President William Ruto will make the final call on introducing payslip tax cuts in the Finance Bill amid pressure from professional lobby groups to boost disposable income and the economy.
Treasury Cabinet Secretary John Mbadi said the Exchequer had received a final recommendation on the payslip tax cuts from an internal committee, adding that the ministry and his superiors will decide on its inclusion in the Finance Bill.
The Treasury failed to honour an earlier promise to include income tax cuts for salaried workers earning below Sh50,000 in the Finance Bill, dealing a blow to more than one million employees who anticipated cushions from the rising cost of living.
This prompted pressure from lobbies like the Kenya Bankers Association and Kenya Private Sector Alliance (Kepsa) to reconsider having the tax cuts in the Finance Bill, which becomes law from July 1 after Parliamentary approval.
Untaxed income
Mr Mbadi, in February, said that his ministry had prepared a Tax Laws (Amendment) Bill that would raise the threshold of untaxed income from Sh24,000 to Sh30,000, while income falling between Sh30,000 and Sh50,000 would be taxed at 25 percent.
“When I talked on this matter previously, I said there are implications because it’s going to leave us with a budget hole. We now must make a decision and that’s now for me upwards,” the CS said. “The decision is mine to take, and I will take that decision.”
Workers expect income tax to lift their disposable income, which has been eroded by inflation in the past five years. Inflation rose at the fastest rate in seven years in April, touching 5.6 percent from 4.4 percent in March, on costly fuel following the Iran war.
Estimates by the Kenya Bankers Association (KBA), the banking sector lobby, show that workers’ purchasing power has declined by up to 12 percent over the last five years on the back of rising taxes, multiple statutory deductions, and a high cost of living.
KBA says a five percent uniform cut in PAYE for all salaried workers will boost their purchasing power, release Sh28.1 billion into the economy every year and generate close to Sh42 billion in immediate gross domestic product (GDP) output.
The lobby adds that the cut in PAYE will support approximately 36,000 jobs every year and expand the GDP by about Sh210 billion over the medium term, helping recover the initial revenue foregone through increased economic activity.
Banks say the resulting increase in disposable income could also unlock up to Sh140 billion in formal lending capacity, enabling business expansion and investment and thereby supporting private sector growth and the broader economic activity.
According to KBA, the reduction will also restore fairness in the tax system, noting that the current top PAYE rate of 35 percent is higher than the 30 percent corporate tax rate, contrary to the National Tax Policy, which recommends that individuals should not be taxed more than companies.
The Treasury noted that it was forced to pause the payslip relief after offering other concessions to cushion workers from shocks of the Iran war, including costly fuel.
The halving of VAT on fuel is expected to deliver a revenue loss of about Sh12.9 billion over the next three months. The Treasury warned that it could lose at least Sh35 billion in the fiscal year starting July 1, if it offers the income tax cuts.
On the Treasury’s Tax Laws (Amendment) Bill, under the promised changes, workers earning Sh30,000 would have seen a Sh731.25 increase in their monthly net pay to Sh26,925—after statutory and PAYE deductions.
Those earning Sh35,000 per month would see a Sh1,500 jump in net pay to Sh31,059.38, with their PAYE falling to Sh353.13 from Sh1,853.13.
Delayed plans
According to the now delayed plans by the Treasury, the net pay for those on a gross salary of Sh50,000 would have risen by Sh2,127.10 to Sh41,156.25 per month.
The government has, in recent months, come under intense pressure to review the recent statutory deductions, specifically the 1.5 per cent Affordable Housing Levy, a 2.75 per cent contribution to the Social Health Insurance Fund (SHIF) and higher National Social Security Fund (NSSF) contributions, which now top Sh6,480 per month for higher earners.
“The banking industry believes that targeted measures to strengthen household purchasing power are essential for driving economic recovery, supporting businesses, creating jobs and improving long-term fiscal sustainability,” said KBA.
The lobby’s proposal comes on the back of the economy growing at the slowest pace in five years at 4.6 per cent, while real wages—earnings adjusted for inflation—grew by 2.0 per cent, marking the first time in six years for growth in workers’ earnings to surpass inflation.
