growth industry.

Industrial and Infrastructure PoliciesThe industrial policy, that is expected to usher Kenya into a newly industrialised economy is being prepared, and will be elaborated in a sessional paper to be presented in due course. This industrial policy is long overdue and will be welcome.The infrastructure is one of the weakest areas so far. Although the Minister said that a strategic road plan has been prepared, which will also involve the private sector, tangible results are yet to be seen. However, the restructuring of Kenya Posts and Telecommunications, and Kenya Power and Lighting Company Ltd, will not only improve efficiency and effectiveness, but will also create opportunities for private sector expansion.

Export PolicyWith the establishment of East Africa Co-operation Council, there will be additional trade measures that will include:exchange of detailed information for policy co-ordination;an agreement on the harmonisation of tariff structures and rates for early elimination of intra-regional tariffs;standardisation of country of origin criteria;co-operation in the prevention of transit trade and export fraud; andpreparation of income tax treaties for the prevention of double taxation.These policies will actualise trade within the Eastern Africa countries in which the private sector is expected to take full advantage.

The table below presents a summary of the planned expenditure and sources for 1996/97 Budget.Expenditure and SourcesExpenditure: Kenya Pounds Million
Recurrent6,000Development1,900Total Expenditure7,900Sources
Recurrent6,300Foreign Finance1,100Local Borrowing500Total Sources7,900

Last year’s tax collections, exceeded the budgeted figure. Considering the more efficient Kenya Revenue Authority (KRA), the budget figures for 1996/97 seem to be realistic estimates.The financing structure of the Budget has not changed over the last five years. However, as a proportion of GDP, the volume has reduced from last year’s figure of 31.5% to 29.5%. The releasing of funds from the public sector is in line with private sector-led-development. However, this proportion is still large and the Government should strive to reduce it to less than 25% of GDP in order to avail more funds for investment by the private sector.Development has continued to be financed largely from foreign loans and grants. The interest on these foreign loans for 1996/97 is budgeted at Kenya pounds 510 Million. This figure, together with the interest payable on local loans of Kenya pounds 900 Million, is more than the expected total foreign financing of 1,100 Million pounds. Thus, Kenya needs to evaluate this financing pattern with a view to obtaining more optimal borrowing that reduces the interest payable.Further, this over reliance on foreign financing for development needs to be re-examined so as to avoid stalling of projects when the foreign loans or grants are not forthcoming. In addressing this issue, the Minister promised to set aside additional funds for net redemption of both foreign and domestic debt.Deficit financing has been reduced substantially, from 2.6% of GDP in 1995/96 budget to 1.9% in this year’s budget. Again this is consistent with the policy of private sector-led-growth.

Economic Performance IndicatorsA table of selected performance indicators of the economy is presented. The economic growth has shown substantial improvement largely as a result of successful restructuring policy. However, this growth and creation of 500,000 jobs have been doubted by a number of commentators. It is necessary that the Government ensures that such vital statistics are always credible and do not leave room for such doubts.The negative balance of trade has more than doubles due to a 34.84 percent growth in imports compared to only 13.65 percent in exports. It looks like the efforts on the export promotion has yet to bear fruits.Tourism has markedly declined with the number of visitors decreasing by 20%. However, revenue earnings has marginally dropped due to an increase in hotel bed-night occupancy. It is expected that the creation of the Tourist Promotion Board will address this important sector.Inflation has fallen substantially, from 46% in 1993 to last year’s figure of 1.6%. this very low inflation may not be sustained given the increased taxation on oil products that will affect all transport areas. It will however depend on the price reductions of various food items that have now been exempted from VAT.Given the turnover volumes of the two classes of items, the net effect is likely to be towards increased rate of inflation.The exchange rates seem to be stabilising from the erratic movements of the past four years. The shilling has held its ground. With stable macroeconomics policies, the shilling is likely to vary only slightly either way, depending on the demand and supply of the currencies concerned.

Tax Reliefs, Rates and BracketsTo simplify and protect the low income earner from the effect of inflation, the Minister has replaced the family, single and insurance’s reliefs with one personal relief of KShs. 7,200.Income Tax brackets are widened by 5% from K± 3,900 to K± 4,104. Marginal rates remain the same except for an addition of a new 30% rate bracket.

Pensions, Contributions and Withdrawals1. The deductible combined contribution limit for registered pension and provident funds is increased from KShs. 60,000 to KShs. 90,000 per year.
2. Withholding tax on amounts in excess of exempt limit is substituted with graduated tax rates.
3. Unregistered pension payment will be tax free where they are paid by non-exempt institutions and where no deductions were taken for contribution and the income earned by the fund has been subject to tax.
4. New Tax Procedures on NSSF Contributions and Withdrawals
5. Both employer’s and employee’ contributions will become deductible under the limits for defined contribution registered pension funds.
6. Lumpsum benefit is tax exempt up to KShs 360,000. Any pension paid in future will be exempt to KShs. 150,000 per year in line with the registered pension funds.
7. Income earned will be tax free so long as NSSF complies with the rules relating to publication of its accounts and the full allocation of income to the accounts of its members.

