The National Treasury is this year raiding the pockets of some of the most vulnerable Kenyans as it tries to grow tax revenues.
In measures outlined in the Finance Bill 2020, the government plans to tax retirement benefits of people in their sunset years, many of them without other revenue streams or energy to and who according to analysts should not be subjected to additional tax measures but instead cushioned by the State.
In the Finance Bill 2020, Treasury has proposed to tax monthly pensions for people aged 65, who are currently tax exempt.
It also proposes to subject income earned by the National Social Security Fund (NSSF) to income tax, a burden that is most likely to be passed on to pensioners that rely on the government-run agency.
All Kenyans formally employed are required by law to remit money to agency while at the same time, those in the informal sector make voluntary contributions as measure to safeguard their livelihoods in future when they cannot run around and earn a living.
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Treasury is also proposing to raid the pockets of not just the retirees but other vulnerable Kenyans, including low income earners.
Money earned while working overtime as well as bonuses and retirement benefits by people in the lowest tax band are currently not subject to tax, but the Bill has proposed elimination of the holidays that these poor workers enjoy and subject them to income tax.
The proposals that Treasury Cabinet Secretary Ukur Yatani has made in the Finance Bill 2020 also appear to be negating the government’s Big Four Agenda that envisioned increasing home ownership in the country.
In the Bill, Treasury introduces tax on Home Ownership Saving Plans (HOSP).
The Bill, which was tabled in Parliament on Wednesday, will delete a section that exempts retirees aged 65 and above from paying income tax.
Treasury had in 2007 through the Finance Act introduced the exemptions, which provide that monthly or lumpsum pension granted to a person who is 65 years of age or more is exempt from tax.
“Should the proposal pass, retirees, many of whom fall within the category of vulnerable members of society will receive lower pensions, reducing their disposable income,” KPMG said in an analysis of the Finance Bill.
Also affecting pensioners is a proposal to subject income earned by NSSF to tax, which will also affect retirees.
“This proposal will reduce the retirement benefits available to retirees and is also contrary to the general provisions for exemption of the income of registered retirement schemes,” KPMG said.
Analysts at PWC Kenya noted that the changes in tax laws will expose pensioners to shocks. A vulnerable segment of the population, should be accorded help by the State as they may not have other sources of income.
“This move will result in lower disposal income to the senior citizens who should be cushioned by the government as they have limited sources of income since they have retired from gainful employment.
“We would recommend that these individuals are cushioned from taxes as they are a vulnerable group within the society,” PWC Kenya said in an analysis of the Finance Bill.
The other class of vulnerable Kenyans who are targeted by Yatani’s tax proposals are the lowest income earners. While their pay is subject to taxation, money earned from working overtime as well as bonuses and retirement benefits are not subjected to tax, which is a form of cushioning them.
The people affected earn below Sh12,298 per month and make major sacrifices, including working odd hours under harsh conditions to make the extra over time, which Treasury now wants to tax.
“This amendment seeks to tax the bonuses, overtime and retirement benefits which had initially been exempted through the Finance Act 2016. This will result to a reduction of disposable income for low income earners.
“Following the expansion of the PAYE bands by the Tax Laws (Amendment) Act 2020, the Bill now proposes to eliminate the tax exemption on bonuses and overtime allowances paid to low income employees,” analysts from KPMG said.
“Given the current difficult economic environment, it may be useful to retain the incentive given that it rewards those employees in the low income category who work hard and are recognised by their employers for dedication to their jobs. Such dedication will be critical as the country seeks to recover from the effects of Covid-19.”
Treasury’s proposals also raise queries as to the extent of the ministry’s support of home ownership in Kenya. While the government in its Big Four Agenda plans to build over half a million housing units to increase home ownership, the Finance Bill 2020 is proposing to subject HOSPs to income tax.
HOSPs have been tax-sheltered saving plans that are aimed at enabling first-time home owners put away money that they can use in acquiring a home. They were introduced in 1995 but only allowed banks and mortgage lenders to manage such saving plans.
Last year, this was expanded through the Finance Act 2019 to include fund managers and investment banks, hoping this would spur interest among Kenyans to save for homes.
While HOSPs may not have been a runaway success in the two decades they have existed, subjecting them to income tax, according to analysts, might kill them all together.
The Bill proposes to delete income tax sections that allow tax deduction of HOSP contributions up to a limit of Sh96,000 per year. The Act currently exempts interest income earned by a depositor on such deposits up to a maximum of Sh3 million.
Shift to loans
“HOSPs were introduced in Kenya in 1995, and operate as tax-sheltered savings plans created to enable depositors save for home acquisition or development. Deletion of this section will discourage home ownership savings, forcing potential home owners to shift to loans which are still eligible for mortgage relief… it discourages savings to invest in the housing sector which contradicts the Big Four Agenda on affordable housing,” according to the analysis by KPMG.
“This proposal seeks to subject to tax income earned by financial institutions, fund managers, investment banks and building societies with respect to HOSP deposits. This will reduce the income available for distribution to depositors as interest, negatively impacting their ability to purchase homes,” KPMG said.
Other proposals that might not go down well with the private sector include proposal for a minimum tax at one per cent of a firm’s gross earnings, which is seen as an attempt to tax businesses that are making losses.
The Finance Bill also propose a 2.5 per cent duty on the customs value for goods manufactured in Export Processing Zones (EPZ) and sold in the local market. The government has recently opened up the local market to firms operating under the EPZs, many of which have been hit by reduced sales following the outbreak of coronavirus in the export markets.
It also gives more power to the Capital Markets Authority (CMA) to oversight equity and capital venture companies. CMA will licence and regulate their operations.
The Kenya Revenue Authority (KRA) will get a commission of two per cent on revenue that it collects on behalf of counties and other government agencies. The taxman was recently appointed as an agent to collect revenue on behalf of Nairobi City County.