More pain for Kenyans: 'Hidden' ways tax plan will raid pockets

Ruto tax plan
Photo credit: Nation Media Group

What you need to know:

  • While most of the attention and controversy has been around the proposed Housing Fund Levy, the Finance Bill 2023 has many other proposals to collect more taxes from Kenyans.
  • Even as Kenyans complain of a high cost of living, the government plans to double VAT on fuel, which will lead to higher prices for essential goods and services.

Small business owners, workers, motorists, employers, manufacturers and transporters face steep tax increases in the coming months if President William Ruto’s administration gets support from Parliament to squeeze an extra Sh200 billion from Kenyans’ pockets.

The window for public petitions on proposals in the Finance Bill 2023 closes today, putting the fate of the recommended tax increases entirely in the hands of members of Parliament.

National Treasury Cabinet Secretary Njuguna Ndung’u is scheduled to read the Budget in Parliament on June 15, during which he will assign effective dates for the new taxes.

Besides the controversial 3 percent Housing Fund Levy, which has formed the bulk of the debate regarding the Finance Bill, the government has proposed a lot more tough tax measures that will hurt the pockets of millions and bank accounts of nearly all businesses.

The proposal with potentially the biggest hit on taxpayers should it get MPs’ support is the planned doubling of Value Added Tax (VAT) on fuel —from 8 percent to 16 percent. This will automatically raise fuel prices and have an immediate knock-on effect on the cost of goods and services. The government targets to raise an extra Sh50 billion from this tax increase.

Even the often mentioned mama mboga and boda boda riders are not spared in President Ruto’s tax plans.

The Bill proposes to lower the net for businesses that pay turnover tax from the current Sh1 million to Sh500,000 of annual revenues. The businesses will be taxed at 3 percent on revenues, three times more than the 1 percent they have been paying since 2020 when the rate was lowered to cushion small enterprises from the Covid-19 pandemic shocks.

This proposal directly hits small business persons, including shopkeepers, who eke out razor-thin profit margins from their turnover.

The new classification means small businesses making as low as Sh1,344 daily sales, or Sh500,000 per year in revenue, will now be eligible to pay tax regardless of whether they make a profit or not.

Coupled with a proposal in the recently passed National Tax Policy to place Kenya Revenue Authority (KRA) agents in markets and street stalls to enhance collections, indications are clear that most small businesses that have been out of the tax bracket will now feel the pinch.

In its 2023 Budget Policy Statement, Treasury indicated that the informal economy is assessed to have a Sh2.8 trillion taxable base that is currently not within KRA’s net.

“Although this proposal aims to boost tax revenue, there is a concern that it could inadvertently drive informal businesses even further towards adopting strategies to evade compliance,” the Institute of Economic Affairs stated in its analysis of the new tax measures.

The Bill also proposes to graduate businesses whose annual turnover exceeds Sh15 million into corporate tax, which is slapped at a significantly higher rate of 30 percent, which will dent their net incomes. The businesses are paying a one percent turnover tax.

Also targeted are millions of consumers of beauty products including fake beards, human hair, wigs, eye lashes and eyebrows, which will be slapped with a 5 percent excise tax.

Byron Muga sells sufurias in Gikomba market in Nairobi.

Byron Muga sells sufurias in Gikomba market in Nairobi. The Finance Bill 2023 contains a number of proposals that will hit Kenyans across the economic spectrum hard, including increasing VAT on fuel which is likely to push up prices of goods and services.

Photo credit: Bonface Bogita | Nation Media Group

The Ruto administration also proposes to introduce a 10 percent tax on imported cell phones, and to raise tax on mobile money transfer services from 12 percent to 15 percent, a service used by millions of Kenyans to send and receive money daily.

With a proposal to introduce 15 percent withholding tax on revenue generated from digital content, Kenya’s nascent online creative industry will also take a hit.

Workers earning at least Sh500,000 monthly will now be taxed a maximum 35 per cent Pay-As-You-Earn, from the current graduated maximum rate of 30 per cent on basic salary, should the Bill pass.

While President Ruto has billed his proposals as the way to grow taxes by at least Sh200 billion in the July 2023 to June 2024 financial year, many have voiced their concerns on the impact it will have on businesses and individual incomes.

“The Finance Bill 2023 risks bleeding Kenyans dry through taxation. The proposed taxation measures are injurious to the Kenyan population,” said Ms Diana Gichengo of The institute for Social Accountability on Monday.

Tax professionals, business organisations and civil society groups have faulted the Bill, arguing that it will blunt consumption and worsen the cost of doing business, but the government has been adamant on the need for more revenues to run operations and repay public debt.

Audit firms have questioned the proposal to slap 16 percent VAT on insurance compensation, which they argue is a replacement of value after a damaging event and thus taxing it amounts to double taxation.

Manufacturers have also raised the red flag over the risk of capital flight to the tune of $1 billion (about Sh138 billion) in the cement, steel and paper industries if the proposal to impose the new Export Promotion and Investment Levy sails through.

The Kenya Association of Manufacturers (KAM) says the levy risks pushing multinationals out of Kenya in favour of more competitive neighbouring economies, with at least 70,000 direct jobs at stake.

“The levy will create trade diversion in favour of neighbouring countries and promote investment in Comesa (Common Market for Eastern and Southern Africa) countries such as in the case of Cadbury and Colgate. If Kenya is not careful, the country will become the supermarket of the region,” KAM indicated in its presentation to Parliament’s Finance Committee.

The proposed mandatory 3 percent monthly deduction on workers’ basic salaries, equally matched by the employer and capped at Sh5,000, has elicited strong criticism.

“The introduction of these deductions will further hit the take-home and will be a burden to employers with an increased cost of employment that may lead to potential reduction in employment opportunities,” Ms Shreya Shah, a senior tax manager at PWC said.

The Federation of Kenya Employers has also opposed the mandatory contribution, which they say will increase the cost of basic wages without justification.

“The requirement is discriminatory to the formal employers who comprise 20 percent of employment whereas the same has not been levied against the informal sector,” the federation said.