World Bank: Tax reform will reduce Purchasing power

The World Bank has warned that the proposed tax changes in the Finance Bill 2023 will have a negative impact on households’ ability to make purchases over the medium term.

It also portends tougher times ahead for businesses dealing with decreased demand as a result of the high cost of goods, as this is likely to exacerbate the current inflationary pressures brought on by an increase in the prices of essential commodities, particularly food and fuel.

The Washington-based organization claimed in a recent report that the current tax reforms, which include raising the standard value-added tax (VAT) on fuel from eight to sixteen percent, will slow growth in the short term.

“Private consumption is expected to remain on a robust growth path, although it will be dampened in the near term by…ongoing tax reforms to boost revenue and sustain fiscal consolidation,” said the World Bank in its 27th Kenya Economic Update (KEU).

The twice-yearly report evaluates the nation’s most recent social and economic developments as well as its future prospects.

According to the forecast, the economy will expand at a faster rate this year 5%, as opposed to 4.8 percent last year.

The proposed tax measures, which will reduce the disposable income of most Kenyans, particularly those who are employed, are likely to temper this growth, though.

The country’s risk of debt distress has increased from moderate to high as a result of the government’s extensive tax measures, which are intended to assist Kenya in reducing its borrowing.

“The fiscal consolidation that the government is planning is very crucial. It is very important for Kenya to generate the surplus that it is planning,” said Aghassi Mkrtchyan, a senior economist at the World Bank.

In addition to raising the VAT on fuel, the Finance Bill, 2023 also suggests raising the PAYE tax paid by workers earning a gross salary of over Sh500,000 from 30% to 35%.

Additionally, it suggests introducing 15% withholding taxes on those who produce digital content.

A digital asset tax will be levied on people who sell cryptocurrencies and non-fungible tokens.

Mobile money transactions would be subject to increased excise taxes, which would also be applied to some cosmetics like false nails, wigs, and hair.

According to calculations made earlier by the Business Daily, the take-home pay of employees earning a basic salary of Sh100,000—who belong to Nairobi’s median middle-class family, per the KNBS’s computation of expenditure patterns—will drop from the current average of Sh76,041 to Sh71,661.

After the government deducts the enhanced deductions for the National Health Insurance Fund (NHIF), the National Social Securities Fund (NSSF), and the 3% salary reduction for a new Housing Development Fund, this is what is left over.

The International Monetary Fund (IMF) applauded Kenya’s decision to increase tax revenue, and the nation was rewarded with an additional Sh162.5 billion over the course of the 38-month program.

“The authorities have responded promptly to the challenges. On the fiscal side, government spending execution has been prudent this fiscal year, consistent with available resources,” said Haimanot Teferra who led the IMF mission to Kenya.