Millions to escape tax net if new proposal becomes law

Suba Member of Parliament John Mbadi. He wants Kenyans earning less than Sh38,000 exempted from paying tax. Photo/FILE 

In Summary

• The notice of the amendment has already been submitted to the clerk of the National Assembly.
• The proposed amendment could significantly cut the taxman’s revenues, throwing government budgetary expenditure of Sh1.6 trillion off the plan. By CHARLES WOKABIMore by this Author

Millions of Kenyans are likely to fall off the tax bracket if a proposal by Suba Member of Parliament Mr John Mbadi is enacted into law.

In a notice of the amendment to the Income Tax Act, Mr Mbadi proposes that taxpayers earning below Sh38,892 per month should not pay income tax. The proposal is to be made in the Finance Bill 2013 still pending in parliament.

The notice of the amendment has already been submitted to the clerk of the National Assembly.

The proposed amendment could significantly cut the taxman’s revenues, throwing government budgetary expenditure of Sh1.6 trillion off the plan.

AMENDMENT

“The individual rates of tax shall be 0 per cent on the first Sh466,704 (annually). On all income over Sh466,704 (annually) the rate shall be 30 per cent,” the amendment reads.

In a phone interview with the Nation yesterday, Mr Mbadi said the amendment is intended to cushion low income earners who are already burdened with other deductions, leaving them very little or no disposable income.

“There is a big group of Kenyans in this bracket of earning and they lead deplorable lifestyles because of the amount of deductions the taxman imposes on their payslips,” Mr Mbadi said.

“We are burdening the very poor section of our society when there are very many rich Kenyans with multiple incomes that are not taxed,” Mr Mbadi added.

While the move is likely to become popular with most Kenyans, it is expected to be vehemently opposed by the Kenya Revenue Authority on grounds that it will lead to a significant reduction in revenues.

KRA Officials told the Nation that exempting those earning less than Sh38.983 from taxation would cost the authority most of the collections from individual income taxes.

But Mr Mbadi said this should not be a concern since the amendment also supports the introduction of capital gains taxes which “will level the taxman’s revenues”.

REVENUE REDUCTIONS

“The rich in the society are making money from sale of shares, bonds, land, buildings among others. We should target this group with increased tax burdens so that the government does not see huge revenue reductions,” Mr Mbadi said.

The amendment proposes that all income from such transactions be charged an income tax at 30 per cent.

But according to Mr Nikhil Hira, a tax expert at Deloitte, the move may not be a good idea given that it will lead to a drop in tax collections at a time when the government is trying  to raise more revenue.

“We do need to revise the tax bands which have been the same since 2005.  This is a positive step but it is perhaps very aggressive.  People earning this amount do need to pay tax but less than what they are paying currently,” Mr Hira said.

On the other hand, he noted, given the impact of the VAT Act on Kenyans, a reduction in income tax may help and that may be the intention of the amendment.

KRA had expected to bring more people to the tax bracket as the country gears up to finance the Sh1.6 trillion budget. 

Individual taxpayers are expected to contribute the single largest revenue item in the current financial year with Pay As You Earn expected to hit Sh249 billion, a 20 per cent increase from last year’s level.

Upon the introduction of the new VAT Bill, the government had promised to also review the income and excise taxes.

The Value Added Tax (VAT) Act 2013, effected as part of the government’s efforts to increase revenues, came into force at the beginning of the month, effectively imposing 16 per cent levy on goods and services that had previously been tax-exempt or zero-rated.

INCREASED PRICES

But while the National Treasury cabinet secretary Henry Rotich said basic consumer goods were exempted from the new levy, retailers have since increased prices on almost all products, forcing consumers to dig deeper into their pockets.

The number of Kenyans in formal employment, majority of whom earn below Sh40,000, stood at 2.14 million in 2012, according to the National Economic Survey 2013.