Salaried workers will get up to Sh4,856 monthly after the State widened the income tax bands to soften the blow from withdrawal of reliefs introduced in April to cushion households and businesses from the economic shocks of the Covid-19 pandemic.
The changes are contained in the Tax Laws (Amendment) (No. 2) Bill, 2020 that seeks to expand Pay-As-You-Earn (PAYE) bands and offer 100 percent relief for Kenyans earning a monthly income of up to Sh24,000.
The proposed law, which is before Parliament, comes as the Treasury prepares to revert to the previous maximum PAYE tax charge of 30 per cent from the stop-gap 25 per cent.
Top earners with a monthly pay of more than Sh1 million stand to lose Sh52,229 of their income starting January when the old terms are reinstated.
Workers on Sh50,000 monthly pay stand to lose up to Sh4,241, while those earning Sh100,000 and Sh150,000 stand to lose Sh7,229 and Sh9,717, respectively in tax reliefs they have enjoyed since the Covid-19 relief package was implemented from May.
The Treasury is seeking to widen the income tax bands that will see the maximum duty of 30 percent apply from a monthly pay of Sh74,000, up from Sh47,060.
This will earn workers a benefit of up to Sh4,856, softening the impact for top earners.
The changes will cushion more than 1.74 million workers from net income loss when the special reliefs are withdrawn next month.
About 63 percent of Kenya’s 2.8 million workers earn less than Sh50,000.
“The Bill also seeks to amend the Income Tax Act to amend the individual top tax rate and resident corporate tax rate,” says the Bill.
“It is proposed to increase the top individual income tax rate and corporate income tax rate on resident companies from 25 percent to 30 percent.”
The lower tax band, which attracts 10 percent tax, will permanently move to Sh24,000 as opposed to Sh12,298 that was in place before the April adjustments. This will offer 100 percent tax relief to workers earning less than Sh24,000.
Each of the next three tax bands, which are taxed at between 15 percent and 25 percent, will now move from Sh11,587 to Sh16,667.
The Treasury changes will see the higher band that attracts the maximum 30 percent tax set on monthly pay above Sh74,000 from Sh47,060.
Industries and other businesses have since cut down on their activities in response to the infectious disease, leading to job cuts and unpaid leave for retained staff as profitable firms move into losses.
Treasury Cabinet Secretary Ukur Yatani said the tax reliefs introduced in the wake of Covid were no longer sustainable owing to persistent revenue collection shortfalls amid a subdued economic activity which affected the implementation of government programmes.
For instance, official data shows that in the first four months of the current financial year ending October, the government missed its revenue collection target — including cash from donors — by Sh65.4 billion. Cumulative revenue amounted to Sh505.3 billion in the July-October period against a target of Sh570.7 billion.
“The shortfalls in government revenues are as a result of suppressed economic activities as a result of the pandemic, as well as the tax reliefs implemented in April 2020 to cushion people and businesses from the adverse effects of the pandemic,” Mr Yatani told a meeting to kick-start budget preparations for the year starting July 2021.
The revenue shortfalls against the background of rising expenditures have widened the budget deficit, which is bridged through borrowing.
Provisional data by the Treasury shows the deficit hit Sh223.7 billion in the first four months of the current fiscal year, marking a growth of Sh89.9 billion or 67.2 percent, compared with a similar period last year.
Mr Yatani last month raised the full-year budget deficit forecast for this fiscal year to 8.9 percent (Sh1 trillion) of gross domestic product from 7.5 percent (Sh841.06 billion) in June.
To boost revenue, the corporation tax for resident firms is also set to revert to 30 percent from 25 percent, while small traders will also start paying tax at the rate of three percent from one percent of their gross sales when the Covid tax reliefs are scrapped. The value-added tax (VAT) will go back to 14 percent from 16 percent.
Mr Yatani expects the removal of the tax holidays and “the gradual opening up of the economy to reverse this (revenue shortfall) trend in the second half of the financial year”.