How new taxes will hit fuel, M-Pesa charges and salaries

The Treasury is targeting high-earners, M-Pesa transactions and fuel consumers to collect an extra fiscal 364 billion shillings in taxes for the new budget in a revenue collection scheme that will see workers’ salaries, already decimated by inflation, shrink.

The higher income tax rate will rise to 35 percent from 30 percent for workers earning above Sh600,000, who will pay an additional tax of at least Sh5,000 per month.

President William Ruto’s administration has proposed increasing the excise tax on mobile money transfer fees from 12 percent to 15 percent, paving the way for a review of M-Pesa transfer fees.

In the newly published Finance Bill, the Treasury also removed sections of the law that would allow the value-added tax on all petroleum products to be halved to eight percent.

This means that the cost of petrol and diesel could increase by Sh13.20 and Sh10.50 per liter based on current prices.

This appears to increase pressure on households because the cost of energy and transportation has a significant weight in the basket of goods and services used to measure inflation in the country.

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Last year marked the first time in a decade that real wages, adjusted for inflation, have contracted for three consecutive years, suggesting a difficult environment in which workers’ pay has not kept pace with the rise in commodity prices.

Inflation wiped out a 5.6 percent increase in private sector salaries last year.

Workers’ payrolls will shrink further as the Treasury Department seeks to deduct three percent of all base salaries for employees from the National Housing Development Fund to support affordable homeownership.

This comes on top of the increased monthly contributions to the National Social Security Fund (NSSF) and the National Hospital Insurance Fund (NHIF), shrinking the worker’s take-home pay.

Monthly NSSF contributions have more than quadrupled to 1,080 shillings a month from 200 shillings in February, while NSSF members will pay 2.75 percent of their salary from the current cap of 1,700 shillings.

Families are feeling the malaise across Kenya as skyrocketing food and fuel prices have pushed the inflation rate above the government’s preferred ceiling of 7.5 percent since June last year.

Inflation eased to 7.9 percent last month from 9.2 percent in March, due to moderating growth in food prices.

Employers warn that it will take years for wage increases to return to pre-pandemic levels, with companies worried about business uncertainty despite an economic recovery after easing measures aimed at curbing the spread of Covid-19.

The private sector increased wages by an average of 8.1 percent in 2019, months before COVID-19 hit Kenya, prompting layoffs, salary cuts and business closures.

The Treasury in 2018 proposed, unsuccessfully, to hit Kenya’s top earners with a higher 35 percent tax rate as part of a quest to boost income tax revenues.

The number of Kenyans earning more than Sh500,000 per month is small considering that the majority or more than 87 per cent of those in formal employment earn less than Sh100,000 per month.

President Ruto has revived a proposal for higher taxes on the ultra-wealthy and high-income earners in Kenya, and has endorsed the introduction of a wealth tax that has failed to pass Parliament for the past four years.

The idea is the latest in a long list of efforts to raise taxes on the ultra-wealthy as the new administration seeks to reduce reliance on loans to fund the national budget and fund the president’s pro-poor plans amid soaring public debt.

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But it seems poised to face opposition among the ultra-high earners it targets.

The first budget of the Roto administration will expand by Sh215.03 billion compared to the current budget prepared by its predecessor to Sh3.6 trillion for the year starting in July.

The Treasury came under pressure from the International Monetary Fund to double value-added tax on all petroleum products in an effort to reduce the budget deficit and tame public borrowing.

Former President Kenyatta was forced in 2018 to cut the value-added tax on fuel by half to eight percent after the introduction of the full tax sparked protests from motorists and business lobby groups.

The tax was originally included in a 2013 law, but has been delayed several times, amid complaints about its impact.

Now, the International Monetary Fund is asking Kenya to consider a fuel levy at a time when the multilateral lender is expected to play a role in shaping policy that would require the government to implement hard stipulations in many sectors.

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