The outbreak of the Coronavirus has led to economic hardships. The Government of Kenya has in response introduced various relief measures intended to mitigate the hardships. These measures include: tax measures, measures by the Central Bank of Kenya (CBK) and other additional measures.
The tax measures cover cuts on Pay as You Earn (PAYE), Value Added Tax (VAT), Turnover Tax (TOT) and corporate tax.
Employees earning a gross salary of up to Kshs. 24, 000.00 have been exempted on the PAYE. In addition, the top PAYE rate of 30% has been reduced to 25%.
Value Added Tax (VAT) is a tax payable on taxable goods and services offered by a registered person in Kenya. The VAT rate of 16% has been scaled down to 14%. Moreover, the President directed Kenya Revenue Authority to release, within three weeks, the verified VAT refund amounting to Kshs. 10 billion. Alternatively, the amount to be refunded can be used to offset withholding VAT.
The TOT was introduced by the Finance Act, 2019. It is payable by residents whose businesses’ annual turnover does not exceed Kshs. 5, 000, 000.00. Its target was on micro, small and medium enterprises (MSMEs). The TOT has been reduced from the current 3% rate to 1%. Therefore, the tax payable will be one shilling for every Kshs. 100 made in gross sales.
The Corporate tax for resident companies has been reduced from the 30% rate to 25%.
These tax measures will create disposable income for both companies and individuals. However, there are legal concerns on the implementation of the measures. For the measures to be implemented, there ought to be a passed Bill capturing the changes. Passage of a Bill entails a long process, but, in the light of the current pandemic, the process might be expedited to meet the urgency of the matter.
The need for a Bill does not, however, apply in relation to the proposed measures on VAT. The Value Added Tax Act, empowers the Cabinet Secretary responsible for National Treasury to change the rate through a gazette notice. Notably, the National Treasury recently issued a gazette notice covering the proposed measures.
Measures by the Central Bank of Kenya
The Central Bank of Kenya, following a Monetary Policy Committee, issued various monetary measures.
The Central Bank Rate was reduced by 1%. This means that the rate will be 7.25% reduced from the 8.25%. This will impact on lowering the interest rate for credit facility issued by a commercial bank.
The Cash Reserve Ratio has been lowered by 1%. Therefore, the ratio will be 4.25%. This will result to increase of capital among commercial banks. Increase in capital will facilitate availability of credit to be offered to citizens.
The Central Bank of Kenya shall provide flexibility to commercial banks in relation to the requirements of loan classification and provisioning for loans that were performing as at March 2, 2020 and whose repayment was extended or restructured due to the pandemic.
Their implications are on health coverage, protection of the old and vulnerable in the society and increase of cash flow.
- Kshs. 1 billion to be taken from the Universal Health Care Coverage Kitty for the purpose of recruiting more health care workers to aid in the management of patients affected by coronavirus.
- State and Public workers with pre-existing medical conditions and/or aged 58 years and above, serving in Job Group S and below or its equivalents, to work from home or take a leave.
- All Government Departments and Ministries to pay at least Kshs. 13 billion, within three weeks as from 25th March, 2020, in order to clear pending suppliers’ debts.
- Temporary suspension of negative listing with the Credit Reference Bureau for borrowers whose loans will be overdue or are already in arrears. This is effective from 1st April, 2020.
- Ministry of Labour and Social Protection to release an additional of Kshs. 10 billion, through cash transfers, to the elderly, orphans and other vulnerable people in the society.
- Voluntary reduction by 80% of the President and Vice-president salaries; 30% for Cabinet Secretaries and Chief Administrative Secretaries and 20% for Principal Secretaries.
These measures are intended to: increase cash flows among companies and individuals; support the healthcare system; and cushion the vulnerable in the society from the effects of the pandemic. However, the pandemic has already resulted in closure of some businesses, specifically the flower exportation, transport and tourism industries. Therefore, it is worth to note that the tax measures may not be of any benefit to non-operating firms.
We shall keep you updated on more measures as they get adopted by the Government in the fight against the novel Covid-19 Pandemic.