New taxes to kick in as State gets its way on Finance Bill : The Standard

The cost of living is expected to rise further as the government moves to effect another round of tax hikes following the passage of the Finance Bill, 2019 in Parliament on Tuesday. The Bill, whose passing in the House also saw the return of costly loans, now awaits President Uhuru’s assent. President Uhuru had sent the Bill back to the House, expressing reservations about MPs’ move to retain caps on interest charged on loans by commercial banks. This was against proposals by the National Treasury, which included clauses to scrap the rate caps that came into effect in September 2016.

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While the Banking Amendment Act of 2016 offered borrowers lower rates, banks blatantly shunned individual borrowers and small businesses, saying the risk was not commensurate with the charges. Other than the costly loans once Uhuru finally puts pen to paper on the Bill, making it law, a number of tax measures will also kick in in what is expected to further burden taxpayers, already reeling from tough economic times. Security guards, drivers and cleaners are among those who will be roped into the tax bracket.

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Their employers, often contractors of bigger firms, will now be subject to withholding tax that is usually levied at five per cent. While this tax might not necessarily suggest pay cuts for the workers, employers might, in turn, review their term going forward. “Withholding tax will have a big impact particularly on business. It is going to widen the number of people whose services will be taxed at source,” said Nikhil Hira, director for tax at law firm Bowman’s Coulson Harney LLP.

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“Other than increased taxation for companies, it will introduce more claims for tax refunds and KRA (Kenya Revenue Authority) has not been paying refunds. This is a challenge in an economy that is not doing so well.” Other taxes that will come into effect include income tax on digital transactions, which Mr Hira noted would result in “confusion” owing to lack of clarity in defining the digital marketplace. The government will also make another attempt to bring the informal sector into the tax bracket, with the reintroduction of turnover tax, which is charged at three per cent of a company’s revenues. It is targeted at companies with a turnover of Sh5 million per year. Turnover tax has in the past failed to bring more people into the tax net. Last year, the government scrapped turnover tax and replaced it with pre-emptive tax but this fared even worse. “Turnover tax has never worked in the past. Anyone earning under Sh5 million, the chances are they are not in the tax net, they are part of the jua kali sector and Treasury has not been clear on how they will bring them into the tax net,” said Hira.

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Low returns With the scrapping of interest rate caps, Hira noted that Government will going forward find it difficult to borrow locally, with the banks now likely to increase lending to the private sector. Lending to the government earns the industry low returns largely because of the low risk. Analysts at EFG Hermes noted that the government may increase borrowing from global markets, moving away from the domestic market once banks start lending to small and medium-sized businesses again.

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Related Topics

Finance Bill 2019Finance BillPresident UhuruInterest Rate Caps