Kenyan employees face hard times as Finance Act continues to bite

Here is what is wrong with the Kenyan economy. ILLUSTRATION | SHUTTERSTOCK

The Supreme Court of Kenya on September 8, 2023, dismissed the petition seeking to halt the implementation of the Finance Act, 2023 (“The Act”), directing the parties to await the court’s final determination of the substantive appeals against the Act.

This follows the earlier Court of Appeal decision that lifted the conservatory orders, paving the way for the implementation of the Act pending hearing and determination of the petition challenging its constitutionality.

By lifting the orders of the High Court, the appellate court effectively reinstated the provisions of the entire Finance Act, 2023, including the much-publicised affordable housing levy deductions and expansion of PAYE bands.

At the date of the appellate court's ruling, most employers had processed their employees’ pay for the month of July without effecting 1.5 percent deduction of their gross monthly emoluments and subsequently matching the same before remitting to the taxman. 

It is worth noting that an employer who fails to comply with this provision is liable to a penalty equivalent to 2.0 percent of the unpaid funds for every month if the same remains unpaid.

Further, the employees will not be able to enjoy any tax relief on their contribution to affordable housing levy unlike the employers, whose contribution will be an allowable deduction. 

In addition, the Act introduced two new Pay as You Earn (PAYE) tax bands with a tax rate of 32.5 percent and 35 percent on employment income above Sh500,000 and Sh800,000 percent month respectively.

As per Trends and Insights for Africa (TIFA) survey report published on July 4, only 3.0 percent of Kenyan employees earn above Sh50,000 gross salary therefore this may not result in a significant increase in PAYE revenue.

It is worth noting that the ruling inconvenienced both employees and employers who by virtue of the stay order, did not make any provisions for the levy.

In August, for example, employees who were paid their salaries without the July deduction were hit with a double deduction as employers effected the new law.

The new changes are set to add pain to the already economically bruised Kenyans who have just come out of one of the worst droughts in recent memory that had nearly 6.4 million people requiring humanitarian support.

Other changes, such as subjecting petroleum products to VAT at 16 percent, except for LPG, have increased transport costs for Kenyans.

Over the past few months, the government has received criticism regarding the high costs of living even as it contends that the current situation has been influenced by various external factors out of its control.

The government has put in place initiatives to revamp agricultural production as a long-term solution to reduce cost of maize floor and basic foodstuffs. It remains to be seen whether the government efforts will lead to sustained economic growth in the long run.

The writer is a Tax Advisor with KPMG Advisory Services Limited and can be reached on [email protected].

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