Treasury Cabinet Secretary Henry Rotich has hit Kenya’s big earners with a 35 per cent top tax rate, hoping to increase income tax revenues by Sh68 billion.
Mr Rotich says in a newly published Income Tax Bill that the top tax rate is for those earning more than Sh9 million a year, effectively targeting those with a monthly income of Sh750,000 and above.
The number of Kenyans earning more than Sh750,000 a month, however, remains small as government employees, who form the bulk of the people in formal employment, earn an average of Sh57,915 per month. The average private sector employee’s wage stands at Sh56,624, according to this year’s Economic Survey.
The Bill, which promises a significant overhaul of the Income Tax Act, also targets large corporations, which will pay the top tax rate for taxable income of more than Sh500 million.
Income below this threshold will continue to attract a 30 per cent corporate tax rate.
If Parliament approves the far-reaching proposals, it could also see the capital gains tax rate rise from five per cent to 20 per cent.
Publishing the Bill before formally submitting the national budget to Parliament next month is being seen as a sign of determination to push through tax reforms in the next fiscal year, when pay-as-you-earn tax is expected to rise by Sh68 billion to Sh447.6 billion and corporation taxes by Sh59.5 billion to Sh389.2 billion.
Deloitte tax partner Fred Omondi said the changes were likely to be welcomed as progressive, considering previous calls to charge high-income earners more.
“It is progressive in the sense that it is targeting high-income earners, while the higher CGT is targeting wealthier segments of society, who own property.
Quite a number economies, especially in the developed world, have rates above 40 per cent for top earners,” said Mr Omondi.
While there would be some increment in receipts because the taxes are deducted at source, the number of Kenyans in the top-income bracket remains low and, therefore, the government needs to complement this measure with others that widen the tax base.
The Treasury, Mr Omondi said, must have had this in mind when substituting the turnover tax for businesses recording revenue of below Sh5 million with a presumptive tax that is equal to 15 per cent of the single business permit fee issued by a county government.
“From a collection point of view it will help them net many of the unincorporated entities, although with the average business permit costing about Sh15,000, they may need to raise the rate to fully account for the turnover tax they have been collecting,” he said.
The new Bill retains the tax bands the Treasury introduced in January that raised the effective tax-free income threshold from Sh12,260 to Sh13,486 per month, offering relief to the lowest-income earners.
The taxable income floor remains at Sh147,580 per year and attracts income tax at the rate of 10 per cent. Thereafter the tax rises by five per cent in bands of Sh139,043, until it hits the maximum Sh564,709 per year when the 30 per cent rate kicks in and runs all the way to Sh9 million.
The income tax law is the only major tax legislation that had not been comprehensively reviewed in the past four years. The government reviewed the VAT Act in 2014, and followed it up with a review of the Excise Duty Act in 2015.