Brace for tough times, pay cut as Ruto now signs the Finance Bill

President William Ruto signing The Finance Bill to law at State House, Nairobi. [PCS]

Three days from now, Kenyans will begin to feel the ramifications of Kenya Kwanza's tax regime when most of the clauses in the Finance Act 2023 signed into law on Monday, June 26, by President William Ruto come into effect.

The new law is expected to further push up the cost of living which analysts note is already unbearably high for many Kenyans. Among the goods whose prices are expected to go up beginning Saturday, July 1, including petroleum products, with Value Added Tax (VAT) of fuel having gone up to 16 per cent, from eight per cent.

This is expected to have the impact of increasing pump prices by Sh12 per litre of diesel and super petrol.

Higher fuel costs are expected to push up the prices of other goods and services including transport as well as manufactured goods. This is as industries adjust their cost and pass on the higher production and transportation costs to consumers.

Affordable Housing

Kenyans in formal employment will also have to contend with more deductions as the Affordable Housing Levy takes effect on July 1.

Employees will contribute 1.5 per cent of their gross pay, which will then be matched by their employers.

Initially, this had been set at three per cent of an employee's basic pay that would then be matched by their employers, also at three per cent. The contribution had been capped at Sh2,500 per month for the employee and employer, translating to a cap of Sh5,000 a month.

The controversial levy, which was hugely unpopular going by public sentiments, has been retained in the Act albeit slightly altered. As opposed to a contribution, it was transformed into a mandatory levy.

It was reduced to 1.5 per cent for both the employer and employee but is now not capped. "We just need to brace for tough times ahead in terms of the disposable income that some Kenyans are going to be taking home," said David Wanjohi a senior tax manager at Ernst and Young (EY) on the impact that the new law will have, adding that Kenyans had tried to lobby MPs to drop many of the issues that will reduce their disposable income.

"Based on the submissions that we saw during the public participation phase, the issues that were sticking out were those to do with the take-home such as the housing levy, the standard rating of VAT of fuel."

In their presentations to the National Assembly's Committee on Finance and Planning during public participation, Kenyans - who included individuals, companies and lobbies - noted that the higher tax rate on fuel would make life unbearable not just for the ordinary Kenyan but also industries.

Wanjohi also noted that the reduced disposable income might not necessarily have the desired impact of increasing tax revenues.

"KRA might be able to collect more from a direct tax perspective but from an indirect tax perspective there will be less money to spend (among Kenyans) as they grapple with reduced disposable income and there may be a dip in terms of collection from an indirect tax perspective," said Wanjohi.

"Some of these goods and services do not have an inelastic demand. People will inevitably look for alternatives... whereas you would think there would be the same economic activity, for example in the transport sector, people who would take matatus, now will probably walk to work (if there is a hike in fares). If there were two vehicles in a household, they will probably use one. We have seen this happening, especially with the slow economic downturn in the recent past."

The high tax rate on fuel is expected to result in a Sh12 increase in the cost of super petrol and diesel.

At the moment, super petrol is retailing at Sh182.04 per litre in Nairobi, and diesel at Sh167.28. Hiking VAT to 16 per cent could see super petrol go to Sh194 per litre in Nairobi and well over Sh200 in far-flung towns such as Mandera, Elwak and Moyale where the fuel is currently retailing at more than Sh190. Diesel will increase to about Sh180 per litre in Nairobi.

The government has in the past said there was a need to standardise VAT either at 16 per cent or zero rate.

"The committee noted that the existing VAT rates were not standard and thus intended to harmonise the rate to 16 per cent including for petroleum products," said the Finance Committee in its report on the Finance Bill, in which it also noted that the proposal was among the most unpopular in the Finance Bill.

"The proposal to increase VAT on petroleum products from eight per cent to 16 per cent was also not supported by most stakeholders because it has the potential to further increase the cost of living for the common mwananchi." The new tax measures in the Finance Act are expected to help the government increase tax revenues by Sh289.3 billion over the 2023/24 financial year.

