The purchasing power of households in the medium term will be negatively affected by the proposed tax measures in the Finance Bill 2023, the World Bank has said.
This is likely to add to the current inflationary pressures owing to an increase in prices of basic commodities, especially food and fuel, and also signals tougher times ahead for businesses that are dealing with reduced demand on account of the high cost of goods.
In a new report, the Washington-based institution said that the ongoing tax reforms, which include raising value-added tax (VAT) on fuel from eight to the standard 16 percent, will dampen growth in the near term.
“Private consumption is expected to remain on a robust growth path, although it will be dampened in the near term by…ongoing tax reforms to boost revenue and sustain fiscal consolidation,” said the World Bank in its 27th Kenya Economic Update (KEU).
The report, which is produced twice a year, assesses recent economic and social developments and prospects in the country.
The economy is projected to grow faster at five percent this year, compared to 4.8 percent last year, according to the forecast.
This growth, however, is likely to be dampened by the proposed tax measures, which will eat into the disposable income of most Kenyans, especially those who are employed.
The government has introduced sweeping tax measures aimed at helping the country reduce its borrowing, with Kenya’s risk of debt distress rising to high from moderate.
“The fiscal consolidation that the government is planning is very crucial. It is very important for Kenya to generate the surplus that it is planning,” said Aghassi Mkrtchyan, a senior economist at the World Bank.
Other than increasing VAT on fuel, the Finance Bill, 2023 also proposes a pay as you earn (PAYE) tax paid by employees with a gross salary of over Sh500,000 to 35 percent from the current 30 per cent.
It also proposes to introduce withholding taxes on digital content creators at the rate of 15 percent.
Those selling cryptocurrencies and non-fungible tokens will be expected to pay a digital asset tax.
There is a proposed increase of excise duty on mobile money transactions and its introduction on some beauty products such as fake hair, wigs and nails.
Calculations done earlier by the Business Daily show that the take-home salary of workers earning a basic salary of Sh100,000—who fall in the median middle-class family in Nairobi according to computation on expenditure pattern by the Kenya National Bureau of Statistics (KNBS) —will reduce from the current average of Sh76,041 to Sh71,661.
This is after the government deducts the proposed enhanced deductions for the National Health Insurance Fund (NHIF), the National Social Securities Fund (NSSF) and the three percent cut on their basic salary to a new Housing Development Fund.
Kenya’s decision to increase the tax revenue has been hailed by the International Monetary Fund(IMF), with the country being rewarded with an additional Sh162.5 billion under the 38-month programme.
“The authorities have responded promptly to the challenges. On the fiscal side, government spending execution has been prudent this fiscal year, consistent with available resources,” said Haimanot Teferra who led the IMF mission to Kenya.