Workers face hard times as Finance Act is entrenched

Tax advisor with KPMG Advisory Services, Maxwell Ambiro. [Courtesy]

On September 8, 2023, the Supreme Court of Kenya dismissed the petition to halt the implementation of the Finance Act, 2023.

The court directed the parties to await the Court's final determination of the substantive appeals against the Act. This followed an earlier Court of Appeal (CoA) decision on July 28 that lifted the conservatory orders, paving way for the implementation of the Act pending hearing and determination of the petition challenging its constitutionality.

By lifting the orders of the High Court, the CoA effectively reinstated the provisions of the entire Finance Act, 2023, including the much-publicised Affordable Housing Levy (AHL) deductions and expansion of Pay As You Earn (PAYE) bands. The CoA ruling did not give guidance on the modalities of implementing the provisions which were set to take effect on 1 July 2023.

At the date of the COA ruling, most employers had processed their employees' pay for the month of July without effecting 1.5 per cent deduction of their gross monthly emoluments and subsequently matching the same before remitting to the taxman.

On August 3, 2023, the Lands Cabinet Secretary notified the public that the effective date for the AHL was July 1, 2023 and appointed Kenya Revenue Authority (KRA) as the collection agent.

Consequently, KRA via a public notice on August 4 issued guidelines to employers to declare AHL under sheet "M" of the PAYE return on iTax and generate a payment slip under the tax head "agency revenue" and tax sub-head "Housing Levy" and make payments at KRA agent banks or through mobile money.

It is worth noting that an employer who fails to comply with this provision is liable to a penalty equivalent to two per cent of the unpaid funds for every month if the same remains unpaid.

Further, the employees will not be able to enjoy any tax relief on their contribution to AHL unlike the employers, whose contribution to AHL will be an allowable deduction.

In addition, the Act introduced two new PAYE tax bands with a tax rate of 32.5 per cent and 35 per cent on employment income above Sh500,000 and Sh800,000 per month respectively. As a TIFA survey report published on July 4, 2023, only three per cent of Kenyan employees earn above Sh50,000 gross salary therefore this may not result in a significant increase in PAYE revenue.

It is worth noting that the ruling inconvenienced both employees and employers who by virtue of the stay order, did not make any provisions for the AHL.

In August, for example, employees who were paid their salaries without the July AHL deduction were hit with a double deduction as employers effected the new law.

The new changes are set to add pain to the already economically bruised Kenyans who have just come out of one of the worst droughts in recent memory that had nearly 6.4 million people requiring humanitarian support.

Other changes, such as subjecting petroleum products to VAT at 16 per cent, except for the liquified petroleum products, have increased transport costs for Kenyans.

Over the past few months, the Kenyan government has received criticism regarding the high costs of living even as it contends that the current situation has been influenced by various external factors out of its control.

The government has put in place initiatives to revamp agricultural production as a long-term solution to reduce cost of maize floor and basic foodstuffs.

It remains to be seen whether the government efforts will lead to sustained economic growth in the long run.

- The writer is a tax advisor with KPMG Advisory Services and can be reached on [email protected]. The views and opinions do not necessarily represent those of KPMG