Tough times for workers as payroll taxes rise slowest in seven years

Payroll taxes for the financial year ended June, grew at the slowest pace in at least seven years. FILE PHOTO | SHUTTERSTOCK

Payroll taxes for the financial year ended June, grew at the slowest pace in at least seven years, excluding the pandemic period, signalling a tough economic setting where firms are struggling to generate new job opportunities and offer pay raise for workers.

The Kenya Revenue Authority (KRA) collected Sh494.98 billion in earnings from workers in the formal sector, it reported Friday, a 7.18 percent growth over Sh461.82 billion in the prior year.

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The rise in receipts was a slowdown from 27.10 percent posted in the year before, pointing to a deceleration in the pace of recovery in job markets where some sectors are still reeling from the aftermath of Covid-induced shocks three years ago.

An analysis of payroll receipts shows growth in the just-concluded financial year was the first single-digit print since the year ended June 2017 when the deductions on salaries rose 8.67 percent to Sh305.16 billion.

This excludes receipts for 2019-20 and 2020-21 when deductions, which are captured as Pay As You Earn (PAYE) on pay slips, were hit by Covid-related reliefs between May and December 2020.

The seven-month reliefs saw Treasury cut taxes on salaries, including a reduction in the maximum income tax rate to 25 percent from 30 percent and scrapping of the taxes for workers earning a monthly pay of up to Sh24,000.

While the reliefs ended in December 2020, the Treasury has maintained a tax cushion for low-cadre workers earning a maximum of Sh24,000 to date.

The KRA acting commissioner-general Rispah Simiyu said in a statement on Friday that PAYE collections from the public sector were largely flat, edging up 1.9 percent year-on-year while receipts from private firms increased 10.7 percent.

Growth in payroll for the State and its agencies has been hampered largely by a long-standing moratorium on new employment in civil service which restricted hiring in essential sectors such as security, education and health since December 2013 in a bid to cut public wage bill.

Private firms have, on the other hand, complained of increasing cost of operation, with a “multitude” of taxes and levies pushing smaller firms into the informal, or jua kali, sector.

“Many businesses especially the MSMEs [micro-, small- and medium-sized enterprises] cannot afford the costs associated with operating in the formal employment sector,” FKE executive director Jacqueline Mugo told the Business Daily in an interview in the fourth quarter of the review fiscal year.

“This has led to the growth in the number of unemployed Kenyans as many employers try to manage their costs.”

Businesses have in the past year battled the stubbornly rising price pressures on the back of the high cost of materials and energy as well as a weakening shilling in addition to a short supply of dollars.

Inflation in the review year ended June 2023 averaged 8.78 percent compared with 6.29 percent a year earlier, official data shows, while the shilling lost 19.26 percent of its value against the US dollar.

“The revenue performance was affected by the slowed domestic economic growth in 2022 which went down to 4.8 percent from 7.6 percent in 2021,” Ms Simiyu wrote, explaining the missed overall tax targets for the review year.

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“The decelerated domestic economic growth was due to adverse impact of multiple shocks that affected the economy, including a prolonged drought, international conflicts that disrupted the supply chain among others.”

The slowed growth of payroll taxes has come against an economic setting where workers have largely endured negative growth in real salaries— adjusted for inflation— since the Covid pandemic struck three years ago.

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