The government has bowed to pressure from the International Monetary Fund (IMF) and agreed to do away with income tax, value-added tax and sales levy cuts that were introduced during the Coronavirus disease pandemic.
Treasury Secretary Ukur Yatani on Wednesday told Parliament that once the Covid-19 pandemic ends, the government will have to review the tax breaks so as to close the gap between the Budget and expected revenues estimated at Sh840 billion.
“We shall closely monitor the economic impact of Covid-19 and once the economy recovers, we will review our fiscal plan, including tax measures to strengthen public finances to sustainably fund our development agenda,” Mr Yatani said in his Budget speech.
There were minimal tax increases on basic items to fund the 2020-2021 Budget amid pressure for the Kenya Revenue Authority (KRA) to raise an additional Sh131 billion to bring tax collection to Sh1.62 trillion.
The IMF had urged the government to reinstate the higher taxes once Covid-19 eases, stating that the cuts will cost KRA and compromise the State’s ability to deal with emergencies and spending on development projects like roads, power and water infrastructure.
The Bretton Woods institution asked the Treasury to reverse its earlier stand of delinking the tax reliefs to the end of the pandemic, meaning that Kenyan workers and companies will stop enjoying them once the virus has been contained.
Mr Yatani said the tax cuts will cost Kenya Sh172 billion and he is hoping to fill the gap by clawing back tax incentives through the Finance Bill 2020.
The incentives are expected to generate Sh38.9 billion, which will account for 22.6 percent of the foregone taxes.
The State’s ability to deal with unforeseen spending has been weakened given that civil servants’ salaries, debt payments and allocation to counties already eat up 94 percent of government revenue.
The IMF did not comment on the reduction in corporate tax from 30 percent to 25 percent, a reduction that was meant to ease companies’ cash flow at a time when they are plagued with lower sales.
The relief excluded workers earning less than Sh24,000 from paying taxes and increased the personal relief for all workers to Sh2,400 from the initial Sh1,400.
The Treasury lowered the maximum income tax rate to 25 percent from 30 percent, which initially applied to workers earning more than Sh47,000. This created an additional income of Sh4,241 monthly for those earning Sh50,000, Sh7,229 for those earning Sh100,000 and Sh9,717 for those with a salary of up to Sh150,000. Employees on Sh500,000 pay will get Sh27,229 as relief.
Top earners on a gross monthly salary of Sh1 million saw their take home increase by Sh52,229, translating to an income increment of about seven percent. Lawmakers agreed to lower the three percent tax levied on small and mid-sized traders’ sales to one percent, a move that looks set to ease the pain for enterprises. Local companies are also paying a lower tax of 25 percent on their profits from 30 percent.
The tax changes were aimed at lowering the cost of basic items while providing workers with additional income to boost consumption. This is expected to boost traders and retailers’ flagging sales.
The Treasury says economic growth could fall to 2.5 percent in 2020, but may go lower to 1.8 percent, compared with 5.4 percent growth a year earlier
The IMF has also raised Kenya’s risk of debt distress to high from moderate due to the impact of the Coronavirus crisis
Kenya’s debt stood at 61.7 percent of GDP at the end of last year, up from 50.2 percent of the end of 2015.
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