The government tax relief measures implemented to cushion Kenyans from the harsh economic effects of the Covid-19 pandemic will be reversed at the end of December 2020.
Making the announcement on Wednesday, November 25, Treasury CS Ukur Yatani further lowered the country's economic growth projection for 2020 to 0.6%.
The Pay-As-You-Earn (PAYE) deducted from salaried employees will revert to 30% from the current 25%, with Value Added Tax (VAT) rising back to 16% from the current 14%.
Speaking to Kenyans.co.ke finance expert Kavata Kiaro explained the various implications of the reversals and what this will mean for the Kenyans.
"The real question is whether or not the tax reliefs made a significant impact for the ordinary person. For example, a businessman involved in importing goods from abroad will have felt the impact of a lower VAT but then again, the Kenyan shilling has been at its weakest,
"This means he/she will have had to pay more for the imported goods. When it comes to the salaried population, the PAYE reduction translated to more disposable income. However, the massive job layoffs, inflation and salary cuts due to the effects of the pandemic arguably negated the full effect of this relief," she explained
She further stated that a reversal to the old rates with the economy in its current state will mean that a majority of Kenyans will be hit hard as the pandemic is yet to be deemed as being 'under control.
Countless businesses have been forced to close shop in the aftermath of the global pandemic. At least 1.5 million Kenyans have lost their jobs or have been put on indefinite unpaid leave as the Covid-19 morphs into a major job crisis.
Public data from some of the companies suggest that the numbers could be higher, especially when casual labourers are factored in.
The massive job haemorrhage from the Covid-19 pandemic has thrown Kenya into one of the worst employment crisis it has faced.
The worst-hit companies are in the tourism, transport, horticulture, communication and education sectors.
Come January 1, the national government will revert back to business as usual, with employees earning below Ksh24,000 per month also set to feel the brunt of being taxed, having enjoyed total PAYE exemption from the pandemic.
"Therein lies the real problem, reverting back to business as usual during these very unusual times is a bit counterproductive. A review on whether to extend the reliefs would be the prudent step," Kiaro further stated.
Companies will go back to paying corporate tax at the rate of 30%, but with most of these companies currently on 'life support', the future looks bleak.
The tax relied reversal will result in increased prices of fuel, food, drugs and other basic commodities.
On his part, the Treasury CS maintained that the government has to boost its revenue collection as the tax reliefs have hurt its projection.
“It’s not going to be easy because we have been hit by a shock not experienced before the pandemic, the expenditure pressures and the low revenue performance. There will be limited scope for borrowing. Our only option is to reduce expenditure,” he stated.
He told government ministries, departments and other agencies to brace themselves for tough times, adding their budgets will be trimmed to reflect realistic projections.
In a bid to fill the gaping 2021/2022 budget deficit, the CS said the ministry would do it through net external financing of 3.2% of GDP and net domestic financing of 3.8% of GDP.
He further revealed that the government hopes to raise more cash by taxing digital transactions which have gained traction during the Covid-19 crisis.
This is expected to hit the taxpayers even harder as the economy faces its biggest challenge to date.
In June, the World Bank projected that global GDP would shrink by 5.2% in 2020, with recessions in both advanced and emerging market economies.
This would make the crisis following the pandemic the worst recession since the Great Depression and far worse than the Global Financial Crisis (GFC), which led to a 1.8% drop in global GDP in 2009.
The impact on jobs has been dire: the International Labor Organization (ILO) estimates a decline in global working hours in the second quarter of 2020 of around 10.7% (equivalent to 305 million full-time jobs) relative to the last quarter of 2019.
Young people are disproportionately affected, due to their concentration in informal employment and sectors most hit by the lockdown.
"An effective recovery will address the fallout of the crisis, ensure financial institutions are able to lend to the economy, and support companies and individuals through a new business cycle. There will have to be trade-offs in this transformation, and those who are left behind will need to be supported," the finance expert opined.