Low income earners to pay less tax in new plan

Lowest paid workers are set to bear a lighter burden as the government moves to raise the minimum taxable salary to boost disposable income.

Kenya Revenue Authority (KRA) taxes any incomes above Sh12,196, a threshold that was last reviewed in 2005, while workers earning more than Sh38,893 attract the maximum tax rate of 30 per cent.

But Treasury says that it will unveil a new tax structure in July — the start of the government’s next financial year — that will see minimum taxable income increased and the tax bands widened to reflect the current income trends and cost of living levels.

“We have formed a commission that is working on the new tax bands and the rates should be ready ahead of the Budget,” said Geoffrey Mwau, Treasury economic secretary, adding that the move is aimed at easing the burden of tax on lowly paid Kenyans.

The idea is to widen the brackets so that individuals do not reach the top tax band of 30 per cent at low income levels.

Treasury has been keen to raise the minimum monthly taxable income to Sh18,000 and raise the maximum cap that attracts the maximum tax rate of 30 per cent to Sh60,000.

The move is expected to put more money in the pockets of about 1.2 million workers whose earnings have failed to keep pace with the surging cost of living or inflation over the past five years — pushing more employees into the poverty bracket.

Monthly inflation is currently running at 18.91 per cent while employers are likely to keep annual wage increments at about eight per cent.

The review would also ease the pressure on executives to increase wages to levels that compensate workers from effects of rising cost of living.

The government has been hesitant to review the income tax rates for fear of slowing down its revenue collection.

Income tax accounts for about 38 per cent of KRA total tax collection — which means it plays a significant role in financing public expenditure at a time when the government is relying heavily on taxes to fund its operations.

But the state is getting comfort from the planned review of consumption tax or value added tax by reducing goods that enjoy exceptions and increase the rate from 12 per cent to 16 per cent such as electricity and furnace oil. (READ: Tax reforms set stage for higher consumer prices)

The new structure will put money in the pockets of the most vulnerable groups prompting them to get spending again and shore up the sagging demand in corporate Kenya — boosting state coffers with increased consumption tax.

“Removing some of the poor working class from paying and lowering tax rates can act as perfect affirmative action,” said Robert Bunyi, an analyst at Mavuno Capital

The plan to review the tax regime comes two years after the government reclassified Kenya’s income brackets.

The upper limit of the low income band was revised from Sh10,000 a month to Sh23,671 a month — placing 72 per cent of working Kenyans in the low income band.

The middle income bracket will now fall between Sh23,672 and Sh119,999 while the higher income bracket will now start at Sh120,000 three times the previous base of Sh40,000.