Kenyans hit hard as new tax rates kick in - Beaking Kenya News

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Friday, 1 January 2021

Kenyans hit hard as new tax rates kick in


Tough times await Kenyans, more so salaried couples, with the new tax measures recently enacted by President Uhuru Kenyatta kicking in on New Year's day.

The Tax Laws (Amendment) Bill, 2020 passed ahead of Christmas Day will pile more pressure on households, with the increased minimum taxation on wives.

Salaried couples will see their net income drop drastically because wives will now be taxed 10 per cent more.

In the new tax regime, anyone earning above Sh32,300 will be charged 30 per cent Pay as You Earn.

Those earning less than Sh24,000 will be exempt from tax while those earning between Sh24,000 up to Sh32,000 will pay at 25 per cent.

A wife’s employment, professional and self-employment income tax rates will be 10 per cent for earnings above Sh24,000 per month.

Those who earn up to Sh32,000 will be charged 25 per cent and 30 per cent for earnings above Sh32,333.

The government had initially sought to expand the lower tax band to provide for 30 per cent to apply from Sh74,000 from Sh47,060.

But faced with a cash crisis and dwindling revenue streams, the move changed as the government sought to net more income earners in the upper tax band.

KNBS data for the third quarter of 2020 showed that 17.6 million Kenyans are employed, of which close to three million will be moved to the new tax regime.

With the reliefs coming to an end, Kenyans will get less pay as companies are yet to reverse pay cuts imposed after the coronavirus outbreak.

The only hope is an increase in tax relief to Sh28,800 from the current Sh16,890, but the longevity of the same is in doubt. 

The reduced Value Added Tax on goods and services to 14 per cent has ended, setting the stage for a price increase pegged on the old rate of 16 per cent.

More trouble awaits loss-making companies as they will be required to pay a minimum tax at the rate of one per cent of their gross turnover.

The minimum tax shall apply to all persons or companies whether they are making profits or losses.

The National Assembly Finance committee chaired by Homa Bay MP Gladys Wanga said the bid was to “expand the tax base and ensure companies that make perpetual losses contribute towards enabling the government in the provision of services”.

“The rationale of this tax is that even where companies are making losses, they continue enjoying facilities such as infrastructure – whose cost of construction continue to be serviced by the government,” the committee said in its report on the tax laws.

Apart from individual top tax rate rising to 30 per cent and loss-making entities paying minimum tax, companies will also be charged 30 per cent corporate income tax.

The tax rate was reduced to 25 per cent in April last year to cushion employers from the adverse effects of the Covid-19 pandemic and to keep their staff in the payroll.

Non-residents will be charged tax on dividends for up to 15 per cent in what is likely to hit foreign investors and by extension on jobs created by such firms.

Treasury seeks to raise Sh5.7 billion from the minimum tax; Sh28 billion from reversal of top individual income and corporate tax rates to 30 per cent.

The measures have sparked outrage with tax experts, lawyers and business leaders pointing out that the new tax regime will impact the economy negatively.

Cotu in a statement from office of secretary general Francis Atwoli said it was insensitive of the government to introduce punitive tax measures at a time when many workers have lost employment as a result of the pandemic.

The trade unions cited concerns that only 2.5 per cent of salaried Kenyans earn above 100,000 and the majority of about 80.5 per cent earn below Sh50,000.

"As much as we understand that the government is struggling to balance between saving the economy and surviving through the pandemic (including the health crisis), we believe that there are alternative ways the government can use to meet its obligations without being insensitive to the working poor," Cotu said.

Federation of Kenya Employers boss Jaqueline Mugo told the Star that the "withdrawal of the tax reliefs will make a bad situation even worse for both ordinary citizens and business."

"These measures were aimed to cushion Kenyans, stem job losses and business collapse as we grapple with Covid-19. So what has changed? We are still at the height of the pandemic so the timing is unfortunate. Employers had asked for the relief measures to be maintained at least till June 2021 when the current financial year ends," Mugo said.

The Law Society of Kenya, in a memorandum to Parliament, said the introduction of minimum tax is likely to hit Kenya’s competitiveness as a business destination.

They further argued that the rate of one per cent is higher compared than in other jurisdictions and should be reduced to 0.3 per cent.

Lawyers also sought that the tax measure be deferred to 2023 in order to allow businesses to recover from the negative impact of Covid-19.

Kenya Association of Manufacturers wants a minimum tax at 0.25 per cent saying the one per cent rate “is extremely high and would affect business”.

Other jurisdictions such as Nigeria Tanzania, and Ivory Coast have minimum tax rates of below 0.5 per cent.

KAM’s Phylis Wakiaga said additional taxes would impact negatively on the economy as corporate taxpayers are still dealing with huge losses occasioned by Covid-19.

She said income tax rates were better retained at the current rates.

“The economy is yet to recover from the effects of the pandemic and the extra income still necessary to cushion and sustain household needs.”

Kenya Private Sector Alliance fought the minimum tax saying it should have been abolished.

The private sector holds it would be used as a blanket tool to punish firms that cook their books and pay little or no tax.

Kepsa said: “The government should extend the relief to its working citizens until the economy stabilises or shows signs of recovery.”

Accountants body ICPAK opposed the introduced minimum tax and instead sought the collection of additional revenue through increase in VAT.

Kenya Bankers Association said the minimum tax is regressive and anti-business, saying it claws back on existing tax incentives.

KBA is concerned that the amount would be pegged on turnover as opposed to taxing profits and wants the proposal to apply to entities that have made tax losses in three consecutive years.

Cofek said the taxes would not do any good as “consumers are still in the middle of the Covid-19 pandemic and are struggling to adjust considering the higher unemployment, high food prices, transport costs and high energy costs.”

“The corporate tax should be suspended and introduced in the finance bill for financial year 2021-22,” Cofex advised.

“It is therefore premature, ill-advised, irrational and unacceptable to revert to higher taxes.”

Kenya National Chamber of Commerce and Industry said more than 50 per cent of all sectors in the economy are projected to make losses.

“They will be denied the ability to carry forward the losses through the introduction of minimum tax,” KNCCI said.

Treasury boss Ukur Yatani recently asked Kenyans to adapt to the new reality adding that the government is committed to cushion them from painful effects of the pandemic.

The CS, in an interview with the Star, said the fall in export and import tax earnings, which are a major revenue stream, had posed a tricky situation.

President Kenyatta is banking on a proposed Sh930 billion post-pandemic war chest to restore businesses and continue cushioning Kenyans.

A Sh54 billion Covid19 economic stimulus package is being implemented in the current budget.

Other jurisdictions are working to cushion their citizens, like in the United States where Congress on December 22 passed a $900 billion pandemic relief package.

The UK, media reports show, has spent hundreds of billions on measures to support businesses and jobs and fight the pandemic.

Germany reduced VAT from 19 per cent to 16 per cent and rolled out a $155 billion stimulus package in June.

France unveiled a 100 billion Euro stimulus plan to kick-start its economy while South Africa rolled out a package of $30 billion.

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