GDP growth in Kenya is expected to contract significantly following the outbreak of Covid-19 and subsequent rise of cases in the country. This has seen the Central Bank of Kenya revised its estimate for 2020 from the initial 6.2% to 3.4% as the economy has continued to experience shocks stemming from the virus. To curb these effects, Kenya, just like many countries globally, has put in place various policy changes and behavioural protocols to try and curb the spread of Covid-19 including tax and fiscal measures to cushion tax payers from the effects.
The government went into immediate action by instituting tax law amendment measures meant to reverse the negatives of Covid 19. The amendments came into effect after the President assented to The Tax Laws (Amendment) Act, 2020 which was gazetted on 27th April 2020. The highlight of the tax relief measures incorporated include:
- Provision of 100% personal income tax relief for persons earning KSh. 24,000 per month
- Pay-As-You-Earn (PAYE) top band reduced from 30% to 25%
- Corporation Income Tax (CIT) reduced from the current 30% to 25%
- Turnover Tax (ToT) reduced from the current 3% to 1% for all MSMEs and is now applicable to any resident person whose turnover from business is more than one million shillings but does not exceed or is not expected to exceed fifty million shillings during any year of income.
- Value Added Tax to be reduced from the previous 16% to 14%
For individuals in formal employment, they are benefitting from the reduced tax bands and an increase in personal relief consequently enabling them to have more disposable income.
Similarly, corporations that are resident in Kenya will benefit from a reduced corporation tax rate by 5 percentage points.
Businesses in the informal sector will benefit from the new TOT threshold and tax rate reduction to 1 % from 3%. Those that that earn an income of below Ksh. 1 million will be exempt from the tax. This is particularly beneficial as businesses in the informal sector are grappling with low traffic and customer walk-ins due to the existing government lockdown measures.
The Value Added Tax which is charged on goods generated domestically and is charged on imports was reduced from the previous 16% to 14% currently. As it is currently, imports have significantly reduced on account of movement restrictions meaning that the VAT component will be affected by the volume of trade and by the reduced VAT rate. The domestic VAT will also be affected by reduced demand for goods and services as well as the reduced rate.
While the benefits of the reduction in tax rates are undeniably beneficial, there is a flipside to this. For instance, over 80 per cent of the Kenyan population that makes up the informal sector will not benefit from the tax relief measures relating to income tax.
Further, from the above tax relief measures, the government is expected to lose about Ksh. 122 billion by end of June following the adoption above tax measures combined. This is according to the Parliamentary Budget special bulletin No. 1/2020.
It is also important to note that with the VAT tax rate reduction, a lot of the money that would be collected from imports will be largely affected. For example, according to a vulnerability index developed by the Overseas Development Institute (Raga and Velde 2020), Kenya is among the top ten most vulnerable economies to COVID 19 due to its interconnectedness with China.
The reduced revenue collection will invariably lead to a reduction in government spending especially government investments. Government projects such as roads and power plants, which employ hundreds of people and contractors will be largely reduced further hurting the economy. The ripple effect of reduced tax rates is that there is a subsequent increase in the government borrowing to cater for the deficit, further adding onto our very high public debt.
Bringing it Together
The existing tax reductions are likely to have both positive and negative implications depending on how you look at it. The negative side being that when the economy is operating below potential, government borrowing is financed by diverting some capital that would have gone into private investment or by borrowing from foreign investors. As a result, Government borrowings crowds out private investment, reducing future productive capacity relative to what it could have been.
On a positive side, taxpayers can take advantage of the reduced tax rates to ensure their survival while foreign investors can consider investing in Kenya when things begin to look up and take advantage of the reduced corporation tax which may extend for a longer period owing to the fact that the effects from the pandemic may stay with us a bit longer.
Nonetheless, all is not lost as there are opportunities in the sectors of healthcare, essential goods production and digital marketplaces. In Kenya the digital market places have already seen an uptick in activity thus reinforcing the argument for Kenya to fully embrace transition to a digital economy. Kenya’s medium-term growth is projected to rebound fast (to about 5.6 percent, over the medium term), on assumption that investor confidence will be restored soon after the COVID-19 pandemic is contained.