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Treasury plans wealth tax to fix July budget


Economy

Treasury plans wealth tax to fix July budget


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Treasury Principal Secretary Julius Muia. FILE PHOTO | NMG

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Summary

  • The push to make wealthy individuals pay higher tax rates gained momentum in 2018 but the idea was ultimately dropped.
  • The impact of the Covid-19 pandemic has battered Kenya’s tax revenue collection at a time when more of its debts are falling due and as it is still grappling with gaping fiscal deficits.
  • The Finance Bill, which expresses Treasury’s plan for new taxes, duties and relief for the year, is set to be tabled in Parliament next month.

The Treasury is considering imposing higher taxes on Kenya’s super-rich and high-income earners in the new budget starting July as part of a broader strategy to raise revenues that have dropped amid the economic fallout from the Covid-19 pandemic.

Treasury Principal Secretary Julius Muia told the Business Daily Tuesday in an interview that the possibility of introducing a wealth tax was among reforms being discussed.

“We are looking at fiscal changes that will go into the Finance Bill and we are in discussions over the wealth tax among many other fiscal reforms to boost revenues,” Dr Muia said.

The push to make wealthy individuals pay higher tax rates gained momentum in 2018 but the idea was ultimately dropped.

The impact of the Covid-19 pandemic has battered Kenya’s tax revenue collection at a time when more of its debts are falling due and as it is still grappling with gaping fiscal deficits.

The Finance Bill, which expresses Treasury’s plan for new taxes, duties and relief for the year, is set to be tabled in Parliament next month.

The shape of the planned increased taxation of wealthy individuals is not clear, and comes in a period when the number of Kenya’s super-rich has dropped as the Covid-19 pandemic disrupted businesses and hammered most asset classes across Africa.

“It is too early to comment on how it will look because we are still consulting to bring people on board. The complexity of budget proposals undergo a lot of simulation, structured stakeholder consultations, considering a lot of aspects, looking at facts without nuance before policy is implemented,” Dr Muia said.

The State could introduce a wealth tax for the high net worth individuals (HNWI), who will pay a small share of their net worth — which is assets minus liabilities.

It could take the form of a higher tax rate for high income earners.

In 2018, the Treasury sponsored a Draft Income Tax Bill that sought to impose a higher maximum tax rate of 35 percent on income of more than Sh9 million per annum or Sh750,000 a month.

At the time, the top tax rate was 30 percent on all income exceeding Sh564,709 per annum or Sh47,059 a month.

The Treasury said it dropped the bid for the higher tax rate after collecting the views of the public on the planned rise.

The latest talk of higher taxes on the rich follows a global pressure for the wealthy to pay more duty and help impoverished populations survive the coronavirus pandemic and its economic hardships.

Developed countries levy the highest taxes on the wealthy. In the UK, the top individual tax rate is 45 percent on annual income above £150,000 (Sh21.8 million) while French residents pay a similar rate for earnings above €152,260 (Sh19.7 million).

American citizens and residents, who are taxed on their worldwide income, pay a top tax rate of 37 percent for earnings exceeding $518,401 (Sh56.7 million) per annum.

The Kenya Revenue Authority (KRA) has stepped up efforts to collect more revenue from the rich through investigations into their conspicuous consumption and reconciling it with their declared incomes and taxes paid.

Kenya’s top tax rate of 30 percent applies for income above Sh32,334.

The KRA recently said it had identified wealthy individuals and companies from whom it could collect up to Sh250 billion worth of unpaid taxes.

The crackdown follows an order from President Uhuru Kenyatta in November last year directing the taxman to keep a watch on high net worth individuals whose lifestyles are not in tandem with the taxes they pay.

The government says the pandemic has hurt revenue collection, with the high net worth individuals among the taxpayer categories seen as plugging the shortfall in the medium term.

Revenue collection underperformed by Sh109.9 billion in the first six months of the financial year to December, amid the coronavirus-related disruptions.

But the recovery of the economy and higher taxes are expected to reverse the drop this year.

Sixteen Kenyans dropped out of the ultra-rich list in 2020 as the Covid-19 pandemic disrupted businesses and hammered most asset classes across Africa.

The latest instalment of the Knight Frank Wealth Report places the number of Kenyans with a net worth of at least $30 million (Sh3.3 billion), including their primary residence, at 90 last year.

Their ranks shrank from 106 in 2019.

Kenya’s group of high net worth individuals, defined as those with at least $1 million (Sh109 million) including their primary residence, dropped by an even larger margin.

The report says that 912 Kenyans fell out of this club last year when their numbers stood at 3,323 compared to 4,235 in 2019.



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