20 June 2018

Kenya: Rotich Admits Housing Fund Tax Error in Budget

Kenyans in formal employment will not contribute one per cent of their pay to the housing development fund as indicated in the Finance Bill, but will instead pay 0.5 per cent, Treasury secretary Henry Rotich said on Tuesday.

The CS described the one per cent charge to the fund contained in the Finance Bill as a typographical mistake that will be corrected as it goes through Parliament.

"The right rate is the one in the Budget statement. The error will be dealt with in Parliament, where we will harmonise what is in the Bill and what is in the Budget speech," the minister said, adding that the proposal that came from the Ministry of Housing was five per cent, which "the Treasury thought was too high."

Mr Rotich had pegged the levy at 0.5 per cent of an individual's pay in his Budget statement -- to be matched by a similar contribution from employers up to a maximum of Sh5,000 -- but the Finance Bill doubled the rate to one per cent, causing an uproar among those in formal employment.

If Parliament passes the Bill without correcting the mistake, Kenyan workers will have to pay the higher levy that also significantly adds cost burden to employers.

The State Department of Housing announced two months ago that it was finalising regulations to operationalise a housing development fund, whose finer details are yet to be released.

This is the first time that the Housing ministry is establishing the fund that has been lying dormant in the Housing Act for decades.

Its implementation means an employee earning Sh100,000 will contribute Sh500 every month to the fund - up to the maximum Sh5,000 for those earning Sh1 million and above.

Mr Rotich defended introduction of yet another payroll levy on people in formal employment who are already burdened by multiple levies, saying that it will help the government realise the goal of delivering half a million affordable housing units in five years.

The Finance Bill has also introduced amendments to the Central Bank of Kenya Act to include regulation of mortgage refinance companies. The move paves the way for the establishment of state-backed Kenya Mortgage Refinancing Company that is to address the demand side of the housing market by offering liquidity to the mortgage industry.

Mr Rotich did not offer details on how the fund will be managed but said those contributing to the fund will have priority over non-contributors in accessing the completed housing units.

"In terms of priority, the first ones in line to get the affordable housing will be the contributors. This is how it works in other countries... we will thereafter determine whether the contributors will access (the houses) on first-come-first-served basis or use a lottery system as it happens in Ethiopia," said Mr Rotich.

The new levy, which comes at a time when Kenyans are about to be hit with a raft of other tax increments in VAT and excise duty, is expected to face stiff opposition from unions and employers, who consider it an additional tax burden.

Companies with large turnovers are set to pay a higher tax rate of 35 per cent on all income above Sh500 million, while for employees, basic food items and petroleum products are in line for VAT charges due before the end of the year.

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