What you need to know:
- The net effect will be to see high earners shoulder the biggest burden of keeping the government afloat.
- National Treasury Cabinet Secretary Ukur Yatani has defended the new tax rates.
The government has hit salaried workers with a hidden tax increase, passed by Parliament at the last minute and signed by President Kenyatta last week.
In what is set to be a painful beginning of the year, the National Treasury has revised the tax bands for salaried workers, which will see them pay a maximum 30 per cent tax on any earnings above 32,333.
To soften the blow, the government has retained the 100 percent tax relief for those who earn less than 24,000.
The net effect will be to see high earners shoulder the biggest burden of keeping the government afloat having run out of the headroom to borrow.
Before Covid-19 struck, the 30 per cent maximum tax was being charged on amounts above Sh74,000. Lowering the tax bands to Sh32,333 will bring nearly half of the working population into this maximum tax rates.
Treasury Cabinet Secretary Ukur Yatani defended the new rates, arguing that simulations by his office had convinced even Parliament that no Kenyan will pay more taxes than what they were paying before Covid-19.
“We reduced on the categories from five to three and there is no one who is going to pay more than what they were paying before Covid-19. Our simulations show that under the new tax rates, all categories will be paying less by at least Sh3,000,” Mr Yatani said in a phone interview.
The CS shared his simulations with the Nation to back up his claims. From the simulations, the Pay As You Earn (PAYE) tax increases significantly under the new bands, but with a relief of Sh28,800, up from Sh16,896, the actual amount paid in tax is less. It is not clear how long the relief will be retained.
Tax experts say there is no way the bands will be reduced to that level and still end up with more money in the pocket.
Nikhil Hira, a tax partner at Deloitte, said the new taxes would destroy the little gains made in pulling the economic out of the crisis by loading all expenditure gaps on the taxpayer.
Cushioning the taxpayer
“What we are trying to do here is to get the taxpayer to pay for the gap in the budget. I don’t understand the thinking of the government on this one other than to say they are short of money,” Mr Hira said.
He said the government has done the exact opposite of what it promised on cushioning the taxpayer to face the Covid-19 nightmare.
“To put it all on the taxpayer would be crazy,” he said adding that there is also a lot of confusion on the new corporation taxes after the government said it will only apply from April 2020. He said instead of punishing the taxpayer, the government should look at its expenditure: “Treasury should look at where to cut back and deal with waste in government. Increasing taxes this way will kill the economy.”
Kenya uses what is known as the graduated scale to calculate tax on salaries. Any amounts below Sh24,000 attract the minimum tax rates of 10 per cent, but due to the relief, which can easily be taken away, they end up paying nil taxes in this band.
Higher rates kick in afterwards in proportion to your pay in a policy that allows those who earn more to pay more taxes.
The new law comes with just three tax bands from the initial five. Now, it will just be 10 per cent for the first 24,000, then 25 percent for the next 8,333 and thereafter the maximum 30 percent.
Before Covid-19 tax relief s were unveiled, five tax bands helped stagger PAYE to soften the blow before the highest tax rates kicked in.
Away on holiday
Kenya Revenue Authority (KRA) will issue tax guidance to stakeholders early in the year on the changes that caught even audit and tax firms by surprise.
Tax experts were away on holiday and were not immediately available to explain the effect of the new bands on payrolls.
Kenya National Bureau of Statistics (KNBS) data released last week shows nearly half of the 2.92 million workers in the formal sector took home more than Sh30,000 last year.
The data shows that 74.58 percent of formal sector workers earn below Sh50,000, and this explains why the government chose to lower the tax band from 74,000 to capture this group.
The KNBS data shows that, by Quarter 3 of 2020, Kenya had an adult working population of 19 million. From this, 17.6 million are employed.
If the government succeeds in bringing most of these people into the maximum tax rate, then income tax will emerge as the biggest cash cow for the government as it struggles to raise taxes to plug its revenue shortfalls at a time when it is nearing its borrowing limits.
The changes are a slap on the face of Kenyans as the government had said it was only reversing the taxes back to what they were before Covid-19, only for it to sneak in higher taxes.
Surviving on pay cuts
It will also be painful for Kenyans who are surviving on pay cuts and have to deal with school fees and support kin who have lost their jobs.
The President’s signing into law the Tax Laws (Amendment) (No. 2) Bill 2020 last week followed the passage of the Bill in the National Assembly’s special sitting session. The Bill seeks to reverse the Covid-19 tax relief measures.
The tax laws will increase the corporate income tax by 20 percent (from 25 per cent to 30 per cent) with effect from January 1. Mr Churchill Ogutu, the Head of Research at Genghis Capital, says in his analysis of the new tax measures that he estimates ‘other income tax’ stream target at Sh175.9 billion.
There is also the minimum tax to be paid by all small companies and businesses on their gross earnings at the rate of 1 percent.
National Treasury estimates to realise Sh5.7 billion from the minimum tax revenue stream that will also be effective from January 1. Consumers should also start preparing for higher prices of household goods with the Value Added Tax (VAT) returning from 14 to 16 percent.
And it is not just the workers the government is going after to shore up its drying coffers in the midst of huge expenditure needs. If you own a commercial vehicle, then you must be prepared to pay upfront in January the advance tax or risk not having your licence renewed.
KRA has already written to vehicle owners to remind them of changes in the payment of taxes in the New Year.
“Advance tax is a tax payable under section 12A of the income tax act by registered owners of commercial vehicles, it is further operationalised by legal notice 52, (2012) of the income tax act which outlines and lays out procedures and regulations of the same,” the notice said.
“Advance tax for year 2021 is due for payment on or before January 20. You are therefore required to pay for all vehicles owned by you as at December 31,” the notice says.
The amount due is calculated at the rate of Sh1,500 per ton load.