Double blow for workers as Uhuru piles taxes on pay, hikes prices of goods

President Uhuru Kenyatta
President Uhuru Kenyatta has dealt a double-blow to millions of working Kenyans by reducing the amount of money that gets into their pockets even as his taxmeasures push up the prices of basic commodities.

The President’s new tax policies, acrimoniously passed by Parliament on Thursday, will see employees’ take-home salary slashed as they begin contributing 1.5 per cent of their gross pay towards the National Housing Development Fund.

Employers are also required to contribute the same fraction to the kitty, which Uhuru hopes will help him realise his dream of building half a million houses by 2022.  

This contribution adds to other statutory deductions including pay-as-you-earn (Paye), National Social Security Fund (NSSF) and National Hospital Insurance Fund (NHIF), which have significantly eaten into employees’ income.  

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Workers will use the little cash they are left with to buy critical items including fuel, airtime, Internet data bundles and mobile money transfer services whose costs have also significantly gone up after Uhuru signed into law the Finance Bill, 2018 on Friday.

“What he has done is drastically reduce people’s income. This has compromised the purchasing power of majority of Kenyans,” says Samuel Nyandemo, an Economics lecturer at the University of Nairobi.

He says no investment or growth can happen in such an environment. “Consumption is going to go down,” says Dr Nyandemo.

For a typical employee with a gross salary of Sh50,000, they will be left with a net salary of Sh39,637, after being deducted Sh7,332 for Paye, Sh1,080 for NSSF, Sh1,200 for NHIF and Sh750 for the housing kitty.

Formal employment

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Official figures show that there are only 2.5 million people in formal employment out of about 18 million Kenyans eligible for work. Majority of them, over 60 per cent, earn between Sh20,000 and Sh49,999, according to the Kenya National Bureau of Statistics (KNBS) data and will bear the heaviest tax burden.

For a good number of employees, their take-home salary will be whittled down further as they also pay for their Sacco contributions and loans.

Even worse is that with employers required to match their employees’ contribution of 1.5 per cent of gross salary, not many of them will have the space to raise workers’ wages, recruit new workers or even expand their businesses.

Official unemployment, which currently stands at 32 per cent, could rise sharply.

“These tax measures have the impact of escalating the cost of doing business. Firms will thus be forced to over-price their products so as to break even,” says Consumer Federation of Kenya Secretary General Stephen Mutoro.

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With the eight per cent value-added tax (VAT) on petroleum products, he says, farm inputs will go up which will in turn have an effect on prices of foodstuff.

But it is those who use kerosene who will bear the brunt of Uhuru’s taxes.

Already, the price of a litre of kerosene has gone up by close to Sh11 to retail at Sh108.41 up from Sh97.70 in Nairobi, making it more expensive than diesel which will now go for Sh108.12 a litre.

Residents of Nairobi and Mombasa will suffer the most. About 47 per cent of households in Nairobi county use kerosene for cooking, followed by those in Mombasa where 43 per cent of households use the fuel.

Kerosene is also used for lighting, especially in rural Kenya where people are yet to be connected to the electricity grid.

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Reduce supply

Interestingly, even as the Government increased taxeson kerosene and the price of charcoal skyrocketed following a ban on logging, Parliament voted to reduce the supply of a million more six-kilogramme gas cylinders, an initiative that was supposed to help rural and slum households transition from dirty fuel.

The lawmakers also reduced the budget for rural electrification, another programme aimed at bringing rural households to the grid.

But it is on financial transactions that the new taxesmight have a lasting effect. For Kenyans on wage employment, a good chunk of their salary is not only used to sustain their immediate family members, but also members of their extended family.

In a highly dependent society as Kenya’s, it is employees in factories and offices in major urban centres that send money back to their parents and grandparents in their rural homes for upkeep.

Most of the households, 44 per cent, receive the money through mobile money transfer services such as M-Pesa or Airtel Money. Even money received from abroad largely comes through the mobile phone.

Yet, the Government has slapped mobile money transfer services, airtime and Internet data with an excise duty of 15 per cent, up from 10 per cent.

Nyandemo says that an increase in duty on mobile money transactions will wipe out money from circulation. “Speed of M-Pesa transactions will reduce, and this will slow down the pace of growth,” he says.  

Punitive measures

When the punitive tax measures on mobile money transfer sailed through Parliament on Thursday, Safaricom’s share price took a hit, with the NSE-listed telecommunications provider shedding a whopping Sh70 billion in paper value.

“If this continues, we are going to see a decline in foreign direct investment,” says Mr Mutoro.

And there is nowhere to run for consumers. The alternative to mobile money, banking, was also targeted.

Kenya Bankers Association Chief Executive Habil Olaka says Kenyans have little alternative but to pay the new taxes.

“Consumers might move to alternatives if they feel the tax is too expensive. But I don’t think the reduction in consumption will be significant,” he says.

Mr Olaka says the consumption might reduce, but not significantly as other avenues have also gone up.

Bank fees

Besides charging 20 per cent excise duty on mobile banking - up from 10 per cent - all other bank fees such as ATM withdrawals, depositing a banker’s cheque and over-the-counter withdrawals will attract an increased taxof 20 per cent, up from 10 per cent.

One out of three households in Kenya receives money through banks.

A 2017 study by Financial Sector Deepening, a programme established to support development of financial markets in Kenya, showed that on average a Kenyan spends between Sh3,629 and Sh13,460 annually to run a bank account, including withdrawals, money transfers and account maintenance fees.

With the new tax measures, these fees and fines will increase to between Sh3,991 and Sh14,806, a situation that might see some Kenyans revert to putting their money in the so-called ‘mattress account’.

With the cost of sending money through either mobile phones or banks getting expensive, people are likely to shift to using friends and relatives to send money.

Already, one in every four households receives money through a family or friend, according to figures by KNBS.

President Uhuru KenyattaNational Housing Development FundTaxesVAT