Kenya’s tax system has undergone extensive policy and administrative transformations over the last three decades. Yet, these changes have not yielded consistent improvements in revenue mobilization.

According to the 2023 IMF Country Report (No. 24/14), Kenya is the only East African Community (EAC) member state to experience a prolonged decline in its tax-to-GDP ratio, from a high of 15.5% in 2014 to just 13.1% in 2020. This decline persisted despite frequent tax reforms, administrative digitization, and an expanding economy. The IMF’s benchmarking exercise, using a newly constructed tax reform database for the EAC, reveals the structural and behavioral dimensions of Kenya’s underperformance relative to its peers like Uganda and Tanzania, both of whom showed either stable or improving revenue trends over the same period.

1. A Decade of Declining Tax Ratios in Kenya

Kenya’s tax-to-GDP ratio peaked at 15.5% in 2014, before entering a consistent decline, reaching 13.1% by 2020. This erosion was largely attributed to weakening income tax performance, notably income tax revenues which fell from 8.0% to 6.5% of GDP over the same period. The COVID-19 pandemic intensified the decline, prompting emergency tax reliefs. However, Kenya began to recover slightly post-2021 with the reversal of COVID-19-related tax measures and the introduction of more ambitious reforms under the 2023 Finance Act, which is expected to boost revenue by 1.5% of GDP, targeting a 14.4% tax-to-GDP ratio by the end of 2023.

2. Frequency vs. Quality of Tax Reforms

Between 1988 and 2022, Kenya implemented 594 tax policy and administrative changes, more than any other EAC country—averaging 18 reforms annually. However, the high frequency masked a structural challenge: over 60% of Kenya’s tax policy changes reduced taxpayer liabilities, either through rate cuts or increased exemptions and deductions. In contrast, countries like Uganda (453 changes) and Tanzania (431 changes) maintained more balanced reforms, with fewer base-narrowing decisions and greater emphasis on compliance and administration. This suggests that reform quantity in Kenya did not translate into effective revenue generation, a central concern raised by the IMF.

3. Administrative Strength vs. Policy Erosion

Kenya demonstrated commendable progress in modernizing tax administration, particularly in areas such as e-filing, electronic payment systems, and taxpayer registration. Measures were aligned with TADAT benchmarks, and Kenya routinely introduced reforms to strengthen revenue enforcement. However, this progress was undermined by concurrent policy decisions that eroded the tax base. For instance, from 2015 to 2022, Kenya consistently registered negative net frequencies for tax policy changes, meaning more revenue-eroding than enhancing reforms. By contrast, Uganda recorded multiple years of simultaneous policy and administrative strengthening, a pattern associated with its upward revenue trajectory.

4. Sectoral Breakdown and Reform Targets

Most tax reforms in Kenya were concentrated in three key areas:

• Corporate Income Tax (CIT) – 442 reforms (24% of all changes), with base-narrowing exemptions dominating.
• Value Added Tax (VAT) – 362 changes, 68% of which involved expanding exemptions, particularly on medical supplies and food.
• Excise Duties – 303 changes, mostly rate hikes on goods like alcohol, tobacco, and fuel.

These trends reveal a strategic shift toward indirect consumption-based taxation, often seen as regressive. In contrast, direct taxes like personal and corporate income taxes were frequently softened through exemptions and incentives—undermining the progressivity and adequacy of the tax system.

5. Tax Package Logic and Offsetting Measures

Notably, 94% of Kenya’s tax changes were introduced as part of multi-dimensional tax packages, usually during budget cycles. These packages often offset one another, with tax increases in one area balanced by exemptions in another. For example, a VAT base broadening reform in 2021 was offset in 2022 by new exemptions for medical goods. Such reform patterns dilute the net fiscal impact and complicate ex-post revenue forecasting. The IMF warns against relying on isolated tax indicators, stressing the need to evaluate reforms in the context of entire policy packages.

6. Regional Performance Comparison: Kenya vs Uganda and Tanzania

While Kenya saw its tax-to-GDP ratio decline by over 2 percentage points from 2014 to 2022, Uganda and Tanzania maintained or improved theirs. Uganda, in particular, aligned administrative reforms with tax base expansion and rate increases across several years. Tanzania had a positive net frequency of excise tax changes, often increasing both rates and enforcement. This contrast underscores how policy coherence and institutional alignment can yield tangible fiscal gains, while fragmented or countervailing measures—as in Kenya—lead to fiscal slippage.

7. IMF-Backed Medium-Term Revenue Strategy (MTRS)

In response to these challenges, Kenya has launched its first Medium-Term Revenue Strategy (MTRS), developed with IMF technical assistance. The MTRS aims to raise the tax-to-GDP ratio by 5 percentage points by FY2026/27, focusing on:

• Broadening the tax base
• Reducing tax expenditures
• Enhancing compliance and taxpayer services
  This strategy is anchored within the Extended Fund Facility (EFF)/Extended Credit Facility (ECF) framework and is designed to stabilize public finances while creating fiscal space for development expenditure.

Kenya’s experience highlights a fundamental tension between ambitious tax administration reforms and politically driven tax policy decisions that erode the base. While Kenya remains one of the most active EAC countries in tax reform, its revenue outcomes have been suboptimal, due largely to a reform design that favored short-term relief over long-term sustainability. The IMF rightly emphasizes that administrative efficiency must be accompanied by tax policy discipline. Kenya’s success in reversing its fiscal decline will depend on how faithfully it implements the MTRS and whether future tax packages prioritize adequacy, equity, and coherence over ad hoc political reliefs.