The decision to withdraw the tax cuts announced in March to cushion citizens from the impact of the coronavirus crisis needs a rethink.
The removal of the reliefs is informed by the Treasury’s bid to raise State revenues in an economy that has limited financial room to manoeuvre during the crisis after years of increased borrowing to fund a range of infrastructure projects.
Though the economy is showing signs of recovery after contracting for the first time in almost 12 years in the second quarter, companies and workers are still hurting from the impact of the coronavirus pandemic.
The workers still require to be cushioned in a business environment where most firms imposed pay cuts to ease costs and navigate the virus.
Company profits will take longer to recover and hence a significant number of them are expected to prolong the pay cut regime. Therefore, any action that will reduce workers’ pay will hit households hard in a month when they will have school fees commitments as students return to schools after an eight-month absence.
Under the reliefs regime, the income tax rate for top individual earners and corporations fell to 25 percent from 30 percent, injecting billions of shillings into the economy to support consumption by individuals and investments by firms.
The value added tax (VAT) rate dropped to 14 percent from 16 percent, helping protect the vast majority of people on low incomes through lower prices of essential goods. The cut also helped firms by reducing the costs of raw materials.
We appreciate the State requires additional revenues to pay debts, civil servants salaries and build infrastructure.
But the welfare of the citizens should be of utmost importance to the State. The withdrawal of the income tax relief has the impact of a 10 percent pay cut.
Still, the State has other options of raising money, including aggressive pursuit of wealth tax cheats. Kenya Revenue Authority (KRA) detectives have already identified wealthy individuals and companies that owe it an estimated Sh250 billion.
In sum, the State should reconsider withdrawing the tax reliefs, especially the income tax bit that directly affects household earnings.