Treasury secretary Henry Rotich has hit Kenya’s big earners with a 35 per cent top tax rate as part of the quest increase income tax revenues by Sh68 billion.
Mr Rotich says in the newly published Income Tax Bill that the top tax rate is for those earning more than Sh9 million a year, effectively targeting those with a monthly income of Sh750,000 and above.
The number of Kenyans earning more than Sh750,000 a month, however, remains small as government employees, who form the bulk of those in formal employment, earn an average of Sh57,915 per month.
The average private sector employee’s wage stands at Sh56,624, according to Economic Survey 2018.
The Bill, which promises significant overhaul of the Income tax Act, also targets large corporations who will pay the top tax rate for taxable income of more than Sh500 million.
Income below this threshold will continue to attract 30 per cent corporate tax rate.
If passed by Parliament, the far-reaching proposals could also see the capital gains tax rate rise from five per cent to 20 per cent.
Publishing the Bill before formally submitting the national budget to Parliament next month is being seen as showing a determination to push through the income tax reforms in the next fiscal year, when pay-as-you-earn tax is expected to rise by Sh68 billion to Sh447.6 billion and corporation taxes by Sh59.5 billion to Sh389.2 billion.
Deloitte tax partner Fred Omondi told the Business Daily that the changes are likely to be welcomed as progressive considering previous calls to charge high-income earners more.
“It is progressive in the sense that it is targeting high-income earners, while the higher CGT is targeting wealthier segments of society who own property. Quite a number economies, especially in the developed world, have rates above 40 per cent for top earners,” said Mr Omondi.
Mr Omondi reckons that while there will be some increment in receipts because the taxes are deducted at source, the number of Kenyans in the top-income bracket remains low, and therefore the government needs to complement this measure with others that widen the tax base.
The Treasury must have had this in mind when substituting the turnover tax for businesses recording revenue of below Sh5 million with a presumptive tax that is equal to 15 per cent of the single business permit fee issued by a county government, Mr Omondi said.
“From a collection point of view it will help them net many of the unincorporated entities, although with the average business permit costing about Sh15,000, they may need to raise the rate in future to fully account for the turnover tax they have been collecting,” he said.
The new Bill retains the tax bands the Treasury introduced in January that raised the effective tax-free income threshold from Sh12,260 to Sh13,486 per month, offering relief to the lowest-income earners.
The taxable income floor therefore remains at Sh147,580 per year and attracts income tax at the rate of 10 per cent.
Thereafter the tax rises by five per cent in bands of Sh139,043 until it hits the maximum Sh564,709 per year when the 30 per cent rate kicks in and runs all the way to Sh9 million.
The income tax law is the only major tax legislation that had not been comprehensively reviewed in the past four years. The government reviewed the VAT Act in 2014, and followed it up with a review of the Excise Duty Act in 2015.
Revenue estimates for the 2018/19 fiscal year show that the Treasury expects ordinary revenue to grow by Sh254 billion to Sh1.74 trillion, making the income tax review a critical component of that growth.
The increased tax on corporate income above Sh500 million is, however, likely to raise concerns about its effect on Kenya’s competitiveness as an investment-friendly destination – especially because it comes at a time when many countries, including the US, are cutting corporate tax to attract investment.
Mr Omondi said some investors were likely to interpret the change as aiming to punish successful firms, who already have to contend with high transport and energy costs when investing in Kenya.
Similar to the highest tax band in PAYE, there are only a limited number of Kenyan firms reporting taxable income of half a billion shilling or more, with the risk also being that some firms may split their big businesses into smaller units to avoid the higher rate.