Kenyans earning less could end up paying lower income taxes, Pay As You Earn (PAYE), if the government adopts proposals from the World Bank.
The global multilateral lender has proposed changes to Kenya's Personal Income Tax (PIT), which the bank assures will increase tax progressivity while keeping revenue neutral.
In the changes, the World Bank has proposed an increase to tax bands, income brackets used to determine how much PAYE an individual is required to pay, noting that the current PIT model disproportionately affects low-wage earners and does not rise significantly for higher earners when accounting for contributions.
For Kenyans earning up to Ksh288,000 per annum (Ksh24,000 per month), PIT was set at ten per cent. This was in line with the previous model, thus representing no change.
The next band covering Ksh288,000 per annum (Ksh24,000 per month) to Ksh388,000 per annum (Ksh32,333 per month) has been revised downward to 15 per cent. Previously, the PIT was at 25 per cent. In the changes, Kenyans would end up paying a lower income tax.
However, the next tax band covering Kenyans earning a salary of Ksh388,000 per annum (Ksh32,333 per month) to Ksh6 million per annum (Ksh500,000 per month) has been split into two in the proposed changes.
The World Bank has proposed a 25 per cent PAYE on individuals earning from Ksh388,000 per annum (Ksh32,333) to Ksh2 million per annum (Ksh166,663 per month). Further, Kenyans earning from Ksh2 million per annum (Ksh166,663 per month) to Ksh6 million per annum (Ksh500,000 per month) are to pay a PIT of 32.5 per cent.
This represents a shift from the current system, where Kenyans earning Ksh388,000 per annum (Ksh166,663 per month) to Ksh6 million per annum (Ksh500,000 per month) pay a PIT of 30 per cent.
Further down the line, Kenyans earning from Ksh6 million per annum (Ksh500,000 per month) to Ksh9.6 million per annum (Ksh800,000 per month) would pay a tax of 35 per cent on their income in the proposal.
Currently, Kenyans within the aforementioned income band pay a tax of 32.5 per cent, representing an increase in PIT. This is in line with the World Bank’s goal of imposing higher taxes on high-income earners to ease the burden on Kenyans with lower incomes.
The World Bank also proposed a 38 per cent income tax on Kenyans earning Ksh9.6 million per annum (Ksh800,000 per month). This is an increase from the current 35 per cent imposed.
Aside from the PIT changes, the World Bank also proposed the scrapping of the housing levy imposed on low-income earners.
For instance, individuals earning Ksh24,000 per month or Ksh288,000 per annum currently pay a housing levy of Ksh360. For those earning from Ksh24,000 per month (Ksh288,000) to Ksh32,333 per month (Ksh388,000), pay a housing levy of Ksh485.
As per the global body, combining the PIT rate reform with exempting low earners from the housing levy would further reduce the average tax rate for below-average wage earners while increasing the burden on top earners, thus maintaining revenue neutrality.
“Given the small contribution from below-average earners, shifting the tax burden from low-income earners to the top income deciles is expected to have a minimal impact on revenues, yet would make the tax system more progressive,” the World Bank noted.
