How Uhuru tax cuts will affect workers, traders

President Uhuru Kenyatta Wednesday reduced workers’ income tax as well as value-added tax (VAT) and lowered the sales levy for small and mid-sized businesses as part of a raft of measures to help cushion the economy from the impact of the coronavirus outbreak.

The President announced a 100 percent tax relief for Kenyans earning a salary of up to Sh24,000 in a move that will offer workers in that band an additional disposable income of between Sh1,000 and Sh1,400.

He also lowed the maximum income tax rate to 25 from 30 percent, which applies to workers earning more than Sh47,000.

This will create an additional income of Sh4,241 monthly for those earnings Sh50,000 and Sh7,229 for workers on Sh100,000.

It will also create additional disposable income of Sh9,717 for those earning Sh150,000 and Sh27,229 for employees earning over Sh500,000 a month.

The cut in the VAT rate to 14 percent from 16 is also expected to lower the cost of a variety of goods like electricity, saniters, detergents, newspapers, processed foods, phones, books, electronics, computer hardware and software. Food items are excluded from VAT and the prices will remain unchanged.

Yesterday’s tax changes are geared to lowering the cost of basic items while providing workers with additional income to boost consumption, which will in turn increase sales for traders, retailers and other outlets.

Traders operating small and mid-sized businesses will paying one percent tax on their sales to the Kenya Revenue Authority (KRA), down from the three percent rate introduced in January, a move that looks set to ease pain for enterprises struggling with low revenues in the wake of the increasing slowdown of movement as part of the strategy to slow down the spread of the Coronavirus.

Local companies buffeted by lowers sales and earnings will also pay a lower tax of 25 percent on their profits from the current 30, translating to a free cash pile for the corporates.

“It is commendable that the President has opted to tax spending rather than income,” said Nikhil Hira, a director at Bowmans (Coulson Harney LLP) law firm. “The only caveat is that the changes require parliamentary approval and possible public participation. How long they will last remains an open question.”

The President yesterday directed Treasury CS Ukur Yatani to seek parliamentary approval for the raft of measures proposed. This will also determine when the reliefs will come into force and how long they will last.

Kenya has so far confirmed 28 cases of the Covid-19 disease and its critical tourism and farm export businesses have been feeling the pinch from the economic impact of the coronavirus outbreak. Yesterday, Mr Kenyatta said Kenya had recorded the first recovery of a patient.

“Many are fearful of what the future holds for them and their children on the possibility of job losses and loss of income weighing heavily on the minds of millions of Kenyans,” he said in a televised broadcast from State House, Nairobi. “The measures are therefore meant to offer support”.

Besides the stimulus package, the government has responded to the coronavirus by imposing tough travel restrictions, limiting mass gathering and requiring self-isolation for the infected and those at risk to curb the spread of coronavirus.

The State on Sunday imposed additional restrictions, including cancellation all flights, save for cargo planes. The travel restriction kicks in today. The government has also ordered the shutdown of bars and nightclubs, again from today evening while restaurants are required to operate as takeaway units. Other measures include a freeze on church, mosque and temple gatherings as well as weddings. Funeral gatherings have been capped at 15 people.

The impact of social distancing and restriction of businesses and institutions like schools, bars and restaurants looks set to impact on consumer spending. Companies have responded by sending workers on leave or asking them to take a pay cut.

Restrictions on foreigners coming into Kenya have also led a hit on the country’s tourism industry, with some hotels at the Coast reporting occupancy rates of well below 10 percent compared to the normal 75 percent. On the upside, no cases have been reported in the country’s major tourism destinations.

Travel restrictions in Europe have also slashed daily flower and other horticultural orders to half for a continent that accounts for 70 percent of Kenya’s cut flower exports.

Besides the stimulus package, Mr Kenyatta also said the government will institute a daily curfew beginning on March 27 from 7pm to 5am to check the spread of the virus. The government also plans to pay pending bills to suppliers in three weeks and speed up company tax refunds to boost businesses’ cash flow and put money in circulation.

Treasury plans to release Sh13 billion to suppliers for unpaid bills within three weeks and expedite the payment of close to Sh10 billion in VAT refunds to businesses in the next three weeks.