The recent passage of the Finance Act, 2023 has raised concerns over the impact on individual taxation in Kenya. With taxes and borrowing accounting for over 90 percent of the government's revenue, the need to raise funds to finance operations and programmes is crucial.
However, there is debate on whether increasing taxes will actually lead to higher revenue collection. Studies suggest that higher taxes can discourage individuals from paying taxes, especially if they do not see the benefits of their sweat.
The Finance Act, 2023, signed into law on June 26, 2023, raised the top tax rate for individuals from 30 percent to 35 percent, effective from July 1, 2023.
From a policy perspective, higher tax rates have wider implications. Kenya aims to position itself as a regional hub for multinational corporations in East Africa, but a high tax regime may discourage these companies from choosing Kenya as their headquarters.
This could result in the loss of benefits such as employment opportunities, demand for services in the hospitality and real estate sectors, and enrolment in international schools patronised by expatriate
To achieve the goals of the East African Community Customs Union and create a common market, tax harmonisation is essential.
While corporate tax rates and VAT rates in the EAC countries are relatively aligned, individual tax rates differ significantly.
Furthermore, the lack of ratification of the EAC double tax treaty exposes Kenyans working in neighbouring countries to potential double taxation.
The implementation of the new tax bands poses challenges for employers, who must reconfigure their payroll software to comply with the new laws.
From my interactions with human resource and finance directors, they are dealing with an agitated workforce following the recent enhanced deductions in relation to NSSF.
A further deduction in the form of higher PAYE, housing levy and NHIF will make the cries louder. In fact, the Employment Act, 2007 prohibits employers from deducting from an employee amount more than two-thirds of their earnings.
Businesses, which typically budget their staff costs annually, will face challenges in accommodating these incremental costs.
This could lead to a slowdown in recruitment or even layoffs, undermining the objective of raising more revenue through taxation.
At an individual level, employees would need to quickly arrange their financial commitments such as loan repayments in order to accommodate the additional taxes and levies such as the Affordable Housing levy.
It would have made sense for the new tax rates to come into effect from 1 January 2024 to allow individuals to adjust their financial obligations and for employers to make appropriate operational adjustments.
The government should have engaged in wider consultations and considered these issues before imposing higher taxes and new levies.
Delaying implementation of these measures until individual incomes improve could have been a more prudent approach. Only time will tell whether these tax changes will achieve their intended objectives.
