The Finance Bill has ignited a wave of mixed reactions across various sectors of Kenya's economy.
This bill, which proposes changes to taxes, duties, reliefs, exemptions, and related legislative provisions, marks the first significant fiscal policy action taken by the new government since assuming power in September 2022.
However, the timing of this bill is crucial as the nation grapples with a high cost of living, soaring inflation rates, and mounting unemployment in the aftermath of a post-Covid economy, further impacted by shocks such as severe drought and a weakening currency.
As such, the implications of this bill have become a matter of great concern.
One of the key aspects of the Finance Bill is provisions targeting the formal sector workforce.
Of particular interest is the proposal to introduce a mandatory National Housing Development Fund (the Fund) levy.
Under this provision, both employers and employees would be required to make monthly contributions to the Fund, amounting to three percent of the employee's basic pay, capped at Sh5,000.
While the objective is to provide affordable housing to citizens, these mandatory deductions would reduce employees' take-home pay and increase the cost of employment for employers.
Moreover, the compulsory nature of the Fund means that even individuals who already own homes or are servicing housing loans would be obligated to contribute, potentially straining their already tight budgets.
To incentivise participation and savings in the Fund, it is crucial for the government to consider providing full tax relief for these contributions, especially considering that the maximum amount of Sh5,000 is not excessive.
The implications of the bill extend beyond individual employees to businesses and the overall economy. Employers may be forced to freeze employment, cut workforce, or restructure compensation packages to manage costs.
Additionally, the bill proposes taxing all employee contributions withdrawn from the Fund in cash after a period of seven years, resulting in double taxation as these contributions were initially deducted from taxed salaries.
Another significant proposal within the bill is an increase in the top tax rate for individual taxes, commonly known as Paye, from 30 percent to 35 percent on income earned above Sh500,000 per month.
Considering the impact of enhanced social security contributions under the NSSF Act, 2013, employees are already experiencing reduced disposable incomes, which could have a negative effect on the economy.
Furthermore, the revision of national health insurance contribution rates, set to rise to 2.75 percent of an employee's gross monthly earnings, adds to the financial burden on both employers and employees.
Undoubtedly, the Finance Bill, 2023 reflects the government's drive to boost tax revenue and improve tax collection and administration through comprehensive tax reforms.
However, achieving a balanced approach is crucial to ensure sustainable growth across sectors.
The tax system should aim to generate essential revenue without stifling economic progress, while also keeping compliance costs low.
It is imperative for the administration to prioritise measures that broaden the tax base rather than deepen it.
Reconsideration is essential for the potential negative impact on businesses and individuals.
Furthermore, the double taxation of employee contributions withdrawn from the Fund may discourage individuals from participating, defeating the purpose of providing affordable housing options.
The government should explore alternative approaches to minimise the burden on citizens, such as offering tax relief for contributions and addressing the concerns of those who already own homes or have existing housing loans.
The recently concluded public participation period provided an opportunity for public input, and the bill will now undergo further debates and scrutiny by the National Assembly before being enacted into law, potentially before the conclusion of the current financial year.
