Treasury plans wealth tax for Covid recovery

The Treasury plans to raise taxes of Kenya’s super-rich and high income earners as part of a broader strategy of raising revenues that have dropped substantially amid the economic fallout from the Covid-19 pandemic.

This marks a revival of efforts to make wealthy individuals pay higher tax rates that gained momentum in 2018 but was ultimately dropped.

The National Treasury says in a November paper titled Post Covid-19 Economic Recovery Strategy 2020-2022 that high-income households are among the categories of taxpayers who will now contribute more to the Kenya Revenue Authority (KRA).

The Treasury’s talk of imposing higher taxes on the rich follows a global pressure for the wealthy to pay more duty and help impoverished populations survive the coronavirus and its economic hardships.

“In this regard, the government is committed to the following revenue enhancement measures … expanding the tax base with a focus on revenue streams not yet fully explored such as taxation of high net worth individuals (HNWI), property taxes, e-commerce, informal sector players, professionals, registered companies, and individuals trading on line who are currently outside the tax net,” the document reads in part.

The shape of the planned increased taxation of wealthy individuals is not clear.

The State could introduce a wealth tax for the HNWI, who will pay a small share of their net worth--which is assets minus liabilities--to the State.

It could take the form of introducing a higher tax rate for high income earners.

In 2018, the Treasury sponsored a Draft Income Tax Bill that sought to impose a higher maximum tax rate of 35 percent on income of more than Sh9 million per annum or Sh750,000 a month.

At the time, the top tax rate was 30 percent on all income exceeding Sh564,709 per annum or Sh47,059 a month.

The Treasury said it dropped the bid for the higher tax rate after collecting the views of the public on the planned rise.

The government lowered income taxes effective April to give financial relief to citizens in the wake of the disruption brought by the pandemic.

The top tax rate, for instance, was lowered from 30 percent to 25 percent and currently applies to incomes above Sh688,000 per annum or Sh57,333 per month.

The government has indicated that the income tax rate cut is temporary, with the impending upward revision of the levy likely to include special higher bands to rope in the wealthy.

The 25 percent top tax rate, for instance, will be in place until January, according to a September 28 presidential directive to the National Treasury.

Developed countries levy the highest taxes on the wealthy. In the UK, the top individual tax rate is 45 percent on annual income above £150,000 (Sh21.8 million) while French residents pay a similar rate for earnings above €152,260 (Sh19.7 million).

American citizens and residents, who are taxed on their worldwide income, pay a top tax rate of 37 percent for earnings exceeding $518,401 (Sh56.7 million) per annum.

Higher tax rates on the wealthy Kenyans will add to the stepped-up efforts to collect more revenue from the rich through investigations into their conspicuous consumption and reconciling it with their declared incomes and taxes paid.

The KRA recently said it has identified wealthy individuals and companies from whom it could collect up to Sh250 billion worth of unpaid taxes.

The crackdown follows an order from President Uhuru Kenyatta in November last year for taxman to keep a watch on high net-worth individuals whose lifestyles are not in tandem with the taxes they pay.

The government says the pandemic has hurt revenue collection, with the high-net-worth individuals among the taxpayer categories seen as plugging the shortfall in the medium term.

“Fiscal performance has been adversely impacted by revenue shortfalls due to decline in economic activities, government tax relief measures to cushion individuals and businesses from the economic impact of the pandemic, and increasing demands to fund Covid-19 related expenditures,” the National Treasury said.

“As a consequence, the fiscal deficit as a ratio of GDP is projected at 8.9 percent in fiscal 2020/21 which is higher than the 7.5 percent in the budget estimates and the actual outcome of 7.8 percent in fiscal 2019/20.”

Cumulative revenue collection in the quarter ended September stood at Sh378.7 billion against a target of Sh428.9 billion, leaving a Sh50.2 billion deficit.

The underperformance was due to lower collections of Pay As You Earn (PAYE), VAT (both domestic and imports), excise duty, import duty and the ministerial appropriations-in-aid (AIA).

“The interventions put in place to contain the virus have also led to unintended outcome of job losses,” the National Treasury said.

The ranks of the unemployed swelled to 1.8 million in the quarter ended June compared to 961,666 in the first quarter when the country recorded its first coronavirus case.

Introduction of travel restrictions, curfew and closure of schools and bars decimated the tourism, education and entertainment industries and the measures have since spread to hurt the broader economy.