Ideas & Debate

Employee tax regime needs major surgery to take care of the ‘geese’


Wananchi outside the Kenya Revenue Authority headquarters at Times Towers in Nairobi. PHOTO | FILE


  • System is grossly out of touch with economic circumstances of workers who are the most visible and stable group of taxpayers.

It has been famously said that the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.

If that is indeed the case, the President’s directive to the National Treasury to exempt low income earners from paying taxes on bonuses, overtime and retirement benefits is bound to elicit no hissing at all.

In a country in which the tax bands and the amount of annual personal relief have remained the same for over a decade, the directive has largely been celebrated. However, the move raises important questions.

What overall policy considerations informed it? How will it be implemented administratively to ensure that only those targeted by it benefit? Identifying “low-income earners” and the quantum and nature of their earnings is bound to be a task fraught with difficulties.

It is also necessary to consider the unintended foreseeable consequences of the directive. Almost overnight, a large number of people will have additional funds and the classic dilemma of whether to spend, save or invest these will come into play.

At this stage it is unclear which of these alternative outcomes the technocrats at the National Treasury would prefer and how they intend to “steer” action towards their preference.

Regardless of the option selected, the move will have an impact on several economic factors including inflation and interest rates hence it will be interesting to see if and how these choices have been considered in the wider economic and fiscal policy context.

Despite the good intention behind it, the President’s directive is likely to be as useful as a handbrake on a canoe. Employees are the most visible, stable group of taxpayers in the country.

They have very limited options if any at all, when it comes to tax planning hence they represent a dependable source of tax revenue. For a long time they have therefore been treated as such.

The country’s employee tax regime requires major surgery in form of an overhaul and not merely piecemeal reform. Consider the fact that any employee earning over Sh11,135 per month pays taxes and has the obligation to file tax returns.

Moreover, prior to 2014, a low income earner was defined as any employee earning Sh 29, 316 per month or below. This is merely Sh 9,576 less than the current earnings threshold for the top tax bracket of 30 per cent.

This is grossly out of touch with the current economic circumstances. Seemingly addressing the needs of one class of taxpayers, while remaining silent on all the others is not sustainable in the long term.

We have a stretched middle class that has been hard-hit by inflation, the rising cost of living, and increased levels of consumption taxes and levies over the last two decades.

Additionally, the needs and concerns of the higher income earners ought to be given consideration.

All three categories of earners have a symbiotic relationship and therefore the system in place ought to be based on and uphold the principles of equity.

A more wholesome approach would be to carry out an overhaul of the PAYE system by raising the tax bands to exempt those earning less than Sh25,000 per month from paying taxes and the obligation to file returns. Such a move will eliminate the need for personal relief thereby simplifying the system even further.

This will have the dual benefit of easing the tax burden on the country’s employees and reducing the KRA’s administrative work load.

To consolidate these gains, legislation should be put in place that allows for the periodic review based on inflation and the prevailing economic environment.

Overall, it is commendable that the plight of the most hard-up geese has been considered. We should now look to the collective welfare of the entire flock.

Mr Warambo is an assistant manager with PwC Kenya’s Tax Consulting Services team.