Kenya’s new tax package threatens to loosen the local labor market, with employers in many sectors confronting a truly tight equilibrium for the first time in decades.
Kenyan workers are bracing for decreased bargaining power in the face of a high unemployment rate, according to new predictions by micro-lending firm Jijenge Credit Ltd.
“What you will see as some of the taxation measures begin to take effect this month, is a radical evaluation of employment contracts between employers and their staff,” offered economist and the firm’s chief executive, Peter Macharia said.
Macharia, like most observers, says that many employers will be forced to tweak their contracts to fit within the increased tax commitments endorsed in the Finance Act 2023.
The new law has seen a sharp increase in employees' and employers’ monthly contributions to both the National Social Security Fund (NSSF) and the National Hospital Insurance Fund (NHIF) for instance, in what Macharia believes will discourage most employers’ ability to match.
Employees earning above Sh500,000 will now pay 32.5 per cent in taxes, and those making above Sh800,000 will pay 35 per cent.
Combined with a new housing tax of 1.5 percent and a medical insurance tax of 2.5 percent, the new burden will see some Kenyans part with about 40 percent of their income.
As a result, most employers may be forced to re-hire their own staff on a short contract model to avoid the looming tax burden on their side.
Its long-term implication, Macharia says, will see reduced contributions to the Kenya Revenue Authority (KRA) keen to finance a Sh3.6 trillion budget for a country spending in excess of Sh1.5 trillion on recurrent expenditure alone.
The Finance Act 2023 was passed by President William Ruto on June 26, 2023, with most of the changes taking effect from July 1, which is the Government's fiscal year, while a few will be effective from September 1 and January 1, 2024.
Similarly, tax on small businesses, meant to increase the number of taxpayers will also hurt loss-making businesses and could push such firms to render their employees redundant in the face of a tough business environment worsened by higher energy tariffs for manufacturers.
National figures show that the unemployment rate stood at 5.5 per cent in 2022 from 5.74 per cent a year earlier, a 0.01 per.
The firm’s greatest specialty is mobile lending, which is efficient and effective, tapping into the demand for microfinance products among MSMEs who are the company’s main clientele.
It essentially targets clients who are unable to access financial services from banks and those seeking loan approval over a short period of time within one hour.
Further, it specialises in Title Deed Loans, Check-off loans, School emergency loans, import duty finance, LPO financing, bid bonds as well as asset financing among others.
The company has tracking technicians and valuers who assess an applicant’s assets before a loan is issued.
Jijenge was one of the first 10 applicants that made it to the CBK’s initial list of compliant players following calls by the regulator on heightened oversight of Digital Credit Providers (DCPs) in the country.
This is higher than the long-term average of 4.22 per cent.