[Continued from Kenya's Tax History II]

Soon after independence Kenya had income tax, corporation  tax, trade taxes and excise taxes. Value-added taxes were introduced later. During the first decade and a half of independence, the government mainly dealt with taxation as there was a  desperate need. The first post-independence strategy was  set out in Kenya’s first planning document entitled Sessional Paper No. 10 of 1965 on African Socialism and its  Application to Planning in Kenya. Its main purpose was  to guarantee every citizen full and equal political rights. It  was stated specifically that the economic approach of the  government would be dominated with ensuring 'Africanisation' of the economy and public service.

In 1970/1971 the finance ministry changed the policy of  cautionary spending and began an expansionary policy. This then resulted to introduction of sales tax in 1973. Again, the oil crisis of 1973 led to an economic shock, leading to a debt problem. Therefore the resulting  fiscal reforms were; 20 % withholding tax on nonresident entrepreneurs, capital allowance restricted to  rural investment, a new tax on the sale of property, taxes  on shares, the sale of land and a custom tariff of 10% on a range of previously duty free goods.

The East African Community (EAC) collapsed in  1977 and thus the government required money to form corporations and buy  out others; these debts were finally paid off as recently as 1994. When the second oil  crisis came in 1979/1980, import prices once again were  deteriorating, leading to reduced availability of domestic  credit and lower returns from agriculture and commerce, causing a large drop in revenue. The Government  responded by increasing sales taxes from 10% to 15%, excise duties from 50% to 59%, while Personal  Income Tax was actually decreased from 36% to 29% in light of increasing tax competition in East Africa. In 1986, the government wanted to increase tax collection to 24% of GDP by 1999/2000. There was a  study of the tax system to favour savings and investment  and make tax revenue more responsive to changes in GDP. All these changes resulted in an 1987 improvement of exchequer receipts also set out in the tax study in  sessional paper no 1 of 1986.

The government aimed at  placing a greater burden of tax structures on consumption in order to encourage savings and promote investments, making sales tax the most significant contributor.  In reforming a corporation tax, for example, one considers equity, ease of administration, the benefit principle  whereby corporations should pay tax in return for the  benefits conferred, and political considerations make  it prudent to tax corporations which have no votes. In  respect of the growth-equity dilemma, one observes an  attempt in the early period to use income taxes for redistribution purposes using progressive income tax rates which  were increased in 1974 to 45% for companies, 52% for foreign companies, and personal income tax  rates ranging between 10% for lower incomes and  65% for those earning higher incomes.

A review of tax revenue performance as well as tax  design and administration changes during the period  1996 to 2005 established priorities for further tax  reform. It revealed the adverse effects of inflation on  tax revenues, that the tax structure is less buoyant and  possibly inelastic although indirect taxes (such as VAT),  and not direct taxes, hold the capacity to improve the  flexibility of the tax system to cope with revenue shortfalls linked to business cycles.

Reference Kenya Report;Tax Justice Network Africa

For the current taxation situation in the country, Read Tax Matters I, Tax Matters III, Tax Matters IV, Tax Matters V, Tax Matters VI