Top earners face more tax pain in Rotich budget plan

Highly paid Kenyans are headed for more tax pain in the coming year when the Treasury is expected to increase income tax bands “to reflect the inflationary impact of annual salary increments.”

Treasury secretary Henry Rotich said on Tuesday that a review of the income tax law to reflect the new reality would come in the next Finance Bill—expected early next year.

Tax experts, however, warned that an Income Tax review remains a hot political issue that will be difficult to implement in an election year. The General Election is set to be held next August.

The planned review follows the Treasury’s recent offer of tax relief to the lowest income earners, who are expected to be spared any fresh pain.

“We want to make the income tax law progressive. We have seen salaries change with inflation while the tax bands have remained the same for a long time. The adjustments we did in the last Finance Bill were just for the lower income earners, but this time we will have more comprehensive changes,” said Mr Rotich, without indicating the extent of the adjustments.

“I do not yet know exactly how the tax bands will shift given that this review is still work in progress, but it should be largely based on the per capita income,” he said.

The income tax law is the only major tax legislation that has not been reviewed comprehensively in the past three years. The government reviewed the VAT Act in 2014, and followed it up with a review of the Excise Duty Act last year.

In the June reforms, Mr Rotich widened the lower tax bands by 10 per cent, meaning that the lowest band of taxable income, which attracts a tax rate of 10 per cent now starts at Sh11,181, up from Sh10,164 previously.

The upper band floor was fixed at Sh42,782.30 per month, from Sh38,893 per month and attracts the top tax rate of 30 per cent.

READ: Salaried workers enjoy income tax relief with new pay bands

There have been calls to review tax rates upwards for high income earners, in order to boost tax revenue from a group that is seen to be capable of absorbing such a rise without erosion of their living standards.

The Institute of Certified Public Accountants of Kenya (ICPAK), a key advisor on economic affairs, has proposed that the tax on salaries above Sh800,000 per month be increased to 40 per cent from the current 30 per cent.

ICPAK at the same time wants the 30 per cent income tax rate paid by top earners to be charged on those earning Sh150,000 and above per month to ease pressure on middle income workers who it says are being weighed down by the tax.

“The upper tax band should fall on individuals earning above Sh150,000. This will free up a lot of disposable income from the majority of the country’s lower income earners who are overburdened by the current tax regime,” ICPAK’s tax workgroup member and EY tax partner Francis Kamau said.

READ: Accountants back bid to overhaul income tax law

The Kenya National Bureau of Statistics defines low-income earners as those spending less than Sh23,670 monthly, middle class (between Sh23,671 and Sh120,000) and upper income over Sh120,000.

The timelines suggested by Mr Rotich for review of the Income Tax Act are, however, being seen as optimistic, especially because the country ia headed into an election year.

“The changes touch on personal incomes, and therefore this is unlikely to be implemented in the next two years because of the election cycle. It also requires stakeholder input, which could take time,” said Michael Mburugu, a partner at consulting firm PKF Kenya.

Mr Mburugu suggested that it would be easier to make incremental changes to the law, and accompany the same with further changes to the other tax laws (VAT and Excise) in order to make a shift towards reducing reliance on income tax for revenue.

Kenya relies heavily on income tax, with the informal sector that has been a key driver of the economy remaining largely untaxed.

According to a report by ICPAK, Kenya’s total revenue significantly increased by 44 per cent from Sh651 billion in 2010/2011 to Sh1.1 trillion in 2014/2015, largely attributed to significant increases in the collection of income tax, which increased from Sh272 billion in 2010/2011 to Sh542 billion in 2015, equivalent to a 50 per cent increase in collection.
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