By FCPA George Mokua
We Should Rethink the Taxation Model
Access to shelter is a basic human need and a key determinant of individual welfare. Globally, housing is on average, the single-largest expenditure item across all income groups and has accounted for an ever-larger share of total household expenditure in recent years.
The housing sector is important and strategic to the government as well as policy makers because of its impact on the country’s output variations. The industry variables impact the well-being of the people: it influences the size and composition of household wealth, health, accessibility to credit, labour productivity and employment.
Article 42(1) (b) of the Kenyan Constitution gives every Kenyan the right to accessible and adequate housing, and to reasonable standards of sanitation. In the realization of this right, the Government has prioritized affordable housing under the Bottom-Up Economic Transformation Agenda (BETA).
Recent public discourse on the introduction of 1.5% housing levy by both the employee and the employer to the National Development Housing Fund to support affordable housing in Kenya have been intense. This is not the first time such a proposal has been mooted. Through the Finance Act 2018, and later the Housing Fund Regulations 2018, employers were required to remit contributions to the Fund by deducting 1.5% from the employees’ basic salary and contributing the other 1.5%, subject to a maximum total contribution of Kshs.5,000.
It is worth noting that Kenya has in the past implemented similar measures to deal with internal economic challenges and shocks. A case in point is the tax reforms in the period of 1993/94 and 1994/95 that were aimed at broadening the tax base and easing the burden of taxation for the economy.
According to the IMF reports, real GDP growth had declined steadily from 4.3 % in 1990 to 0.5% in 1992 and 0.2 % in 1993 due to among many factors, a prolonged drought. The drought had discouraged planting thus reducing agricultural productivity. As such, import-dependent sectors were adversely affected by the scarcity of foreign exchange and the depreciation of the Kenya shilling.
The Kenyan government at that time made a bold decision to deal with the drought situation. A temporary drought levy was introduced through the 1994/95 Finance Act through imposition of an additional 2.5% tax charged on taxable corporate profits and on income of individuals in the highest tax bracket. This approach was redistributive in nature in terms of taxing the wealthy and well-off individuals to support livelihoods through interventions on drought.
Perhaps, the government could have adopted a similar approach in introducing the housing levy. Focusing on taxable income tax profits and the higher income bracket just like the drought levy will have gained more public acceptance and support.
It is agreeable that housing is a major challenge in Kenya, especially in the urban areas. According to the World Bank Report, over 70 % of urban households in Kenya experience severe housing affordability challenges, manifested in the high levels of homelessness, poor human settlement conditions, and high price of housing relative to the incomes of households, mortgage delinquencies, defaults, and foreclosures.
A report released last year ( 2022) by World Bank indicated that the main cause of housing deficit in Kenya is the high rate of rural-urban migration and population growth versus few housing units that are built annually. Kenya’s population is over 47 million people of which about 12 million are urban dwellers. However, a child born in 2017 in an urban area will see Kenya’s urban population double to 24 million by 2035 and more than triple to 40 million by 2050.
The creation of the National Housing Development Fund was therefore meant to help the government realize its goal of delivering 500,000 affordable housing units per year to stop the expansion of slums in informal dwellings in major towns countrywide.
We note that considerable progress has been made in supporting this sector. According to the Economic Survey 2023, as at December 2021, there were 3,480 housing units under construction by the State Department for Housing (SDH), with an estimated construction cost of KSh.6.9 billion. During the same period, the National Housing Corporation constructed 424 housing units at an estimated cost of KSh.1.7 billion.
As we grapple with funding the housing sector, there is need for a comprehensive review of the special plans across the country for complete and planned development. As the fund’s operation kicks in, strict measures should be instituted to curb against misuse of funds collected.
Moreover, the role of the private sector cannot be underestimated. The government should partner and create the right environment for lenders, developers, and players in the real estate sector. Important preconditions such as financing instruments, access to land, providing basic infrastructure, and improving the efficiency of accelerating mortgage registration and title transfers should be established.
Most importantly, we should rethink the taxation model and benchmark with the Finance Act 1994 provisions on temporary drought levy, revisit the gains of that levy and focus more on redistributive taxation model to fund affordable housing in Kenya. Instead of the current 1.5% housing levy contribution by both the employee and the employer.
Maybe it is time we experimented with a 1.5% % levy on taxable corporate profits and on income of individuals in the highest tax bracket as a temporal measure instead of imposing the levy on gross income of employees regardless of their level of income and as a levy on even loss-making corporates.
The writer is the Chairman of ICPAK
