MPs back workers salary cut, halts Covid tax relief

Workers, households and businesses are staring at a tough new year after MPs voted to end income and value-added tax cuts imposed to cushion Kenyans from the impact of the coronavirus crisis.

This will see workers earning more than Sh50, 000 monthly take a cut on their net salaries after the Treasury 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 cost of basic goods like detergents, cooking oil, electricity, airtime and services such as pay TV subscriptions will go up with the reinstatement of the higher VAT, putting pressure on inflation.

Lawmakers last evening defied pressure from manufacturers, employers and business lobbies and passed the Treasury-backed Bill that will see the tax reliefs introduced in the wake of Covid-19 scrapped from January 1.

MPs approved the Tax Laws (Amendment) (No 2) Bill 2020 at a special session called to fast-track debate and approval of the proposed law that seeks to reinstate the higher taxes.

The Bill now waits the signature of President Uhuru Kenyatta to become law, which will cut workers net pay in a year when employers are not likely to increase salaries to protect earnings hit by the pandemic.

“This is a very big debate and we would rather stand here to say people should pay taxes that existed prior to Covid-19 than to take the populist route that people should pay zero or reduced tax because government must provide services,” Gladys Wanga, who chairs the Finance and National Planning committee said.

“We have approved these amendments and call on you to take the path that is not populist to ensure that government has sufficient revenues to service projects, pay bursaries and develop infrastructure in schools to ensure social distancing,” the Homa Bay Woman Representative said.

The MPs backed the committee’s position. The Treasury had raised an alert over delays in paying civil servants’ salaries and threatened to suspend undisclosed critical services amid a cash crunch triggered by the coronavirus economic hardships.

Tax collections for the first five months to November dropped by Sh100.72 billion to Sh527.7 billion due the coronavirus-related disruptions.

The passage of the Bill means that VAT will return to 16 percent from 14 percent while businesses will pay corporate tax of 30 percent instead of 25 percent.

The maximum personal income tax will be reinstated to 30 percent from the current 25 percent.

Small traders like salons and groceries 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 tax reliefs were aimed at lowering the cost of basic items while providing workers with additional income to spur consumption and boost retailers’ flagging sales.

This was the first time in seven years that Kenya will be reducing VAT after including more commodities under this tax category in 2013. Raw foods are exempted from the tax.

Salaried workers will get up to Sh4,856 monthly after the State widened the income tax bands, but this will not be adequate to cover for higher taxes for those earning more than Sh50, 000.

Kenya is slowly recovering from effects of the infectious disease, which led to job cuts and unpaid leave for retained staff as profitable firms fell into losses.

A number of institutions, including Kenya Association of Manufacturers (KAM), Kenya Private Sector Alliance (Kepsa) and Kenya Bankers Association (KBA) as well as top accounting firms PwC and KPMG petitioned MPs to extend the tax reliefs.

“You are creating taxes that will drive out all businesses. You are going to finish the remaining companies,” KAM’s Job Wanjohi said, adding the Bill will kill the “goose that lays the golden egg.”

Consumers Federation of Kenya (Cofek) said it was “irrational and unacceptable to revert to higher taxes as if Covid-19 ended three to six months ago.”

The Treasury says 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.

The decision to end the tax reliefs came amid fears that Kenya had bowed to pressure from the International Monetary Fund (IMF) to scrap them to protect the country’s revenue collection targets.

The IMF had urged the government to reinstate the higher taxes once the impact of Covid-19 eased, stating that the cuts would cost the Kenya Revenue Authority (KRA) and compromise the State’s ability to deal with emergencies and spending on development projects.