Workers may lose their money in the controversial Housing Fund if Parliament approves a fresh proposal to scrap a clause requiring the State to offer refunds to contributors who miss out on affordable homes after seven years.
The National Assembly Finance and Planning Committee has recommended an amendment in the Finance Bill, 2023 to convert the housing fund into a levy, which effectively means that the money will not be refunded after it is collected.
“Cognizant of this and objections raised by the shareholders, the committee agreed to amend the proposal on Housing Fund by making it a levy as opposed to a contribution so that the funds can be appropriated directly to fund the housing initiative under the Bottom-Up Economic Transformation Agenda,” said the chairperson of the Finance and Planning Committee Kuria Kimani.
“In response to the stakeholders’ submissions, the rate was reduced to a manageable rate of 1.5 percent.”
Housing and Urban Development Principal Secretary Charles Hinga said he was awaiting the report from the committee.
Read: President Ruto housing levy set at 3 percent of basic pay
“I’m waiting to see the proposal as this is not part of the Executive,” said Mr Hinga. But Nikhil Hira, a tax expert, noted that in the Finance Bill, workers were to contribute to a fund “where if you don’t require an affordable house, your money will be earning interest for seven years.”
“Now, they are saying the sound of it, that there will be no fund, so you are not going to earn any interest on it, you just give it to the government,” said Nikhil.
None of the existing levies in Kenya are refundable to taxpayers after collection, since they are channelled to a particular use.
They include the export levy, the railway development levy, the roads maintenance levy and the anti-adulteration levy.
The housing contribution, which was earlier capped at a maximum of Sh2,500, and matched by employers, will now go directly to the government’s bank accounts as opposed to a fund.
In the Finance Bill contributors who missed out on houses were supposed to get their money in seven years with interest.
Mr Kimani did not respond to our inquiry on whether the proposed conversion meant that the deduction had now been turned into a tax, which would not be refunded.
Government officials, including President William Ruto, have insisted that the deduction for affordable housing is not a tax but a contribution just like that to the National Social Security Fund (NSSF).
To appease taxpayers, the parliamentary committee has reduced the contribution from the proposed 3.0 percent to 1.5 percent, but shifted it into a tax, which will now be collected by the Kenya Revenue Authority (KRA) alongside other levies.
News of the reduction of the housing fund started filtering in on Monday following a parliamentary group meeting of the UDA Party, the largest party in the ruling Kenya Kwanza coalition.
Dr Ruto’s administration wants to build houses as part of his bottom-up economic model, arguing that it will provide houses to those living in slums and create employment through the construction of 250,000 houses annually.
Critics, however, say that the contribution will reduce the take-home salary for employees who are already grappling with inflationary pressures.
It is not clear whether the proposed amendment will also affect the maximum contribution per employee of Sh2,500.
Employers are to match their employees’ contributions.
Mr Kimani said that the committee has reduced the cap as well. “Those earning more were paying a less percentage than those earning less,” said Mr Kimani.
The government intends to raise an additional Sh211 billion in revenues through the various tax policy changes contained in the Finance Bill, 2023, in one of the most ambitious revenue-raising plans.
The additional revenue being proposed by the Treasury is more than four times what the government had in the Finance Act, 2022, reflecting the Kenya Kwanza administration’s intensified efforts at plugging the budget hole.
Read: Chief whip hints at amending Housing Fund proposals
Last year, then-President Uhuru Kenyatta’s government came up with tax measures that sought to generate an additional Sh50.4 billion for the national coffers.
The bulk of the additional revenues, around Sh50 billion, is expected to come from value-added tax (VAT) on fuel after the government proposed to increase the tax head on petroleum products from the current eight percent to 16 percent.
On Tuesday, the Finance and Planning Committee approved the proposed increase in VAT, noting that while the increase will push up the cost of living, the negative impact of retaining the sales tax at eight percent outweighs the positives.
“The government stands to lose as petroleum businesses become perpetual creditors which then impacts quality of service delivery by the government to the citizenry. Therefore, this calls for an end to the subsidized rate of eight percent,” said Mr Kimani.
A new World Bank report has noted that although the tax proposals will help the country reduce its borrowings, it will push up the cost of living for households in the medium term.
Proposed changes in the Finance Bill include the introduction of a 15 percent digital service tax on digital content creators, with the committee recommending the rate be slashed to three percent.
There is also an enhanced turnover tax of three percent on small businesses that make sales of Sh1,389 a day (Sh500,000), which MPs want to be retained at Sh1 million.
Employees with a monthly basic salary of over Sh500,000 will pay a pay-as-you-earn (PAYE) of 35 percent from the current 30 percent.
Excise duty on fees charged for money transfer services such as Safaricom’s M-Pesa has also been increased from 12 percent to 15 percent, raising fear of rolling back the progress the country has made in financial inclusion.
The government has argued that it wants to collect more revenue as part of its fiscal consolidation in which it wants to reduce its borrowing appetite.
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