New levies have been imposed on fuel, the sale of homes and land for small-scale property owners in the proposed changes designed to plug the tax hole left by the reduction in personal and corporate taxes announced by the President last month to protect the economy against Coronavirus.
The Tax Laws (Amendment) Bill has removed exemptions granted to individuals selling their own homes from the five percent capital gains tax that investors say could affect investment in property.
Those selling land valued at less than Sh3 million in urban centres and farmland of below 50 acres outside towns will also pay the five percent tax.
Capital gains tax was dropped in the mid-1980s to attract foreign and local investments, but was reinstated in 2014 to raise funds for development projects
The Bill to be debated by Parliament this month is also proposing a new way of calculating tax on petroleum products, which will see the duty on petrol and diesel rise by at least Sh3.30 and Sh2.50 per litre respectively.
It wants other charges, including duties and other levies in the calculation of value-added tax (VAT), in what will add billions of shillings to State coffers.
Currently, the duties and levies including road maintenance, railway development and regulatory fees amounting to Sh41.19 per litre of fuel do not attract the eight percent VAT.
Fuel prices have a big effect on inflation because Kenya’s economy depends heavily on diesel for transport, power generation and agriculture, while kerosene is used in many households for cooking and lighting.
Tax on kerosene will increase by Sh2.50 a litre.
The Bill has also reinstated the 14 percent VAT on cooking gas, which was removed in 2016 in efforts to cut reliance on firewood and charcoal for cooking. This will have the effect of increasing the cost of refilling the 13-kilogramme cooking gas by Sh300.
“This will trigger an increase in consumer prices of most products that use fuel in the manufacturing process as well as thousands of homesteads and hotels that rely LPG as source of cooking energy,” says consultancy firm KPMG in reference to the new taxes. “The inclusion of excise duty and other charges in the computation of the VAT on fuel will significantly increase the VAT cost of fuel, negating the decision to charge a lower VAT rate of eight percent”.
President Uhuru Kenyatta in September 2018 cut the new VAT on fuel from 16 to eight percent. The government had faced a fuel dealers’ strike, anger among commuters and a lawsuit after transport and fuel prices jumped when the 16 percent VAT on all petroleum products came into force on September 1, 2018.
The Treasury is seeking to introduce the additional petrol tax in the current environment where crude oil prices have hit 18-year lows, helping to soften the impact of additional VAT charges.
The planned tax hikes are designed to fund a range of government development goals in an environment where the State has cut a number of taxes to boost businesses’ cash flow and workers’ disposable income amid the coronavirus pandemic.
Treasury cut VAT to 14 from 16 percent and corporation tax will be reduced to 25 from 30 percent under plans scheduled to come into force this month once approved by Parliament.
Workers earning less than Sh24,000 will be excluded from paying taxes while the minimum income tax rate, known as pay-as-you-earn (PAYE) has been reduced from 30 to 25 percent.
Kenya has confirmed 158 cases of coronavirus and sought aid from the International Monetary Fund (IMF) and the World Bank as economic sectors such as tourism and exports take a hit.
As a result of the global pandemic, the Central Bank of Kenya cut its 2020 economic growth forecast to 3.4 percent from its initial 6.2 percent as the outbreak saps demand from trading partners such as Europe, and disrupts tourism, supply chains and domestic production.
The Parliamentary Budget Office (BPO) — a unit which advises lawmakers on financial, budgetary and economic matters — estimates the reduced income and VAT measures will cost the Exchequer nearly Sh122.26 billion. Tax reliefs for earnings of up to Sh24,000 will cut government revenue by another Sh19.84 billion, while a drop in payroll taxes will cut PAYE by Sh7.08 billion.
Similarly, the reduction in corporate tax will deny the Exchequer some Sh45.69 billion.
The biggest revenue loss will, however, come from reduced general VAT levy from to 14 from 16 percent whose cost the BPO has put at Sh49.60 billion. The proposed drop in monthly turnover tax is likely to leave a Sh50 million revenue hole.