By CPA Frederick Mutuku
My attention has been drawn to the discussion triggered by a letter apparently originating from the Kenya Revenue Authority. The letter dated 6/12/2022 and titled “Pay As You Earn (PAYE) Filing And Payment” reads in part ; “As we are nearing the due date for filing and payment of Pay As You Earn (PAYE) for the November 2022 tax period, I take this opportunity to remind you to do soon time (before 9th) “. Of interest is the list that follows; “while filing and paying, ensure to include these receivables (payments) in your PAYE calculations:
- Leave pay, sick pay, payment in lieu of leave, directors’ fees and other fees, overtime, commission, bonus, gratuity or pension whether payable monthly or at longer or shorter
- Cash allowances, e.g. house or rent allowance, telephone allowance, round sum allowance, dinner allowances, travelling allowance etc.
- The amount of any private expenditure of the employee paid by the employer otherwise than as a loan, e.g. house rent, grocery bills, electricity, water, telephone bills, school fees, insurance etc.
- Non-cash benefits when the aggregate value is exceeding Ksh. 3,000 per month e.g. share ownership plan, low interest rate employment benefit/fringe benefit,car benefit, gardeners etc.
- Taxes paid by employer on behalf of employee.
- Per diems over Ksh. 2,000 per day that are not reimbursements.
Then author of the letter concludes by informing the tax payers of the impending fines and penalties in case of non-compliance. The reason I would wish to express my personal opinion on this subject matter
is several fold. Firstly, the specific “tax demands” are not foreign nor new. In fact, most of them are generational, transcending to over 5 decades. They are well embedded in out Income Tax Act cap 470.
This is especially to the Kenyans On Twitter (KOT) crew most of whom, expressed shock on some of the taxable proceeds. By the way, I hope Elon-Musk will tolerate the KOT Crew.
The question would be how often are our tax laws adjusted for economic realities? I say this well aware of the principles of a good tax system. Just to remind ourselves – canons of an efficient tax system include: Equality, Certainty, Convenience, Efficiency, Economy, and Simplicity.
Section 5(2) (a) states “For the purposes of section 3(2) (a) (ii), “gains or profits” includes:
“(a) wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or
subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered and any amount so received in respect of employment or services rendered in a year of income other than the year of income in which it is received shall be deemed to be income in respect of that
other year of income”
Section 3(2) (a) (ii) states “Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya. Sub section 2- “Subject to this Act, income upon which tax is chargeable under this Act is income in respect of – (a) gains or profits from – ii employment or services rendered.”
Clearly from the quoted section of the Act, it is evident what employment income is taxable. Some of
these taxable incomes are based on some given thresholds. Secondly, two thousand Kenya shillings and a basket of goods today, compared to a decade ago, is an oxymoron. There is definitely a huge difference in what two thousand Kenya shillings is worth today compared to even 3 years ago.
The question would be how often are our tax laws adjusted for economic realities? I say this well aware of the principles of a good tax system. Just to remind ourselves – canons of an efficient tax system include: Equality, Certainty, Convenience, Efficiency, Economy, and Simplicity. In 1776 Adam Smith in the Wealth of the Nations argued that taxation should be based on four canons; Equality, Economy, Certainty and Convenience.
Of course a lot has happened in the taxation field since 1776. The canons were advanced to seven. The conversation continues to date. The truth is, the jury is still out there in terms of how compliant our tax
systems are. You may ask why all this information? But please bear with me, I promise you aren’t on a wild goose chase. Going back to the letter from the Kenya Revenue Authority(KRA) and even the Income Tax Act, allow me to draw your attention to taxes that are based on reimbursement basis or is it incomes that are taxed based on amounts reimbursable.
Let me call a spade a spade, yes, the taxation on subsistence, is somewhat unclear. In other words, it doesn’t conform to the cannons of taxation. Especially the principles of certainty, simplicity and even convenience. While the Act allows ksh. 2,000 per day as untaxable amount for subsistence (Per diem), it leaves to a great level the burden to determine what else is untaxable to the beneficiary (income earner/ receiver of Per Diem)
One is required to provide evidence that the amount received was utilized, not for purposes other than to facilitate the employee in the course of his or her duties outside the usual work station. This requirement creates a lot of inconveniences on the part of the tax payer, it creates some level of uncertainty on the part of the tax man. The question is, who does it serve? Should it be left as is? Should it be overhauled all together? Another question related to this is the one that borders on the frugality or lack of it on the receiver of the reimbursable/ non- reimbursable subsistence.
The choice of accommodation, meals and means of transport during the official duty away from the normal duty station is a personal decision. This may be informed by how thrifty one is or the standard of the city/town one is visiting among other factors. Take for instance two employees at the same job group, earning the same amount of salary and of course Per Diem. They both have different tastes and preferences.Definitely one is more frugal than the other.
It follows that the amount of tax levied on both will be different, unless a cap is placed in terms of the expenditure allowable. Whichever the case a certain level of uncertainty exists both on the side of the tax man and the tax payer. Thirdly and lastly, the aforementioned areas of concern among many others in
our tax system, call for a lot of goodwill. This goodwill is definitely from the employer or the person paying the allowance.
Definitely, this goodwill is envisaged in the Act. When it comes to allowances such as subsistence, it is not as straight forward as it may seem. It brings to debate the principle of economy and simplicity, among the principles of a good tax system. Does this tax meet these canons of taxation? Economy; since for the tax man to maximise taxation from this income stream, he must invest time and other resources. Question is, does the cost – benefit -analysis equation tick to his favour? It is not economical to chase this
The principle of simplicity comes into play definitely, because one will have to do lots of paper work to separate between the “good and the evil” (taxable & non-taxable). Making the process complex. Should it be the case? Let us have this debate, let us review continuously, consistently and purposefully; for a better broader productive inclusive tax system.
The author is a member of the institute in a good standing with over 15 years of experience both in the private and public sector)