Total tax revenues are expected to increase to Sh2.57 trillion, from a projected Sh2.1 trillion this fiscal year, with the entire budget set at Sh3.6 trillion. The deficit of Sh720 billion is expected to be financed through debt, of which Sh522 will be sourced locally and the balance of Sh199 will be through foreign debts.

Other taxes that are set to become effective on Saturday include a Sh5 excise duty per kilogramme of imported sugar that is set to be a pain for households. The cost of sugar has in recent weeks gone up significantly, retailing at over Sh450 per two kilogramme bag up from about Sh250.

This has also already had the impact of increasing products that use sugar in their production processes including bread, which has increased to Sh65 per 400-gramme loaf of bread. The higher tax on sugar is expected to result in not just higher prices of sugar but also other products. Also going up will be the turnover tax, increasing to three per cent from one per cent.

This is the tax that traders such as mama mbogas pay on the income that they make. This will affect companies making between Sh1 million and Sh25 million annually in the move expected to increase tax revenues from the informal business. The new Act also lowers the upper limit to cover firms making Sh25 million annually from the previous Sh50 million. Previously, firms with a turnover of between Sh1 million and Sh50 million paid the one per cent turnover tax.

Lowering the upper threshold, the Act will have the effect of pushing small and mid-sized businesses with a turnover of over Sh25 million to paying higher tax rates at a rate of 30 per cent. Analysts note that this will push 'larger' SMEs to the mainstream tax regime and also migrate them to the same tax regime as large companies whose income tax is at 30 per cent.

They will also go through a rigorous tax compliance process that could also add to the cost of doing business for the SMEs. Marshel Nyangor economist at Zimele also noted that the impact of the new tax measures might not go well with Kenyans due to the reduced disposable income, but also considering the high spending among government agencies on what is viewed as unnecessary areas.

"You're going to have less money than you got last month," he said.

"We have seen a situation where the budget for the big offices has been increased and there is no particular explanation for this... we have seen an increase in unnecessary expenditure but there is a reduction in capital expenditure. If you are increasing recurrent expenditure, then you are increasing taxes, it is difficult to convince anybody that you want to make the cost of living better."

The cost of beer and other alcoholic beverages could also go up, as alcoholic beverage firms figure out how to comply with the requirement to pay excise duty on their products in advance.

A new clause that was not initially in the Bill but added during the public participation phase requires them to pay excise duty on alcohol in advance. The move, the Committee on Finance and Planning noted, is expected to play part in fighting illicit alcohol.

Also hit are high-income earners, with Pay as You Earn (PAYE) going up to 35 per cent for Kenyans earning upwards of Sh800,000 per month from 30 per cent. Those earning between Sh500,000 and Sh800,000 will be taxed at 32.5 per cent. This is set to take effect on September 1.

The Act has also increased advance tax paid by public service and commercial vehicles. The advance tax for passenger vehicles will increase to either Sh100 per passenger per month or Sh5,000 per year, whichever is higher, from a rate of Sh60 per passenger or Sh2,400 per year.

Advance tax for cargo vehicles will double to Sh3,000 per tonne per year or Sh5,000 per year, whichever is higher, from the current rates of sh1,5000 and Sh2,400 per year.

Advance tax is paid by owners of commercial vehicles, and includes passenger vehicles such as matatus, taxis and tour vans as well as cargo vehicles such as pick-ups, lorries, prime movers, trucks and trailers.

Perhaps to ease the pain that the new taxes will have on Kenyans, the Finance Act 2023 has zero-rated VAT on cooking gas, offering some relief to households that have increasingly been using the fuel in their kitchens. Liquefied Petroleum Gas (LPG) started attracting VAT in 2022 but at a lower rate of eight per cent. This resulted in prices going up and in turn a reduction in the consumption of cooking gas by 10 per cent last year.