Employee BenefitsAll benefits will be taxed at the higher of the cost to the employer or the prescribed value by the Commissioner.

Accounting PeriodAccount date for a person carrying on any unincorporated business is the period of 12 months ending on 31st December of each year.Any person with a different accounting date should change to December year end by 21 December 1998.Except where indicated all other changes take effect from 1.1.97.

Withholding TaxesWithholding tax rates are changed as follows :Tax on qualifying dividend is reduced from 7.5% to 5% for residents with effect from tax is introduced on Royalty income paid to residents with effect from 1.7.96.Tax on interest and discounts is increased from 10% to 15% and to 20% for bearer deposit certificates.The rates for housing bonds remains at 10%.Withholding tax paid by individuals on interest income earned from financial institutions is qualifying and therefore final tax.Withholding tax on equipment supplied by non-residents is reduced from 30% to 15%. Tax on immovable property remains at 30%.

Duty Paid on Imported Capital GoodsA tidying up amendment has been made to clarify duty set-off on qualifying projects:Import duty set-off is only made against tax paid, andExcess import duty is carried forward and applied to reduce the person’s final tax liability for the following and subsequent years.Advance Tax on Public Service VehiclesThis has now been expanded to cover goods-carrying heavy commercial vehicles effective 1st January 1997.Keeping of Business RecordsA person carrying on a business is now required to keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which are deemed adequate by the Commissioner of Income Tax for the purpose of computing tax. Contravention of these provisions attracts a penalty not exceeding KShs. 20,000. This is effective 19 June 1996.

General fine for offences under Income Tax ActThe penalty limit has been increased from KShs. 4,000 to KShs. 100,000 with effect from 19 June 1996.Wear and Tear Allowance on Non-Commercial CarsThe limit on capital expenditure on passenger cars qualifying for wear and tear allowances is raised from KShs. 100,000 to KShs. 500,000 in 1997 and to KShs. 1,000,000 in 1998.Instalment TaxThe payment dates for last three quarterly instalment payments have been brought forward from the end of 6th, 9th and 12th months to the 20th day of the respective months of the current year. The payment in the 4th month remains at the end of the month to coincide with the final payment of self-assessment tax for the preceding year. The instalment tax returns are no longer required. This is with effect from 19 June 1996.Change of Accounting DateWith effect from 19 June 1996, the Commissioner of Income Tax Department has to approve any change of accounting date by an incorporated business.Any person seeking to alter the accounting date must apply in writing to the Commissioner at least six months before the date to which the accounts are intended to be made.


The following changes were announced mainly to further rationalise tax rates and to improve the efficiency in VAT administration.The definition if “service exported out of Kenya” is re-worded to remove the requirement that the payment be made in foreign currency convertible into Kenya currency.In determining the taxable value of goods liable to tax and valorem imported by air, only fifty per cent of the air freight costs is allowed to be deducted when determining the taxable value. Previously, total air freight and stamp duty was excluded in determining the taxable value.The monthly VAT payment date is brought forward from 27th to 20th day of the month following the supply. This is effective 1st September, 1996. However, where the 20th day falls on a public holiday, Saturday or a Sunday, the return and payment is to be submitted on the last working day prior to that public holiday, Saturday or Sunday.To continue the rationalisation of VAT, the top rate is lowered from 25% to the standard rate of 15% and the lower rate raised from ^5 to 8%. This will markedly simplify compliance for VAT payers and VAT administration for the Kenya Revenue Authority.Taxable services have been increased to include actuarial services and material testing services, but excluding testing for medical, dental and agricultural purposes. While the bill implies the effective date to be 19 June 1996 there appears to be practical problems on implementation as the persons involved will need to register and cannot issue tax invoices before registration.Certain additional types of juices are designated and therefore taxed at the retail level like most of the other beverages.The VAT rate on hard fats is raised to 15% in order to encourage the consumption and production if vegetable oils the latter which remain subject to VAT at the lower VAT rate. Also to be charged at the lower rate is oil cake.A number of basic commodities have been exempted from VAT, including wheat, wheat flour and bread, maize and maize flour, rice and milk.To help combat malaria, mosquito chips and coils are zero rated.To encourage tourism promotion, hotel and restaurant services provided to visiting groups of professionals in the travel and tour business where their tours have been organised with local associations and approved by the Director of Tourism are zero rated.Exemption from VAT has been extended to cover all assets of a business which is sold as a going concern. Previously, only stocks were exempt.Except where, specified, all the changes take place with effect from 19th June 1996.

