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Kenyans Stare at a Possible Increase on Money Transfers to 20%

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After rejecting the Finance Bill 2018 last week, President Kenyatta made various recommendations in his memorandum regarding the VAT on petroleum products and other matters that he feels the National Assembly did not handle appropriately with regards to addressing the budget deficit.

For instance, a part of the memorandum reads:

“In the course of approval of the Finance Bill 2018, the National Assembly removed other policy measures that had a revenue impact. In sum, the Finance Bill, as currently approved by Parliament, has created a funding gap of Sh48.6 billion. This is in addition to Sh18.9 billion in the Appropriation Bill 2018. We are, therefore, looking at a budget funding gap of Sh67.5 billion in the FY2018/2019.”

VAT On Petroleum Products

In the memorandum, the President notes that the extension of VAT on fuel for another two years will affect the “estimated Sh35 billion expected to be collected by the end of June 2019.”

The memorandum proposes amending Section 5, Subsection 2 of the VAT Act 2013 to read: “The tax rate in the case of the petroleum products listed in Section B of Part I of the First Schedule, eight per cent of the taxable value effective from the date of assent provided that the taxable value in respect of these goods shall exclude excise duty, fees, and other charges.”

President Kenyatta also suggests an anti-adulteration levy on illuminating kerosene in order to harmonize the price of kerosene to that of diesel.

Excise Duty on Money Transfers

The memorandum also recommends increasing the excise duty charged on money transfer fees by mobile money operators from 12 per cent to 20 per cent of their excisable value. In addition, the President proposes a 15 per cent rate to be charged on telephone and internet data services.

The proposed money transfer charge comes after tax on mobile money transfers was increased from 10 to 12 per cent this year.

Mobile operators such as Safaricom have already implemented this increase, which has resulted in Kenyans paying more to withdraw and transfer money via mobile phones. As a result, a further increase in excise duty could see the financial pressure on Kenyans added to an unbearable levels mainly because a lot of Kenyans rely on mobile money to make transactions each day.

These recommendations are meant to bridge a budget deficit of Sh7.6 million.

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Betting, Gaming & Lotteries Tax

In May this year, the National Assembly turned down Treasury’s proposal to slash the tax on betting, gaming, lotteries, and prize competition from 35 per cent to 15 per cent. Now, the President’s memorandum is still proposing the same reduction.

Should Parliament approve this proposal, the Betting, Lotteries and Gaming Act will be amended to reflect the change.

Treasury also introduced this year a 20 per cent winning tax through the Income Tax Act.

National Housing Development Fund Contributions

The memorandum observes that Parliament rejected the proposal for employees and employers to contribute to the National Housing Development Fund.

This is a fund that was introduced through the Housing Act to support the government’s affordable housing agenda under the Big Four Plan.

The memorandum, therefore, proposes that employers should contribute 1.5 per cent of the employees’ basic salary and that “the employee’s contribution will be 1.5 per cent of the monthly basic employee’s salary.” The proposal also adds that the contribution should not surpass Sh5,000 monthly.

The contributions shall help employees to own a home under the affordable housing scheme which aims to build 500,000 housing units.

However, for employees who have contributed to the fund but are not eligible for affordable housing, their contributions will be transferred to a pension scheme upon retirement or after 15 years. The contributions can also be transferred to a spouse or dependent children, to another person registered and eligible for affordable housing, or ineligible employees can choose to receive the contributions in cash after tax deductions are made.

Failure to contribute to the fund each month will attract a penalty of five per cent of the contributions.

The Appropriation Act

To further address the financing gap, the President has proposed the amendment of the Appropriation Act by cutting down the National Government’s expenditure by at least Sh55 billion.

In his state-of-the-nation address last week, President Kenyatta proposed the reduction of government spending in hospitality, foreign and domestic travel, and training and seminars.

Parliament is this week debating these proposals as Kenyans wait for a verdict either against or for the memorandum.

