Raiding the pockets of Kenya’s upper-deck people
As the British empire began collapsing post world war two, it developed an offshore unregulated Eurodollar market domiciled in the City of London that would not be regulated by any country, creating a system where the elite could make money without taxation.
When Kenya was about to get independence in 1960s, the global offshore market was rising rapidly, joining forces with the Americans, Canadians and other rich nationals, who wanted a pie of the unregulated market.
Before the British Crown could give Kenya independence, they had independence leaders commit to all colonial legislation, international treaties and agreements that the British Crown had undertaken on behalf of the colony.
Most crucially, Kenya was to re-negotiate all double taxation agreements. This was to favour the repatriation of profits of colonial era enterprises back to Europe as independent Kenya gained fiscal sovereignty.
According to the Tax Justice Network, every year, Kes76.9 billion ($558.7 million), which could have been paid in taxes is wired through London and its tax heaven jurisdictions each year to the Eurodollar markets that in turn lend the country billions in dollar debts.
Now, the country is running out of taxes to pay these loans and is turning on Kenyan middle class to squeeze every penny from their pockets while the powerful multinationals continue to make money from the country tax free.
Instead, the Treasury is proposing some of the most far reaching tax measures that will hit the middle class income and expenditure hardest.
“We have not seen any proposals in the Finance Bill 2023 to raise money from tax loopholes, despite the current fiscal strain that is pushing up consumer taxes,” Leonard Wanyama regional coordinator of the East African Tax and Governance Network (EATGN) said.
Kenya’s middle class is not the biggest, according to the Institute of Economic Affairs (IEA) 2016 study, the number of employees falling within the middle class increased from 166,515 people in 2009 to 272,569 people in 2015.
This class, however, paid the most taxes on their incomes and were more vulnerable to rising cost of living that reduced their take home in real terms.
The IEA study noted that while the nominal wages for the upper limit grew from Kes67,380 in 2009 to Kes109,429 in 2015, due to inflation, the real wage dropped from Kes66,026 in 2009 to Kes63, 834 in 2015. Consequently, the size of the middle class marginally reduced.
Today the nominal average earnings in the modern sector per person increased to Kes72,130 per month. However, when adjusted to inflation, the average incomes shrinks to about Kes70,239 a phenomenon that has occurred over the last three years as the wages have been falling in real terms.
The middle class is fairly urban and vocal especially on social platforms and for a time has had a say on state policy especially under former president Uhuru Kenyatta.
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Although Mr Kenyatta introduced the 16 percent value added tax (VAT) on fuel a decade ago before Kenya borrowed its inaugural Eurobond as part of the tax reforms to raise more revenues he needed to appease the middle class was cautious about the impact of this 2013 law. Mr Kenyatta exempted petroleum products for a transition period of three years, which was subsequently extended to 2018.
Implementation of the 16 percent rate on petroleum at the end of the transition period led to widespread anger that prompted President Kenyatta to offer a 50 percent cut on fuel vat as a compromise.
President Kenyatta proposed the lower charge on fuel in 2018 as a compromise after an uproar over imposition of 16 percent VAT on petroleum products.
But his successor, President William Ruto, has little or no sympathy for middle class social media pressure having been elected on a bottom up ideology and has taken to dismissing what his government thinks are misguided snobbish expectations the middle class, who his economic advisor and state ideologue Dr David Ndii has branded #UpperDeckKE people.
In a Finance Bill that reads like the first draft of International Monetary Fund (IMF) austerity and tax consolidation plan, Kenya has agreed to implement radical tax measures that will among others charge 16 percent on fuel.
The new tax Bill is targeting typical middle class goods that consume a larger share of their shopping baskets, from sugar and confectionary, pasta and noodles, powdered juice, human hair wigs, false beards, eyebrows and eyelashes.
The government also wants to increase fees charged for money transfer services by cellular phone service providers and will indirectly hit alcoholic beverages and betting with taxes on advertising, hence the cost of production.
The middle class according to the IEA study is especially concentrated in the financial sector and services space where young entrepreneurial Kenyans are taking advantage of high education levels, and digital skills to earn a living given the high levels of unemployment.
For instance 8.5 percent of the population or 4.25 million young Kenyan today trade in cryptocurrency giving the government ideas. In the new Bill, the government will target digital assets such as crypto and non-fungible tokens, which will be demanded within 24 hours of settling a transaction.
A new middle class emerging from social media marketing will also be targets of new tax measures despite their seesawing incomes, and lack of health and pension benefits in their gig earnings ecosystem.
The government in keeping with its practice of giving multinational preference over its citizens has chosen the highest rate of withholding tax on digital content creators while ensuring the VAT registration threshold shall not apply to non-resident persons making supplies of digital services over the internet, an electronic network or a digital marketplace.
“We note that the proposed 15 percent rate is unusually high in comparison with the five percent rate that appears to be the standard withholding tax rate for payments to resident persons. It’s our view that the proposed withholding tax should be capped at five percent in tandem with rates applicable on other services provided by resident persons to avoid muzzling growth in this fledgling industry,” tax advisory firm Deloitte said.
Finance Act 2022 also clarified that non-resident taxpayers with permanent establishment in Kenya are not subject to digital service tax (DST) provided that the DST is declared in Kenya for income tax purposes.
The government also noted that while most middle class are in the formal space, a lot of them own businesses on the side. The government fancies informal businesses that employ the majority of workers in Kenya as a crucial area to extend the tax base.
Wage employment in the private sector recorded a growth of 4.8 percent from 1.9 million jobs in 2021 to 2.07 million jobs in 2022. Within the public sector, wage employment increased from 923.1 thousand jobs in 2021 to 937.9 thousand jobs in 2022.
The new money bill is proposing to increase turnover tax from one percent to three percent while incorporating business that make as little as Kes500,000 a month or just Kes1400 a day.
While the middle class are more vocal especially online, they rarely translate into political action on the ground. This handicap has made them extremely vulnerable targets for tax increases.
However, higher taxes has bred nationwide discontent with the civil society promising a fight on the new Finance Bill, under the banner of Okoa Uchumi, an umbrella of civil society organisations. The group cautioned that heavy taxation might occasion closure of many businesses and that as the civil rights groups, they will no longer talk to the IMF and instead will direct engagements with the government in a push to renegotiate loan conditionalities.
The government risk fomenting a formidable opponent especially when the middle class have nothing more to lose a situation that is becoming a reality everyday.
As IEA indicated that most middle class are actually barely out of the lower class with individuals earning up to Kes50,000 per month constituting 74 percent of all waged employees, the taxes may soon flip them to the bottom of the pyramid.
And at the bottom, as legend has it, the revolution shall not be televised. Latest data shows growing strain as crime, especially, theft is on the increase. Economic Survey 2023 shows the number of offences reported for stealing increased by 25.1 per cent to 14,718 last year.
The highest increase in crimes reported to the police was recorded for theft of stock (36.4 percent) followed by traffic offences (28.5 percent) and robbery (27.2 percent).
Nairobi City, Kiambu and Meru command stations accounted for the highest proportion of crimes reported at 9.7, 8.9 and 6.5 per cent, respectively, in 2022. And it is getting more violent, in 2022, police recovered 235 illegally held firearms compared to 98 firearms recovered in 2021.