Low-income earners will continue to enjoy 100% tax exemption indefinitely as National Treasury Cabinet Secretary Ukur Yatani reverts Value Added Tax and Income tax to earlier rates before the outbreak of the COVID-19 pandemic.
Individuals earning below Kshs. 24,000 monthly will continue to enjoy full exemption from Pay-as-You-Earn (PAYE) tax in what CS Yatani says is aimed at cushioning low-income earners from the severe impact of the coronavirus economic fallout.
“This indeed increased tax relief for individuals from Kshs. 16,896 to Kshs. 28,000” said Yatani in a statement released Thursday.
The tax relief measures which had been extended to consumers and businesses under Value Added Tax and Income Tax in April will cease, as the treasury announces the return of normal rates.
Beginning 1st January 2021, the Corporate Tax rate will revert to 30% from the current 25%, same as Individual Income tax which will also shoot to 30% from 25%.
In the face of revenue pressures and maturing loans, CS Yatani has projected that the 7 month Economic Stimulus Programme will dent implementation of priority programmes under Big 4 Agenda and recovery of the economy in general.
“Indeed, the government will have, as at 31st December 2020, forgone tax revenues totaling Kshs. 65 billion over the course of the preceding seven months.”
Consumers who have enjoyed reduced cost of essential vatable goods will notice a slight increment as VAT also returns to the normal rate of 16% from 14% announced in April.
In his defence, Yatani added, “It’s important to note that even at the earlier rate Kenya’s VAT is considered the lowest in the region.”
Tanzania, Rwanda, Burundi, and Uganda all apply the VAT at the rate of 18%.
The return of the normal VAT rate comes at a time Kenya’s inflation rate in November rose to a six-month high of 5.5%, from 4.9% registered in October.
Analysts at Mentoria Economics are of the view that low-income earners will still have to deal with the high cost of living even with the exemption in place.
“We expect to see a rise in the cost of goods and services due to these measures. Furthermore, the weakening of the shilling against the dollar will also introduce imported inflation in areas such as electricity bills which have a foreign exchange component. The net effect is that this will reduce the volumes of business and weigh heavily on the economy,” said Ken Gichinga, Chief Economist at Mentoria Economics.
The local currency has continued with the free fall, breaching the 111 mark to trade at a mean of 111.06 as quoted by the Central Bank of Kenya on Thursday.
However, the treasury says the government will continue to roll out interventions under the Kshs. 58.1 billion Economic Stimulus Programme to cushion vulnerable groups and enhance liquidity in businesses.