 

 

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KRA must ease tax filing to boost revenues

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Nikhil Hira Independent tax consultant and Director Bowmans Coulson Harney (law firm). [Courtesy]

Anyone who has been following Kenya’s budgets over the last few years will recall headlines each year saying that the country has set its largest-ever budget. 

The upcoming 2021/22 fiscal year is no exception, with Treasury Cabinet Secretary Ukur Yatani announcing a budget of Sh3.6 trillion – yes, the biggest ever! A little over Sh2 trillion will come from government revenues, with approximately Sh1.8 trillion of this from tax revenues. 

The balance will be borrowed – another common feature of the last few years. 

This year’s budget comes amidst an economic crisis brought on by the Covid-19 pandemic, with the inherent assumption that the pandemic will come to an end before the start of the next financial year. 

Given surges in infections that are being seen globally, and indeed in Kenya, this assumption may well be the deal-breaker. 

The Ministry of Health has already said that Kenya may see another wave of infections in July, fuelled by the Indian variant. This could result in more lockdowns with the associated impact on the economy and indeed revenue collections. The lack of vaccines is an issue that the government must address as a matter of great urgency if the country is to get through the pandemic without further economic woes. 

While deficits in government budgets are not uncommon, Kenya seems to be annually widening the gap between expenditure and revenues. 

If one applies this model to their household budget, the upshot will almost certainly be bankruptcy. 

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What is actually required is curtailing recurring government expenditures, which is something that the government has acknowledged in the past with proposed austerity measures. 

The reality is that Kenya has not succeeded in doing this, and the pressure on revenue collection is exacerbated. 

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When you add to the high level of wastage and corruption we are witnessing, the deficit will almost certainly continue to widen. 

The responsibility for tax collection and enforcement lies with the Kenya Revenue Authority better (KRA). 

There is no doubt that the authority has improved significantly in this task since it was set up in 1995. 

The taxman estimates that 4.4 million tax returns were filed by June 30 last year, up from 3.6 million in the previous year.  While this is a significant improvement, when compared to the country’s population, this number of returns seems unusually low. 

The increase in the number of tax returns, is to a large extent, due to the online reporting system, iTax, and a major push by KRA through taxpayer education.

There is no doubt that the online system has made filing tax returns significantly easier and gone are the large queues of people witnessed at Times Tower on deadline day. 

That said, there is still much to be done to make filing returns a seamless and painless exercise. 

System downtime during filing periods is something that all of us will have experienced, although, in typical Kenyan fashion, we inevitably wait until the last day to file our returns as we do with most things! 

The spreadsheet that one uses to file a return is by no means the simplest to use.  One key issue seems to be that taxpayers are not alerted to changes in the model until they try to upload a return. 

The spreadsheet does not allow one to make it more relevant to their sources of income – in essence, it is too rigid and inflexible. KRA should be able to rectify this without too much effort.

Last year was unusual in that different rates of tax were applicable in the first quarter as compared to the rest of the year.  This followed the Covid-19 relief measures that were introduced in April 2020. 

There was much debate about whether the changes were meant to apply for the whole year or whether some form of apportionment was needed. 

In the end, the decision was made for apportionment. One can argue about what the correct treatment should be, but the issue was how long it took for the decision to be made and, indeed, to amend the iTax system. 

The age-old notion has always been that the more complex and difficult it is to file a tax return, the more likely it will be that taxpayers simply won’t file their returns. While the issue with the system has been resolved, there is an inherent administrative issue here that must be addressed. 

KRA has to be significantly more proactive in dealing with changes in rates and law to ensure the least inconvenience to taxpayers. 

The writer, Nikhil Hira, is the Director of Bowmans Kenya.

The views expressed in this article are the author’s and not necessarily those of Bowmans Kenya  

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The age of gentrification is truly upon our country

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Never mind the businessmen outside Nairobi could be richer. Rural folks aspire to one day moved to a new county (city).

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The rise and fall of Trade Bank: A tale of the sleazy 90s

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It is where titans such as Equity Group boss James Mwangi, who now oversees an over Sh1 trillion asset-rich bank, cut their teeth.

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