Income tax, value-added tax and sales levy cuts announced by President Uhuru Kenyatta in the wake of the Covid-19 pandemic will be reversed if Kenya agrees with the International Monetary Fund (IMF) to reinstate the higher taxes.
The fund says the cuts will cost the Kenya Revenue Authority (KRA) and compromise the State’s ability to deal with emergencies and spending on development projects like roads, power plants and water infrastructure.
The IMF has asked the Treasury to reverse its earlier stand of delinking the tax reliefs to the end of the coronavirus pandemic, meaning that Kenyan workers and companies will stop enjoying them after the spread of the virus has been contained.
The Treasury and the Central Bank of Kenya (CBK), in a response to the IMF, have committed to review Kenya’s tax measures without being specific, adding that the country will restore the lost revenues.
Kenya’s revenue collection is expected to drop by Sh43 billion in three months due to the cuts on Income tax, value-added tax and sales levy, the IMF warned after agreeing a Sh78.3 billion ($739 million) in emergency financing to help Kenya respond to the economic shock caused by Covid-19.
“Going forward, to support the revenue effort over the medium term, staff recommends that the tax rate reductions for the VAT, turnover tax, and personal income tax be reversed once the crisis has passed,” says the IMF in an assessment of Kenya’s economy published on Tuesday.
The State’s ability to deal with unforeseen spending has been weakened given that civil servants’ salaries, debt payments and allocation to counties already eat up 94 percent of government revenue.
The IMF did not comment on the reduction in corporate tax from 30 percent to 25 percent, a reduction meant to ease companies’ cash flow at a time when they are plagued with lower sales.
The relief excluded workers earning less than Sh24, 000 from paying taxes and increased the personal relief for all workers to Sh2,400 from the initial Sh1,400.
The Treasury lowered the maximum income tax rate to 25 percent from 30 percent, which initially applies to workers earning more than Sh47,000. This created an additional income of Sh4,241 monthly for those earning Sh50,000; Sh7,229 for those earning Sh100,000 and Sh9, 717 for those with a salary of up to Sh150,000. Employees on Sh500,000 pay will get Sh27,229 as relief.
Top earners on a gross monthly salary of Sh1 million will see their take home increase by Sh52,229, translating to an income increment of about seven per cent. Lawmakers agreed to lower the three percent tax levied on small and mid-sized traders sales to one percent, a move that looks set to ease the pain for enterprises. Local companies are also paying a lower tax of 25 percent on their profits from the current 30 percent.
Treasury Secretary Ukur Yatani in an April 30 letter to IMF director-general Kristalina Georgieva committed to restore some taxes without being specific.
“We are closely monitoring the economic impact of Covid-19. Once economic activity recovers sufficiently, we will review our tax measures to fully restore revenues as a share of GDP as part of our efforts to strengthen the public finances,” Mr Yatani said in the letter he co-authored with Central Bank of Kenya governor Patrick Njoroge.
“We remain committed to raising the ratio of tax revenue to GDP over the medium term,” the two added in the letter made public by the IMF.
The tax changes are aimed at lowering the cost of basic items while providing workers with additional income to boost consumption. This is expected to boost traders and retailers flagging sales.
Kenya has confirmed 715 cases of Covid-19, and 36 deaths, and has imposed restrictive measures to halt its spread.
The country has suspended international passenger travel, imposed a daily dusk-to-dawn curfew and banned public gatherings including closure of schools, bars and nightclubs. Those moves have led to a sharp reduction in economic activity
The Treasury says economic growth could decline to 2.5 percent in 2020, but may go lower to 1.8 percent, compared with 5.4 percent growth a year earlier. The IMF has also raised Kenya’s risk of debt distress to high from moderate due to the impact of the coronavirus crisis
Kenya’s debt stood at 61.7 percent of GDP at the end of last year, up from 50.2 percent at the end of 2015, the IMF said, driven up by gaping budget deficits that were caused by large infrastructure projects such as the SGR railway line.
“The risk of debt distress has moved to high from moderate due to the impact of the global Covid-19 crisis which exacerbated existing vulnerabilities,” the fund said.