How new taxes will hit employers
Employers will be one of the hardest-hit groups in the new tax mobilisation and social welfare funds being set up by the William Ruto administration.
The proposals will increase the wage bill, impacting the cost of doing business for companies and the threshold for firms to add new jobs and improve salaries.
From increased statutory deductions, higher tax rates and stringent tax procedures, this is how the Finance Bill threatens to hit employers.
Additional statutory deductions
Employers will shoulder half of the burden that will come with the mandatory deductions to the National Housing Development Fund.
Unlike employees who will claim their contributions, employers will never recover such contributions.
While the proposal further squeezes out employee take-home pay, the provision requires employers to match the employee contributions by up to Sh2,500 a month per employee.
This is expected to increase staff costs, forcing firms to consider hiring freezes and even job cuts.
At the same time, employers could face a pay rise push from employees seeking to cushion themselves from the increased statutory deductions.
NSSF and NHIF
The implementation of the NSSF Act has come with additional costs for employers, who must match the increased contributions of employees.
The NSSF Act, 2013 increased salaried employees’ monthly deductions from Sh200 to Sh600 for the lowest earner and from Sh320 to Sh1,080 for top earners under a graduated scale.
The upper limits on contributions are set to rise yearly.
At the same time, the proposed amendments to the National Health Insurance Fund (NHIF) will raise deductions to 2.75 percent of basic salaries from the current ceiling of Sh1,700 per month.
16 percent VAT on petroleum products
Doubling the VAT on fuel to 16 percent will immediately increase the cost of transportation and producing goods.
With the cost of fuel having a bearing on electricity costs, higher fuel prices will mean higher power bills which present a large share of firms’ cost bases.
For instance, the Kenya Association of Manufacturers estimates electricity costs to be about one-fifth of production costs.
From higher transport costs, employers would be expected to fork out more cash for fuel and transport costs reimbursements to employees, further lifting payroll and other operating expenses.
The Finance Bill proposes adjustments to turnover tax, lining up higher taxes for businesses based on sales.
The change in the turnover tax band from Sh1 million-Sh50 million to Sh500,000-Sh15 million is expected to widen the scope for turnover tax, roping in small businesses with revenues of between Sh500,000 and Sh1 million per year.
Meanwhile, businesses with a turnover greater than Sh15 million but not exceeding Sh50 million who fall in the turnover tax bracket at present will be squeezed into the mainstream tax regime and will now be required to account for corporate taxes at the rate of 30 percent.
The change will represent higher compliance costs as the tax regime moves from simple accounting, requiring firms to hire additional staff.
The Bill has proposed to lift the rate of turnover tax to three percent from one percent.
Disallowing expenses not supported by eTIMS
The taxman is expected to disallow expenses not supported by invoices compliant with the Electronic Tax Invoice Management System (eTIMs).
The move is expected to discriminate against small traders who do not qualify for VAT registration and who are not on eTIMs this financial year.
The provision is expected to not only challenge the discounting of expenses by small traders but also large firms who would not bill smaller businesses with eTIMs compliant invoices.
35 percent PAYE
The proposal to introduce a higher band for pay as you earn (PAYE) at 35 percent could see employees covered in the higher tax band demand a pay raise to cushion them from the more painful taxes.
The demand for higher pay would raise the staff cost base for firms even as the number of workers earning Sh100,000 and above remains negligible.
Security on appeal to the High Court
The proposed amendment to the Tax Appeals Tribunal Act introducing the requirement to deposit 20 percent of the tax in the dispute or security of an equivalent amount with the Kenya Revenue Authority (KRA) before filing an appeal is expected to hit company liquidity and cash flows.
This means firms that are unable to raise the high threshold would not appeal against the taxman’s demands.
Tax experts say this blockade that was previously challenged in court is unjust.
Withholding VAT to be remitted in three days
Withholding VAT agents who include firms will be required to remit it within three days from the current provision of 20 days of the following month.
The proposal presents an administrative burden to taxpayers in ensuring taxes are withheld and remitted promptly. Tax experts say the timelines are too short.
The Bill has scrapped the KRA’s Commissioner's power to waive a penalty or recommend to the Treasury Cabinet Secretary on account of hardship or difficulty in recovering the tax.