KENYA TAX UPDATE ON COVID-19
Following the outbreak of COVID-19 and the subsequent declaration of the virus as a global pandemic by WHO, the world economy has been greatly affected and the Kenyan economy has not been exempted. The pandemic has had adverse effects on millions of Kenyans, which among other things includes loss of income, imminent job losses, indefinite closure of businesses, not to mention the mounting pressure on social infrastructure.
To shield Kenyan and Kenyan businesses from the effects of this pandemic, the President, on the 25th day of March 2020, directed the National Treasury to table a bill in parliament to effect the below tax changes;
Income Tax Changes
i) 100% Tax Relief for Persons Earning Gross Monthly Income of up to Kshs. 24,000
Currently, the tax exempt bracket for Pay As You Earn is Kshs. 12, 298 and below. The President has directed that all persons earning a monthly gross income of up to 24,000 be exempted from income tax. This relief will be effective starting 1 April, 2020.
This is a welcome relief as it will increase the ‘take-home’ pay for low income earners, who are expected to be worst affected by the pandemic.
ii) Reduction of the Pay As You Earn from 30% to 25%
Currently, individuals are taxed on graduated tax bands that range between 10% and 30%. The President has directed that the maximum tax band be lowered from 30% to 25% offering some relief to employees. This reduction is effective starting 1 April, 2020.
However, this reduction in tax rate will have a minimum effect on the ‘take home’ pay for most middle-income earners. According to statistics by the Kenya National Bureau of Statistics, about 74% of all Kenyans working in the formal sector earn a monthly salary of below Kshs.50,000.
In our analysis, employees who earn a taxable income of Kshs 50,000 will have a meager tax relief of slightly below Kshs. 150 from the reduction in PAYE. It is therefore our opinion that the President should have considered extending a bigger tax relief to this category of employees.
Value Added Tax Changes
i) VAT rate reduced from 16% to 14%
In abid to cushion the citizens from the prices of commodities during the pandemic, the President has directed the National Treasury to reduce the standard VAT rate applicable on goods and services from 16% to 14%.
This is a welcome move that will see people purchase items at a relatively cheaper price. While the ultimate beneficiaries of this reduction in tax are the Kenyan consumers, businesses will also be slightly relieved on VAT payments.
Given that the above reduction is effective 1st April, the government must move fast to effect the necessary changes in the systems of VAT administration. For instance, ETR/ ESD machines will need to be re-programmed and the iTax system reconfigured to incorporate the
above changes, all in less than 7 days.
ii) Payment of VAT Refund of Kshs 10 Billion within 3 weeks
The President has directed that the Kenya Revenue Authority expedites on paying all the verified VAT refund claims amounting to Kshs. 10 Billion within 3 weeks. Furthermore, He directed that where there are alternatives, the Kenya Revenue Authority should expedite on allowing for offsetting of Withholding VAT.
This directive will see companies with verified VAT refunds benefit from the much needed cashflows for their operations.
i) Temporary suspension of Listing by the CRB
The President has also temporarily suspended individuals, SME’s and Corporate entities whose loans fall in arrears effective 1st April from being listed with CRB. The effects of the coronavirus have rendered many businesses stagnant making it hard for them to service any
active loans. With this directive from the President, businesses and individuals will be cushioned from being listed by the Credit Reference Bureau and their credit ratings protected
despite loan arrears.
ii) Central Bank Rate at 7.25%
The Central Bank of Kenya has lowered its lending rate (CBR) from 8.25% to 7.25% with immediate effect. As a measure to cushion borrowers from the COVID-19 effects, commercial banks are expected to subsequently lower their interest rates and thus making it easier for micro, small and medium enterprises and other borrowers to access affordable credit.
iii) Cash Reserve Ratio
The Central Bank of Kenya has also reduced the cash reserve ratio from 5.25% to 4.25%. This simply implies that commercial banks will have access to an additional portion of their mandatory deposits with the Central Bank. This is estimated to be about Kshs 35 Billion and commercial banks are expected use the funds to support distressed borrowers in the wake of COVID-19 pandemic.
iv) Payments of Verified Pending Bills
The President also directed Ministries and Departments to facilitate the payment of at least
Kshs. 13 Billion of verified pending bills within 3 weeks. This will provide a boost in cash flows
among many SMEs’ that supply to the government and this is also expected to improve
liquidity in the economy through ripple effect.