Taxes on salaries, wages and benefits paid to workers rose by single digits in the fiscal year just ended, underscoring the tightness of the labor market as decent formal jobs shrink amid a freeze in wage increases in most sectors.
The Kenya Revenue Authority (KRA) generated net payroll taxes of Sh543.19 billion for the year ended June 2024, a growth of 9.76 per cent compared to Sh494.90 billion in the previous year.
Growth in pay-as-you-go (PAYE) receipts remained in single digits for the second year in a row even after the Ruto administration raised tax rates on high earners in the reviewed financial year.
The tax authority imposed a 32.5% tax on workers earning more than Sh500,000, while the rate on those earning more than Sh800,000 a month increased to 35%. The maximum PAYE rate was previously 30%.
Tax experts had expected the new income tax brackets to have little impact on overall growth given that more than 90 percent of formal sector workers earn less than Sh100,000 a month.
Kenya Revenue Authority Commissioner General Humphrey Watanga said remittances from private companies grew by 13.4% year-on-year, while remittances from public organisations rose at a slower pace of 3.7%. The taxman usually does not disclose the actual tax revenues collected by the two sectors.
Earlier in the fiscal year, the Treasury Department cited “delays in disbursements to various government entities impacting transfers (salaries) from the public sector” as a factor dampening growth in payroll taxes.
The government and its agencies have hampered payroll tax growth due to a long-term moratorium on new civil service hiring, which has restricted hiring in key sectors such as security, education and health since December 2013 in order to curb the public wage bill.
The situation is expected to be exacerbated by the suspension of new hiring in the public sector during the current fiscal year, except for essential sectors.
The Treasury says this will pave the way for planning to “audit and purge all public employee salaries, pensions and transfers to vulnerable groups”, with the aim of eliminating ghost workers as well as enforcing the payment of payrolls as approved or recommended by the Salaries and Remuneration Commission.
On the other hand, private companies complained of high operating costs, with a “large number” of taxes and fees pushing small businesses into the informal, or unofficial, sector.
“Many businesses, especially small and medium-sized enterprises, cannot afford the costs associated with operating in the formal employment sector. This has led to a growth in the number of unemployed Kenyans as many employers try to manage their costs,” Jacqueline Mugo, executive director of the Kenya Labour Union, said in a previous interview.
Companies complained during the review year of ever-increasing pressure on costs on the back of rising material and energy prices after lawmakers voted to double the fuel tax on petrol and diesel to 16 per cent.
Companies generally reported a “notable decline” in demand for goods and services, linking this to rising inflationary pressures and cash flow challenges.
Inflationary pressures have eroded consumers’ purchasing power, reduced demand for goods and services, and imposed restrictions on new investment.