A tax relief is an incentive aimed at promoting various initiatives for example investments and savings. Some tax reliefs accrue automatically whereas some are tied to certain conditions, for example contributions to specified schemes, savings or application for exemption. A tax relief means you either pay less tax on account of money spent on specific things or get a credit against the tax payable.
The Income Tax Act incentivises taxpayers through other reliefs and tax deductions tied to either saving for specific courses or investments. These reliefs and deductions, if utilised can ease the tax burden significantly. The main difference between a relief and a deduction is that a relief reduces the tax liability while a deduction reduces the income subject to tax.
Gains accruing from employment, including allowances paid, are subject to tax with the exception of tax free benefits provided for under Section 5 of the Income Tax Act. Some of the benefits include meals up to a maximum of Sh48,000 per annum and medical services provided by an employer.
The current personal relief for individual taxpayers is Sh1, 162 per month or Sh13, 944 per annum. The relief is applied to reduce an individual’s tax liability. The effect of this relief is to exempt from tax, people earning income of up to a maximum of Sh11,135 per month. This amount hardly covers the current legal minimum wage for most grades of labour and is due for a long overdue review.
The first deduction aimed at encouraging savings is the Home Ownership Savings Plan (HOSP) introduced on January 1, 1999. It was intended to encourage individuals to save to acquire or develop a home.
A taxpayer is entitled to a tax free saving of Sh4,000 per month or Sh48,000 per annum on payments to a registered HOSP. This relief is granted for ten years of mandatory contributions to the HOSP before one is allowed to utilize the money for investment.
Whereas this is a great move to encourage savings and investments, the deduction is out of touch with the reality of current home prices most of which start of at Sh3 million. While a saving of Sh480,000 over a ten-year period would have afforded a reasonable home in 1999, it is hardly adequate to purchase a 50 X 100 plot in most urban centres in Kenya today. There is an urgent need for the government to review this incentive to encourage a saving culture and home ownership.
Then there is the mortgage relief which is a tax deduction on interest incurred on mortgages. The mortgage interest deduction was first introduced in Kenya in 1996 at Sh56,000 per annum. This rate was revised in 2001 to Sh100,000 and lastly in 2006 to Sh150,000.
At the current average mortgage interest rates of 16 per cent, the deduction can hardly support a mortgage of Sh1 million. As a result, it is hardly adequate as an incentive for taxpayers to take up a mortgage. No wonder mortgage uptake in Kenya is low. This incentive should be reviewed as well in line with changes in property price index and interest rates.
Individuals are entitled to a pension contribution deduction of up to Sh20,000 per month or Sh240,000 per annum for contributions to a registered scheme. The relief has remained constant over a period of time. One of the budget proposals submitted through the Institute of Certified Public Accountants of Kenya is to increase the tax free limit for pension contributions to Sh360,000 per annum to encourage savings and increase the pension available on retirement.
The insurance relief on education policy for children, life of self or spouse, allows one a tax free deduction equivalent to the lower of 15 per cent of the premiums paid or Sh60,000 per annum. This is also very low and although meant to encourage the uptake of insurance savings, it has not been successful partly due to the low tax savings.
Introduction of reliefs and deductions was a noble idea. However, But with the rising cost of borrowing, inflation and property prices, the thresholds must be reviewed to ensure they remain attractive. This is the challenge for the government as it seeks to increase tax revenues.
The author is a manager, Tax and Regulatory Services, with KPMG Kenya ([email protected]). The views and opinions are those of the author and do not necessarily represent views of KPMG.
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