New budget proposals leave workers, employers worse off

Some of the changes made to the Finance Bill by a committee of the National Assembly have left workers and employers in a worse position.

This is after the committee removed the cap of Sh5,000 on the housing deduction and converted the mandatory contribution into a levy, meaning workers will not get back their money after seven years as it has been proposed in the Bill.

Read: What's the actual size of Kenya's new Budget?

Although the Finance and Planning Committee made a lot of concessions in their report, the overall impact has been to increase tax revenues flowing into the State coffers by converting the contribution for affordable housing into a levy.

Kuria Kimani, the chair of the Finance and National Planning Committee, noted that retaining caps would have been discriminatory, with those earning less paying their rightful share of three percent while those earning more would pay less.

“We have also established that these funds will go into the consolidated fund Mr Speaker as per the PFM Act,” Mr Kimani said.

He said the levy has been reduced from three percent to 1.5 percent, and will be paid by both employer and employee.

This means that an employee who is earning Sh500,000 a month will pay Sh7,500 with his employer matching. This is an increase of three times from the proposed cap of Sh2,500.

The new levy will provide the government with an additional Sh39.15 billion in taxes that will go into the national coffers, and which will not be refunded to the contributors.

The money will be collected from around three million wage employees in both public and private sectors as at the end of last year.

Initially, workers were to contribute three percent of their monthly basic salary to the Housing Development Fund, with the employers matching the contribution.

The contribution, which was capped at Sh5,000 were to be refunded in seven years should an employee not get a house.

As a result, Mr Kimani said that the additional revenues that would be generated would rise to more than Sh300 billion.

This is six times the additional taxes that was to be generated in the current Finance Act, 2022.

In the Finance Bill, 2023, the government has projected that it will generate an additional Sh211 billion.

Most of the additional revenues will come from the additional eight percent on petroleum products.

The Bill has far-reaching tax proposals that have attracted opposition.

There is also an enhanced turnover tax of three percent on small businesses that make sales of Sh1,389 a day (Sh500,000), which MPs want to be retained at Sh1 million.

Employees with a monthly basic salary of more than Sh500,000 will carry a heavy pay as you earn (PAYE) of 35 percent from 30 percent.

Excise duty on fees charged for money transfer services such as Safaricom’s M-Pesa has also been retained at 12 percent.

The Bill had proposed to increase it to 15 percent, raising fears of rolling back the progress the country has made in financial inclusion.

Read: Budget proposals that will hit you if effected as drafted

The government has argued that it wants to collect more revenues as part of its fiscal consolidation in which it wants to reduce its borrowing appetite.

“We are in an environment where we cannot borrow too much money externally given the Russia-Ukraine war and the way the financial markets are especially, raising the US interest rates,” said Martin Masinde, the Director of Parliamentary Budget Office, an advisory agency for lawmakers.

“So, even if we are fighting this Finance Bill, we require domestically to raise some revenues, albeit the challenges of prices,” added Dr Masinde.

Treasury CS Njuguna Ndungu will on Thursday read a budget of Sh3.68 trillion.

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