The Kenya Finance Bill 2023 was tabled in Parliament on 4th May 2023 by the National Treasury. The Bill proposes various amendments to the tax laws and other related statutes to raise revenue and support the government’s budget of KES 3.6 trillion for the year 2023/2024. Among the many proposals, two stand out as exceptional and have generated a lot of public debate. These are the provision for the withholding tax for content creators and the provision for increasing the tax rate for those earning Kshs. 500,000 and higher per month.
Finance Bill 2023: Withholding tax for content creators
One challenge Kenya has faced when it comes to revenue generation is that there are very few Kenyans who support the country’s economy, as the majority directly or indirectly suck up the blood of those few. In order to ensure that as many Kenyans as possible contribute to the country’s revenue collection, the government has consistently proposed to widen the tax bracket by introducing more tax bands and adjusting the tax rates accordingly.
According to the World Bank, Kenya’s tax-to-GDP ratio was 15.7% in 2019, which is below the average of 18.2% for sub-Saharan Africa and 34.3% for OECD countries. This means that Kenya is not collecting enough taxes to finance its public services and development projects. By widening the tax bracket, the government can capture more income earners who are currently under-taxed or evade taxes.
Thus the provision to tax content creators is a step towards expanding the tax bracket. Kenyans under payroll are forced to pay income tax through the PAYE program, as their counterparts in entertainment and other online programs get to enjoy their incomes untaxed. To equalize this injustice, the Kenya Finance Bill 2023 proposes to impose a 15% withholding tax on income from digital content, which will be deducted at the source by the payer or agent. This means that content creators who partner with brands, sell merchandise, receive sponsorship, charge subscription fees, or earn commissions from affiliate marketing will have to pay tax on their earnings.
The Bill’s Proposal to Increase the tax rate for the very rich
Kenya is one of the most unequal countries in the world, with a Gini coefficient of 0.44 as of 2016 (countries aim to achieve a Gini Index of 0). One way to lower one’s Gini Index is to ensure that higher-income earners give back to society by being taxed more. That’s why the provision in the Finance Bill 2023 that those who earn Kshs. 500,000 and more will incur additional taxation on their higher incomes is an exception provision.
Increasing the tax rate for the very rich can also work towards reducing income inequality and promoting social justice. Kenya is one of the most unequal countries in the world, with a Gini coefficient of 0.40 in 2016, which measures the degree of income distribution among households (countries aim to achieve a Gini coefficient of 0). This means that there is a large gap between the rich and the poor in Kenya, which undermines social cohesion and economic growth. By heftily taxing the very rich, the government aims to redistribute income from the rich to the poor through social spending.
The increased revenue the government will get from the increased taxation for the very rich will help reduce the fiscal deficit. The government of Kenya has been facing a persistent fiscal deficit. This implies that the government has to borrow more to finance its spending, which increases its debt burden and interest payments. Increasing income tax on high-income earners would help to raise more revenue for the government and reduce its reliance on borrowing. This would also improve its fiscal sustainability and credibility in the eyes of creditors and investors.
The Finance Bill 2023 proposes to introduce a new tax band of 35% for income above shs 500,000 per month, which is currently taxed at 30%. This means that those who fall in this category will have to pay an additional 5% tax on their income above shs 500,000 per month.
Given that The Finance Bill 2023 is generally a good bill that is meant to help the government raise revenue (thereby avoiding unnecessary borrowing), maybe what should be done is to scrap the housing levy as that appears to be the most contentious from those who are opposed to the bill.
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