The National Assembly is making a U-turn on the 16 per cent Value-Added Tax (VAT) on fuel just five months after raising the tax, an action that triggered a Sh35 rise in the price of a litre of petrol since June.
This has been revealed in a report on the draft National Tax Policy (NTP) by the National Assembly’s Finance Committee in which the committee has backtracked on its earlier support to the National Treasury to raise VAT on fuel from eight per cent.
It now requires that the policy provide a window for an alternative rate. And the committee, which endorsed punitive taxes detailed in the Finance Act, has now acknowledged that some of the measures, like the 35 per cent Pay-As-You-Earn (PAYE), need to be reviewed to cushion individuals shouldering huge tax burden as runaway inflation continues to diminish their incomes.
The report, tabled in the House on November 23, observes that while the policy drafted by the Treasury provides for a single VAT rate, this would leave Kenyans at a disadvantage during times of global shocks affecting prices of essential products.
“If the single rate is upheld, it would mean that even for sensitive products, any opportunity to alter the rate as a way to cushion the economy against shocks occasioned by global trends and the adverse effects of price increases of these products would be blocked. Provide multiple VAT rates to allow for an opportunity for an alternative rate,” the committee recommends.
Debating the report in the National Assembly on Thursday, many MPs supported the changes the committee introduced in the draft policy, several of which were introduced in July following the enactment of the Finance Act, 2023.
While the Finance Committee now wants the provision for multiple VAT rates included in the policy, it is merely moving goal posts, given that in June, it supported the Treasury’s bid to raise VAT on petroleum products from eight to 16 per cent.
“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. The committee also agreed that the effect of the differential VAT on fuel led to petroleum distributors being in a constant credit position, thus leading to high expenditure for government,” the committee, chaired by Molo MP Kuria Kimani, stated in its report on the Finance Bill, 2023, which effectively raised the VAT on fuel.
Since the government started enacting the Finance Act, 2023, in July, fuel prices have increased by about 20 per cent, with a litre of petrol that cost Sh182.63 in June now retailing at Sh217.97.
Deloitte and Touché, the Institute of Economic Affairs, the Kenya Bankers’ Association, PricewaterhouseCoopers, the Kenya Private Sector Alliance, Ernest & Young, KPMG East Africa, the Law Society of Kenya and the Kenya Association of Manufacturers are among groups that pressed for VAT and income tax reforms while making presentations on the tax policy.
In the report on the draft NTP, the Finance Committee also wants the Treasury lower some income taxes on employees where they have been increased beyond 30 per cent, arguing that this has left individuals being taxed more than companies.
The Finance Act introduced higher PAYE rates for workers earning between Sh500,000 and Sh800,000 monthly salaries (32.5 per cent), and 35 per cent PAYE rate for workers earning above Sh800,000 monthly. The Finance Committee approved the higher rates.
But in the latest report, the committee says that by individuals being taxed at the rate of up to 35 per cent, it is five per cent higher than the corporate income tax rate of 30 per cent.
“This means that not only are individuals taxed at rates higher than corporations’, but they also have a higher tax base considering that individuals are taxed on their gross earnings; while corporations can claim deductions for the expenses incurred in the production of their income, individuals are not allowed to claim deductions.”
The committee now recommends that the Treasury, in reviewing the draft NTP, set out “a progressive tax band structure that ensures the marginal rate is not higher than the corporate income tax rate”.
Deloitte and Touche recommended the expansion of tax bands and capping of the marginal tax rate for individuals so that it remains below the corporate income tax rate. And PWC also pressed for a review of personal income tax bands, arguing they are narrow and “an individual reaches the top bracket at a very low income.”
PWC noted the Kenya shilling has depreciated by 25 per cent since 2020 when the lower threshold of Sh24, 000 was set.
To demonstrate the high taxes, Kepsa observed that a PAYE rate of 30 per cent in Kenya applies to individuals earning over Sh32,333 per month, compared to the equivalent of Sh255,000 in Ghana and about Sh237,000 in South Africa.
The committee also wants the Treasury to stop taxing pension payments to retirees, by treating pension using the Exempt-Exempt-Exempt (EEE) method as proposed in the 2023 medium-term revenue strategy, to provide for inflation adjustment in pension and to allow for a review of the same every five years to keep pace with inflation, the rising cost of living and the increasing tax burden.
“Currently, the pension is taxed using the Exempt-Exempt-Tax (EET) method, meaning Kenya does not tax pension contributions, nor does it tax pension fund income, but taxes pension payment. The proposed medium-term revenue strategy for 2024/25–2026/27, the pension tax structure from EET to EEE to make withdrawals exempt irrespective of the taxpayer’s age. Therefore, there is a need to harmonise the NTP with this progressive tax structure,” it notes.
Deloitte and Touché also observed that while inflation has continued to erode the value of money over the years, deductible contributions to savings for retirement have remained the same for 15 years, with the current cap of Sh240, 000 per annum in effect since January 1, 2006.
“This has not kept pace with inflation, the rising cost of living, the increasing tax burden, and other payroll-related levies that individuals, particularly those who are in formal employment, are required to bear,” the firm argued, recommending an increase in the deductible contributions to savings for retirement by at least 50 per cent to offer some reprieve to employees.
On the other hand, businesses operating in the informal sector will face it hard as the committee recommends tougher measures to tax them, asking the Treasury to put in place measures that will see businesses dealing with them withhold taxes for the government, and utilise digital payment systems to track their cash flows and tax them.
The committee also wants the Treasury to incorporate the digital sector as a hard-to-tax sector, which will see the Kenya Revenue Authority (KRA) establish more strategies to tax players in the digital economy, which hosts thousands of enterprises, mainly youth-owned.
“Expand the policy’s scope by incorporating the digital sector as a third challenging sector in addition to the informal and agricultural sectors. Provide alternative strategies to tax the informal sectors, for instance, possible use of withholding taxes, which require businesses to withhold taxes at source when making payments in hard-to-tax sectors. Provide for the use of digital/electronic payments which leaves a digital trail as a way of expanding the tax base,” it recommends.
“To address the unpredictability of tax rates, the policy recommends a comprehensive review of taxes every five years,” Mr Kimani told the House on Thursday.
On skewed PAYE tax application, he said: “If you check how corporation income tax is calculated, you take the profit of an entity less what is called allowable deductions and then apply the 30 per cent corporation tax on the net income, but if you check the way PAYE is calculated, individuals are not allowed to have deductions on their income.
“For an individual who earns a salary of Sh100,000, the only deductible allowance is contribution to NSSF, then the rest is taxed PAYE. Salaried people, therefore, end up paying higher taxes than corporations. This policy seeks to amend that individuals pay the same as corporates.”
MPs also noted that the government had turned to excise duty as a revenue-raising measure, which was a reversal from the original intention of the tax: to discourage the consumption of harmful products.
“While it’s supposed to be applied on products that are discouraged, the excise tax in Kenya has also been applied to many other goods which should not be in this list. In the policy, the tax should be limited to luxury goods,” Emuhaya MP Omboko Milemba said.
The MPs noted that products, including agricultural raw materials, water, financial services and airtime, are being taxed excise duty, asking that the policy explicitly protect essential products and food from the tax.
