Government to Scrap Personal Tax Relief in New Proposal

Government to Scrap Personal Tax Relief in New Proposal

The government has announced plans that could see it scrap personal relief for salaried employees from the next financial year.

The proposal is contained in the Kenya Kwanza government’s Draft Medium-Term Revenue Strategy for the period covering the 2024-25 and 2026-27 financial periods.

In the draft proposals published by Treasury, the government says it will review tax reliefs with a view of eliminating those that are counterproductive.

Currently, taxpayers enjoy personal, insurance, medical, housing and relief related to persons with disability as government seeks to encourage a saving culture, boost purchase of insurance policies, increase home ownership and ease the tax burden on Kenyans.

Treasury, however, notes that the tax incentives come at cost by way of government foregoing tax revenue.

“In addition, tax incentives increase the complexity of the tax system and reduces its effectiveness as an instrument to promote equity,” Treasury said.

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It further adds that research has found that tax incentives do not necessarily influence taxpayers’ behaviour into embracing the self-improvement culture such as saving or mortgaging.

“During the strategy period, the government will review the tax reliefs with a view to eliminate reliefs that are counterproductive. However, with the removal of tax relief, the low income tax earners will be cushioned in line with the adjusted tax bands by creating a zero-rate tax band,” Treasury said.

Currently, personal relief is pegged at Sh2,400 per month (Sh28,800 per annum) while the minimum monthly taxable income is Sh24,001.

This means individuals earning less than Sh24,000 monthly (Sh288,000 per year) continue to be exempt from income tax.

The Income Tax Act provides for five tax bands on personal income.

These are Sh0-Sh288,000 per year at the rate of 10 per cent; the next Sh100,000 per year at the rate of 25 percent; the next Sh5,612,000 per year at the rate of 30 percent; the next Sh3,600,000 per year at the rate of 32.5 percent and above Sh9,600,000 per year at the rate of 35 percent.

However, Treasury has proposed to review and expand the tax bands under the draft medium term revenue strategy.

“The structure is not progressive since tax bands are not wide enough to cushion low income earners. Further, the structure increases opportunities for tax avoidance and evasion,” Treasury said.

“The government will review the structure to improve its progressivity and harmonise the income tax top rate with the corporate income tax rate during the strategy period.”

The standard corporate tax rate is 30 percent (increased from 25 per cent effective January 1, 2021).

Treasury said the Medium-Term Revenue Strategy is aimed at boosting domestic revenue which has been declining over time.

It said funds realised from the tax reforms will go towards financing government programmes for the remaining period of Vision 2030.

Kenyans have until October 6, 2023, to submit their views to Treasury on the proposals.

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