Ruto’s revenue plan in limbo as employers halt deductions

The roiling controversy surrounding the Housing Levy in Kenya has taken a new turn, with the Federation of Kenya Employers (FKE) advising its members to cease deducting the levy from millions of employees’ salaries following a Court of Appeal declaration of its unconstitutionality.

In a similar measure, the court ruling has sparked a joint response from workers’ unions, demanding a refund of already deducted funds while further urging the government to halt its proposed Social Health Insurance Fund (SHIF) program as well.

The Housing Levy is one of the array of tax measures rolled out by President William Ruto’s government, aiming to boost revenues and support social programs.

The latest call by employers and workers’ unions comes at a time when the government is grappling with a June deadline to repay a $2 billion Eurobond.

Read also: Court dismisses State’s request to stay housing levy

Controversial levy

Citing public interest, Court of Appeal judges Lydia Achode, John Mativo, and Paul Gachoka held the High Court’s earlier verdict, stating that the Housing Levy lacked a legal framework.

This ruling made on Friday, January 26, 2024, has prompted the FKE to instruct its members to suspend the deduction of the controversial levy until further legal clarity is obtained.

In a united front, workers’ unions, including the Kenya Medical Practitioners, Pharmacists and Dentists Union (KMPDU), Union of Kenya Civil Servants (UKCS), Kenya Union of Clinical Officers (KUCO), Universities Academic Staff Union (UASU), and the Trade Union Congress (TUC), have demanded a refund of the deducted housing levy.

The unions have equally expressed dissatisfaction with the government’s attempt to fund affordable housing projects without proper legal backing.

Furthermore, they have raised concerns about the proposed SHIF, labeling it as unfair to employed workers.

FKE Executive Director Jacqueline Mugo has advised employers to immediately halt the deduction of the housing levy from employees’ salaries in compliance with the Court of Appeal ruling.

Read also: IMF raises queries over Kenya’s revenue shortfall

Resume levy collection

Ms Mugo noted that employers should only resume levy collection when another ruling is issued after the court hears and determines the government’s appeal. This directive aims to ensure that employers act under the law, pending further legal proceedings.

The Court of Appeal judges, in their ruling, highlighted the potentially irreversible consequences of implementing decisions based on an unconstitutional housing levy.

The alliance between employers and workers against the unconstitutional Housing Levy is poised to close income streams for the government at a time when the taxman is facing declining collections.

Even with increased taxation, Kenya has fallen short of its revenue goals. Already, the International Monetary Fund (IMF) is urging the inclusion of all tax measures outlined in the first year of the plan in the Finance Bill 2024.

Notably, the IMF highlights that Kenya stands alone in the East African Community as the only country facing a prolonged decline in its tax-to-GDP ratio since 2014.

“Implementation of the Medium-Term Revenue Strategy would be key to reverse the erosion in the tax base while promoting equity and fairness in the tax regime and create more space for spending to improve public services,” the IMF noted this month in an update on Kenya.

KRA targets to collect Kes2.768 trillion by the end of the Financial Year 2023/2024 in June. The taxman, however, missed the Q1 revenue target of Kes665.9 billion after recording a Kes79 billion deficit.

“If the performance rate follows the same trend for the rest of the fiscal year, then the annual target is likely to be missed by approximately Kes300 billion,” the Quarterly Economic and Fiscal Update (July – September 2023) report by the Parliamentary Budget Office notes.

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