Traders in the informal sector who fail to pay the monthly 1.5 percent housing levy risk having their bank accounts frozen and their PINs blocked in a new push to boost compliance.
The Kenya Revenue Authority (KRA) is expected to launch a crackdown on defaulters, notably in the informal sector where traders are not paying the levy and businesses such as bars, salons and corner shops are not remitting deductions from their staff pay.
The government began enforcing deductions of 1.5 percent of the gross salaries or income of formal and informal workers last July to fund the construction of affordable houses for low-income earners.
But compliance by informal sector workers has trailed that of salaried employees whose employers deduct and remit the levy to the Kenya Revenue Authority (KRA).
Now, the Affordable Housing Board, the agency mandated to oversee the development of houses and their off-take, and the KRA are planning a crackdown on defaulters in the largely unregulated informal sector.
The small traders are expected to pay 1.5 percent of their gross income—total revenues minus the cost of goods sold.
Businesses in the informal sector are also expected to deduct the levy from their employees’ pay and match it before remitting it to KRA.
The taxman is set to deploy hundreds of spies to conduct a series of background checks and on-site visits to businesses.
Affordable Housing Board’s acting chief executive, Sheila Waweru, said contributions from the informal sector have been slowly coming through.
“There are people in the informal sector who are already contributing, just that we don’t have everybody contributing mainly because it is about self-declaration of your income. This is something that we are trying to work on with KRA and ensure that everybody pays,” Ms Waweru said in an interview.
“If you are not truthful about your business, your income and the people you have employed, then it also becomes difficult on our end and that’s when enforcement comes in. Whatever mechanism they [KRA] are using to collect the taxes, is the same mechanism for the housing levy because that is the same income from which you are required to pay the levy.”
Section 42 of the Tax Procedures Act empowers the KRA to deactivate PINs, issue travel bans, collect cash due from the taxpayer’s banker and prosecute if the taxman has reasonable grounds that he will default.
The Affordable Housing Act 2024 requires employers to deduct 1.5 percent of gross monthly pay to employees and match the contributions towards the housing levy.
An earlier law had left out informal sector workers from paying the levy, triggering discrimination concerns.
The levy sparked an outcry from the opposition and a large section of Kenyans, who feel burdened by the raft of taxes introduced under President William Ruto.
It was implemented nearly at the same time with the controversial healthcare insurance levy, which will require people to contribute 2.75 percent of their monthly salaries to a social healthcare programme.
Workers and traders pay the levy on a single income, exempting side hustle.
KRA has listed small traders in informal settings, alongside landlords and high net-worth individuals, as hard-to-tax sectors despite having high potential for expanding the taxpayer base and growing revenue, signifying the tough task ahead.
“They [KRA] have foot soldiers who walk around even in the estates where businesses are and they will come to your premises to see if you are making money, if you are registered under KRA and if you’re paying taxes and the levy,” Ms Waweru said.
The KRA is largely using 1,406 paramilitary revenue service assistants to help ramp up compliance levels amongst traders operating in the informal space.
Contributions from the housing levy stood at Sh54.16 billion in its first year to June 2024, according to the Treasury, narrowly missing the target of Sh54.58 billion.
The deductions from employees — whether on permanent and pensionable terms or contract-based engagements — were initially declared unconstitutional by the courts largely for being discriminatory and creating unequal principles under Employment law.
This was after they were applied to workers in formal employment only.
That prompted lawmakers to enact the Affordable Housing Act 2024 to comply with the ruling of the courts. President William Ruto signed the Act into law on March 19, enabling KRA to resume the deductions that had been suspended in January.
The law requires workers in the informal sector to also pay the housing levy at the rate of 1.5 percent of their gross monthly earnings to fund Dr Ruto’s pet project, but modalities for collections have not been clear.
The Board gets monthly reports from the KRA detailing the total contributions to the affordable housing fund’s accounts at KRA.
The monthly reports, Ms Waweru maintains, give indications that there are remittances from the informal sector, added that her team was yet to work out specific numbers.
“There are people in the informal sector who are paying because without paying, it almost becomes impossible for you to even get a housing unit,” she said.
“One of the requirements for you to own a housing unit is also that you must have a tax compliance certificate. If you don’t have that then opportunity is not available to you.”
The Ruto administration has set a goal of building 250,000 houses every year on public land using funds from the levy.
Currently, the affordable housing board is selling some 4,888 units comprising studios, one-, two- and three-bedroomed units in different parts of the country.
