Kenya’s New Tax Plan: Raising Exemptions, Expanding Fairness, and Embracing AI

In a move set to benefit millions of Kenyan workers, the government has announced plans to raise the zero-tax threshold from Sh24,000 to Sh45,000 monthly over the next three years. This change would allow Kenyans to earn up to Sh45,000 per month without paying income tax, thereby increasing disposable income for a larger portion of the workforce. Currently, only those earning Sh24,000 or less per month are exempt from income tax, which limits tax relief to a small fraction of the formal workforce.

David Ndii, Chairperson of the President’s Council of Economic Advisors, recently spoke on the importance of broadening tax contributions to include those in both formal and informal sectors. Speaking at the 2024 NCBA Economic Forum, Ndii highlighted the need for a more balanced tax system, pointing out that informal sector workers, who form the MSME economy, contribute significant economic value yet often remain outside the formal tax system. He argued that the tax burden should not fall solely on salaried employees while self-employed and informal sector workers go largely untaxed.

The government’s goal is to close this tax gap by promoting a fairer, more efficient tax structure that better aligns with the evolving economy. As an example, Ndii pointed out disparities in tax contributions between bank tellers, who pay taxes, and mobile banking agents, who typically do not, despite performing similar roles. This imbalance, he says, is unsustainable and requires reform.

To address these challenges, the government is exploring automated tax assessment using algorithms and artificial intelligence. Ndii envisions a future where 90% of tax assessments are handled automatically, relying on digital transaction data to provide a more accurate and equitable assessment of tax liabilities. This system would reduce manual intervention, enhance transparency, and give taxpayers the option to review and adjust their returns as needed.

By harnessing technology, the government aims to improve tax compliance across sectors, making it easier and fairer for everyone to contribute. With the continued digitization of financial transactions, this approach could soon become a reality, aligning Kenya’s tax system more closely with the needs and contributions of its diverse economy.