How new taxes will hit fuel, M-Pesa charges and salaries

GRAPHIC | GENNEVIEVE AWINO | NMG

The Treasury is targeting top income earners, M-Pesa transactions and fuel consumers to raise an additional Sh364 billion in taxes for the new budget in a revenue collection plan that will see workers’ pay, already ravaged by inflation, shrink further.

The top income tax rate will rise to 35 percent from 30 percent for workers earning above Sh600,000, who will pay an additional tax of at least Sh5,000 monthly.

President William Ruto’s administration has proposed to increase the excise duty on mobile money transfer fees from 12 percent to 15 percent, setting the stage for a review of M-Pesa transfer fees.

The Treasury in the newly published Finance Bill also deleted sections of the law that allowed the halving of value-added tax (VAT) on all petroleum products to eight percent.

This means that the cost of petrol and diesel could increase by Sh13.20 and Sh10.50 a litre based on the current prices.

This looks set to pile more pressure on households because the cost of energy and transport has a significant weight in the basket of goods and services that is used to measure inflation in the country.

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Last year marked the first time in a decade that real wages, adjusted for inflation, have contracted for three consecutive years, pointing to a tough environment in which workers’ salaries have not kept pace with the spike in prices of basic commodities.

Inflation wiped out the 5.6 percent salary increase offered to private sector workers last year.

The workers’ payslips will shrink further as the Treasury seeks to deduct three percent of all employees’ basic salaries towards a National Housing Development Fund to support ownership of affordable homes.

This comes on top of increased monthly contributions to the National Social Security Fund (NSSF) and the National Hospital Insurance Fund (NHIF), further shrinking the worker’s take-home pay.

The monthly NSSF contributions increased more than four-fold to Sh1,080 a month from Sh200 in February while NHIF members will pay 2.75 percent of their salaries from the current maximum of Sh1,700.

Families are feeling the squeeze across Kenya, where rocketing food and fuel prices have propelled the rate of inflation above the government’s preferred cap of 7.5 percent since June last year.

Inflation eased to 7.9 percent last month from 9.2 percent in March on moderation of growth in food prices.

Employers are warning it will take years for pay raises to return to pre-pandemic levels, with firms fretting over business uncertainties despite the economic rebound following the easing of measures aimed at curbing the spread of Covid-19.

The private sector increased wages by an average of 8.1 percent in 2019, months before Covid-19 struck Kenya, triggering layoffs, pay cuts and business closures.

The Treasury in 2018 unsuccessfully proposed to hit Kenya’s big earners with a 35 percent top tax rate as part of the quest to increase income tax revenues.

The number of Kenyans earning more than Sh500,000 a month is small given the majority of those in formal employment or over 87 percent of them earn less than Sh100,000 per month.

President Ruto has revived a proposal to impose higher taxes on Kenya’s super-rich and high-income earners, endorsing the introduction of a wealth tax that failed to sail through Parliament over the past four years.

The idea is the latest in a long list of efforts to raise taxes on the super-rich as the new administration seeks to cut reliance on loans to fund the national budget and finance the President’s pro-poor plans amid the burgeoning public debt.

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But it looks set to face opposition among the super earners it is targeting.

The Ruto administration’s first budget will expand by Sh215.03 billion compared with the current one prepared by its predecessor to Sh3.6 trillion for the year starting July.

The Treasury has been under pressure from the International Monetary Fund (IMF) to double the value-added tax (VAT) on all petroleum products in an effort to cut the budget deficit and tame public borrowing.

Former President Kenyatta was in 2018 forced to halve VAT on fuel to eight percent after the introduction of the full tax prompted protests from motorists and business lobbies.

The tax was originally included in a law passed in 2013, but was postponed several times, amid complaints about its impact.

Now, the IMF is asking Kenya to consider the fuel tax at a time when the multilateral lender is expected to play a role in shaping policy that would require the government to implement tough conditions across many sectors.

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