The decision made by the Kenya Revenue Authority (KRA) to apply new taxes from July 1 has created a compliance challenge for tax agents, leaving employers facing a double burden this month as they have to remit taxes that were previously suspended by a court. Failure to remit these taxes within the specified five-day window period will result in penalties for non-compliance. This is following the KRA’s application of taxes from the effective date under the Finance Act 2023. Late tax payments will attract a one percent penalty per month or part thereof, as stipulated in the Tax Procedures Act of 2015. One sector heavily impacted by this change is commercial banks, as a survey by audit firm PwC showed that they collected Kes 37.3 billion, accounting for 25.2 percent of all withholding tax collected by the KRA in 2022.
Employers are also facing challenges due to the backdating of deductions for the 1.5 percent housing levy and a higher pay-as-you-earn (PAYE) rate for employees earning over Kes 500,000 monthly. This directive has created administrative and cash-flow difficulties for accounting departments and payroll managers. Employers must remit the housing levy within nine working days, implying a deduction on August 11, or face fines of two percent of the amount due. However, since employers had already paid July salaries before the lifting of conservatory orders against the Finance Act 2023 on July 28, they are now deducting the amounts from their day-to-day cash-flows and planning to recover the balances from employees at the end of the month.
Read more: Kenya Revenue Authority (KRA) Updates iTax Portal, Introduces New Charges Under Finance Act 2023
Jacqueline Mugo, the Executive Director of the Federation of Kenya Employers, emphasized the unfortunate nature of the situation as most employers had already prepared their payrolls for July 2023, without factoring in the new rates due to the High Court’s suspension of the Finance Act 2023 implementation. Employers are expected to update their payroll systems to accommodate the new tax deductions, including the revised PAYE rates. In response, the KRA has introduced new templates for employers and employees to facilitate tax returns and correct tax payments. The taxman issued a circular outlining the changes brought about by the 2023 Finance Act, including adjustments to PAYE filings. Recently, the Court of Appeal lifted the order suspending the Finance Act 2023 implementation after Treasury Cabinet Secretary Prof Njuguna Ndung’u successfully argued that the government was losing significant revenue daily due to the freeze.
Read more: Will the Government Back Date Taxes?
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