Brace yourselves for higher income tax and VAT in January

National Treasury CS Ukur Yatani

National Treasury Cabinet Secretary Ukur Yatani addresses the media in Nairobi. He has told State corporations to tighten their financial belts. 

Photo credit: Lucy Wanjiru | Nation Media Group 

What you need to know:

  • An increase in taxes comes with a rise in the cost of basic goods and services.
  • The government also hopes to raise more cash by taxing digital transactions.

Brace for higher monthly income tax and increase in food and fuel prices in 2021 as the Covid-19 relief comes to an end next month.

National Treasury Cabinet Secretary Ukur Yatani on Wednesday said the monthly Pay-As-You-Earn (Paye) deducted from salaried employees will revert to 30 per cent from 25 per cent in January.

The government reduced Paye to cushion millions of workers from the economic effects of the coronavirus pandemic.

The government is also expected to revert Value Added Tax (VAT) to 16 per cent from current 14 per cent, meaning the prices of fuel, food, drugs and other basic commodities will shoot up. 

Companies will go back to paying corporate tax at the rate of 30 per cent from the current 25.

Mr Yatani said the measures are intended to increase the country’s revenue. 

“The government will continue to review the prevailing economic situation and institute measures that ensure we protect lives and livelihoods while upholding a stable macroeconomic environment,” the CS said after launching public sector hearings on the 2021/22 financial year budget in Nairobi. 

An increase in taxes comes with a rise in the cost of basic goods and services, meaning disposable incomes will fall.

Also to be scrapped is the provision that saw those earning less than 24,000 exempted from taxes. 

He said the government has cut this year’s national economic growth outlook to 0.6 per cent. 

The CS added that the government will make a decision in January on whether to join the controversial International Monetary Fund (IMF) support programme.

Tough times

He told government ministries, departments and other agencies to brace themselves for tough times, adding their budgets will be trimmed to reflect realistic projections.

“Considering the tight resource envelop, sectors are required to scrutinise their proposed budgets and ensure strict adherence. We have heard of cases where accounting officers and senior staff manipulate budgets. That will not be entertained,” he said. 

Noting that Kenya’s economic terrain remains rough, Mr Yatani said the government plans to limit borrowing.

He said the 2021/22 budget deficit would be filled through net external financing of 3.2 per cent of GDP and net domestic financing of 3.8 per cent of GDP.

“It’s not going to be easy because we have been hit by a shock not experienced before: the pandemic, the expenditure pressures and the low revenue performance. There will be limited scope for borrowing. Our only option is to reduce expenditure,” he said. 

“We are going to rein in on ministries, departments, agencies, State corporations and county governments on pending bills,” he said. 

Mr Yatani added that the government began experiencing pressures to deliver on its promises even before Covid-19 pandemic.

“We have not achieved sustainable financing of critical development programmes because of the pandemic,” he said.

The IMF projects that the East African economy will grow by a percentage this year, down from 6.2 per cent in the last financial year.