Covid-19 will affect tax collections until next year

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

27 September 2020

The Covid-19 pandemic has negatively affected our economy and, as a result, precipitated a big drop in the revenue collection by the Kenya Revenue Authority. Indeed, a friend told me that his business, which normally pays Sh175,000 in monthly VAT is now paying just Sh50,000.

Monthly Pay-As-You-Earn (PAYE) collections have also plummeted du to two main reasons: first, the government announced reduction of tax rates and an increment of tax reliefs with effect from April 2020; secondly, many employers either laid off or placed employees on leave without pay.

But there is a third shockwave that will hit tax revenues between January and June next year – 2021. When taxpayers start filing their returns for the 2020 year of income, many will discover that they were over-taxed in 2020 and so they will apply for refunds of the excess taxes paid.

It is still not clear how KRA will work out the annual PAYE taxes given that the rates were changed in the middle of the year. However, I assume that they will apply the new rates over the entire year – January to December 2020. This is based on the fact that, even though the new rates took effect on 25^th April, employers were allowed to apply them for salaries earned during the entire month.

Consider a hotel worker whose monthly taxable earning was Sh50,000 at the beginning of the year. Suppose he earned this salary in January, February and March and then was placed on leave without pay from April onwards.

His PAYE was Sh9,064 (before relief), making a total of Sh27,193 in three months. When doing the tax return at the end of the year, the workings are re-done based on the actual annual earnings.

In this case, the total annual taxable earning comes to just Sh150,000. Using the rates introduced in April, the income tax due is Sh15,000 (before relief). Therefore, he paid an extra Sh12,193 and KRA is required by law to refund this amount.

In addition, the tax relief granted was only Sh1,408 per month or Sh4,224 in total, yet, in the new tax rates, he should have received Sh28,800 during the year. That is, he is owed another Sh24,576.

Consequently, his total tax refund claim will be Sh36,769! Now multiply that by the hundreds of thousands who are in similar predicament. We better start preparing for this revenue shockwave.