The following regulatory measures are imposed in order to improve the efficiency in clearing goods and in revenue collection.Bills of lading are required in addition to ships manifests.Goods are required to be entered for clearance within 21 days of discharge failure to which they are gazetted for auction. A warning period of 21 days will however be given before the auction.Input Declaration Form (IDF) processing fee of 2% is to be collected by Kenya Revenue Authority and not the banks. The importer is required to send the IDF to the preshipment inspection company directly. The minimum inspection limit is increased from an f.o.b. value of $500 to $1,000.Items not identifiable by marks such as serial or model numbers are no longer to be entered in bonded warehouse. Explicitly excluded are vehicle and dry cell batteries, tyres, used motor vehicles, office supplies and food products such as maize, wheat, powdered milk, rice and sugar.Bonding of duty free equipment imported and funded by projects is to be followed up by investigation and verification on site before the bond is released. Motor vehicles and earth moving equipment purchased duty free with aid funds will only be registered in the name of either the project being funded, the Government or a gazetted non-profit organisation. Automotive fuels and lubricants are only exempted where a specific provision is made in the legal notice covering the project.The certificate of clearance is redesigned to strengthen controls on registration of vehicles that have cleared customs.Goods imported for the Navy, Army and Air Fore Institutes and for the Armed Forces Canteen Organisation now bear the mark NAAFI or AFCO in order to identify the importing organisation.An additional licence is introduced for customs agents clearing goods in transit.Containers used repetitively in international trade are allowed to move duty free.Contraceptives can now be imported duty free by the Minister of Health and other agencies approved by the Treasury.Spouses and returning diplomats are able to import a motor vehicle duty free.Transit sheds may be located outside the traditional air-side and port areas with the approval of the Commissioner.Owners of seized goods are required to apply to the Commissioner for restoration of their goods.Time periods of ownership of motor vehicles of returning residents is clarified where the vehicle was purchased under hire purchase terms.The application for duty free importation of motor vehicles specially designed for the disabled will first be reviewed by the Commissioner before approval.Limit on duty free value of cares of 2500cc imported by returning residents is removed.Speed recording and ignition key recognition devices are exempted from duty.Manufacturers will no longer be required to show that payment in foreign exchange was received before exporting.The following are proposals with direct revenue consequences:-The top duty rate is lowered from 40% to 35%. Duty on capital goods items and primary raw materials in the 10% band is lowered to 5%.Duty on certain capital equipment and certain raw materials in the 25% band is reduced to 15% and 5% respectively. This includes hand tools, wheel barrows, raw materials in the plastics and spinning and weaving sectors. Duty on goods which are exported in 25% band is reduced to 15%.Duty on paper and paperboard is raised while duty on lead mix used in making motor vehicle batteries and or plastic bottles for cosmetic sector is reduced.Tariffs on sporting equipment is lowered to 15% where rates were higher.Alternative specific duty rates on used clothing imports is discontinued.Raw materials for making shading netting or reinforced plastic sheeting for agricultural or horticultural use can now be imported duty free under EPPO. Minimum amount of raw materials inputs per application is reduced from KShs. 1 Million to KShs. 200,000.Tariff rates on major agricultural commodities are set as follows :Maize and wheat15%Powdered milk25%Sugar and rice35%

The alternative specific duties are retained.Customs duty for air freight has been reintroduced at a rate of 0.5% of the freight charges. This charge was discontinued in 1991.Duty has been imposed on kerosene at a rate of KShs. 3/=per litre which is an effective duty rate of about 18%.These measures are effective from 19 June 1996.

Road Maintenance LevyThe levy is increased by KShs. 0.70 per litre. This increases the levy on petrol and diesel to KShs. 2.70 and KShs. 2.20 per litre respectively.Motor Vehicle LicencesFees for registration and licensing of motor vehicles, drivers licences and for sale and transfer of motor vehicles are increased.Entry PermitsFees for entry permits and for issuing identity cards to aliens is increased.

Banking IndustryThe minimum capital requirement for banks is raised from 7.5% of deposits to 8%.Insurance IndustryThe following measures have been taken to strengthen the financial soundness of the insurance industry. These include:Increasing the bank guarantee on initial registration to KShs. 500,00 for both insurers and brokers.Minimum balance to be kept by Central Bank of Kenya is increased to KShs. 4 Million.Value of professional indemnity policy to be taken by brokers is now KShs. 4 Million.College of insurance levy passed over to policy holders is reduced to 0.2% of gross premiums.Additional powers have been granted to statutory managers under the Insurance Act. They can now declare a moratorium in companies in financial difficulties.

Shaun Bakamoso

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