Public servants, including Members of Parliament, will be exempted from paying tax on reimbursements for expenses incurred during official duties if President William Ruto assents to a new Bill amid concerns about potential abuse by some officers.
The Tax (Laws) Amendment Bill, which sailed through Parliament on Wednesday night, provides for unfettered benefits for public officers including non-taxation of any amount paid or granted to them as reimbursement of expenditure incurred while performing official duties regardless of the ownership or control of the assets purchased.
“Any amount paid or granted to a public officer pursuant to any written law or statutory instrument, with effect from July 27, 2022, to reimburse an expenditure incurred for the purpose of performing official duties, notwithstanding the ownership or control of any assets purchased," says the Bill.
An estimated 992,900 employees in the public service, according to data from the Salaries and Remuneration Committee (SRC), are expected to be beneficiaries of the uninhibited reimbursements.
The change means that all reimbursements made to public servants for expenses supporting their work, including the purchase of assets, will not be considered as income subject to tax, increasing the income of public officers. This is irrespective of whether assets purchased belong to the public officers or their employer — the government.
It implies that a public servant can purchase a motor vehicle for use at work and get reimbursed for the expense without the compensation being subject to a tax slash.
Unrestricted benefits
The push for unrestricted benefits was first introduced in the shelved controversial Finance Bill 2024 before fresh lobbying by the Parliamentary Service Commission (PSC) for its inclusion in the Tax (Laws) Amendment Bill.
Consultants and analysts have previously cautioned against handing unfettered benefits to public officers, saying it would be prone to abuse.
They termed the provision biased as similar expenses incurred by private sector employees are subject to income tax.
“This provision creates a disparity in the treatment of reimbursements between public and private sector workers. It is also open to abuse, especially where it appears to suggest that costs for the purchase of assets can be reimbursed regardless of who owns the assets,” tax consultants at KPMG stated.
The consultants warned that rogue public officers could accumulate personal assets, including homes and motor vehicles, without paying requisite taxes by claiming such expenses from the State.
The Teachers Service Commission (TSC) had the bulk public sector jobs in 2023 at 390,400. Other public sector employers are parastatals, corporations controlled by the government, county governments, and ministries.
The unfettered benefit for public officers is likely to exacerbate the public service wage bill, which recently crossed the Sh1 trillion mark per annum.
Total wage payments in the public service reached Sh1.17 trillion in the fiscal year 2023/2024 from Sh870.14 billion in 2018/2019.
The wage bill as a percentage of tax revenues has remained above the recommended threshold of 35 percent, mirroring the squeeze on public coffers.
The public wage bill constituted 48.7 percent of taxes, albeit an improvement from 51 percent five years ago.
The Income Tax Act currently limits the list of employee expenses and benefits not subject to employment taxes, including expenditures on passages between Kenya and other countries borne by the employer and expenses for vacation trips to destinations in Kenya paid for by an employer on behalf of an employee.
The value of meals served to employees also passes as a non-taxable benefit in the computation of income tax alongside medical covers provided by employers and pension contributions made by an employer.
Employment income
Taxable employment income include wages, salary, sick pay, leave pay, fees, commissions, bonuses, service gratuity, allowances, director’s fees, overtime, pension, and entertainment allowances.
Employment income includes the value of non-cash benefits exceeding Sh3,000 a month.
The employment income is subject to income tax at individual tax rates/bands that range from 10 to 35 percent, with the deductions going to the Kenya Revenue Authority (KRA) on or before the ninth of the following month.
All employees meanwhile enjoy tax reliefs, including the personal relief granted to residents at Sh2,400 a month.
Contributions made towards the Social Health Insurance Fund (Shif) and the affordable housing levy meanwhile now qualify as deductible expenses in the calculation of pay-as-you-earn (PAYE) taxes.
