Economy

Workers get Sh1,000 in withdrawal of income tax relief

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Treasury CS Ukur Yatani at a past press briefing with other leaders. PHOTO | LUCY WANJIRU | NMG

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Summary

  • Treasury Cabinet Secretary Ukur Yatani says tax exemptions on earnings up to Sh24,000 will be retained in line with a presidential directive.
  • Yatani says the tax reliefs are no longer sustainable owing to persistent revenue collection shortfalls amid a subdued economic activity.
  • He expects the removal of the tax holidays and “the gradual opening up of the economy to reverse this (revenue shortfall) trend in the second half of the financial year”.

Salaried workers will retain Sh1,000 in tax savings in January when the Treasury withdraws the special reliefs that had been granted to cushion households and business from the economic shocks of the Covid-19 pandemic.

Treasury Cabinet Secretary Ukur Yatani on Wednesday said tax exemptions on earnings up to Sh24,000 will be retained in line with a presidential directive—handing relief to the more than 300,000 workers falling within this pay scale.

This means that all workers will continue enjoying a preferential personal tax relief of Sh2,400 compared to the normal Sh1,400 before the pandemic set in.

The maximum pay- as-you- earn (PAYE) tax charge will, however, revert to the previous 30 percent from the stop-gap 25 percent.

Top earners with a monthly pay of more than Sh1 million stand lose Sh52,229 of their income starting January when the old terms are reinstated.

Workers on Sh50,000 pay stand to lose up to Sh4,241, while those earning Sh100,000 and Sh150,000 stand to lose Sh7,229 and Sh9,717, respectively in tax reliefs they have enjoyed since the Covid-19 relief package was implemented from May.

Mr Yatani said the tax reliefs were no longer sustainable owing to persistent revenue collection shortfalls amid a subdued economic activity which affected the implementation of government programmes.

For instance, official data shows that in the first four months of the current financial year ending October, the government missed its revenue collection target — including cash from donors — by Sh65.4 billion. Cumulative revenue amounted to Sh505.3 billion in the July-October period against a target of Sh570.7 billion.

“The shortfalls in government revenues are as a result of suppressed economic activities as a result of the pandemic, as well as the tax reliefs implemented in April 2020 to cushion people and businesses from the adverse effects of the pandemic,” the Mr Yatani told a meeting to kick-start budget preparations for the year starting July 2021.

The revenue shortfalls against the background of rising expenditures have widened the budget deficit, which is bridged through borrowing.

Provisional data by the Treasury shows the deficit hit Sh223.7 billion in the first four months of the current fiscal year, marking a growth of Sh89.9 billion or 67.2 per cent, compared with a similar period last year.

Mr Yatani last month raised the full-year budget deficit forecast for this fiscal year to 8.9 per cent (Sh1 trillion) of gross domestic product from 7.5 per cent (Sh841.06 billion) in June.

To boost revenue, the corporation tax for resident firms is also set to revert to 30 per cent from 25 per cent, while small traders will also start paying tax at the rate of three per cent from one per cent of their gross sales when the Covid tax reliefs are scrapped. The value-added tax will also go back to 14 per cent from 16 per cent.

Mr Yatani expects the removal of the tax holidays and “the gradual opening up of the economy to reverse this (revenue shortfall) trend in the second half of the financial year”.

The gap in the budget has also widened after the Treasury raised estimated expenditure by Sh128.4 billion to Sh2.92 trillion, through a proposal to be included in a supplementary budget for approval by lawmakers.