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The Tax Laws (Amendment) Bill, 2020 (the Bill) underwent its second and third reading in Parliament on 22 April 2020.
It is our understanding that the Bill has now been forwarded to the President for assent and will be enacted into law upon him signing it. This is anticipated to happen in a matter of days. One of the most highly anticipated changes relates to the proposal to reduce the Pay As You Earn (PAYE) rates.
The Bill proposes to replace the current tax brackets with the following individual tax rates:
|Proposed New Tax Bands|
|Proposed annual bands
under the Bill (KES)
|Proposed monthly bands
under the Bill (KES)
|Proposed Rate of Tax|
|On the first 288,000||On the first 24,000||0%*|
|On the next 200,000||24,001-40,666||15%|
|On the next 200,000||40,666-57,333||20%|
|All income above 688,000||Above 57,333||25%|
*Note that the first band is subject to tax at the rate of 10 percent, however the personal relief granted of KES 28,800 (approx. USD 270) – approx. KES 2,400 (approx. USD 22) per month – would reduce the effective tax for this band to 0 percent.
By way of practical illustration, an employee who earns KES 100,000 (approx. USD 935) who currently pays PAYE of KES 22,656 (approx. USD 212) per month would under the new rates pay a reduced PAYE of KES 16,500 (approx. USD 155) due every month.
When will the new rates become effective?
As stated above, the new PAYE rates will not come into force until the President has assented to the Bill.
At this stage, it is not possible to know when the President will sign the Bill into law, or whether the effective date will be set (for example, 1 May 2020) or it will be the date of the Bill’s assent.
Members of the public, therefore, will have to wait until the assented Bill has been published by the Government Press in order to confirm the effective date of the proposed changes to the PAYE rates.
What are the options available to employers in the interim period?
Given the fact that the payroll for the month of April 2020 is currently being processed by most employers, in our view, there are two options available for employers to deal with the PAYE obligations for this month:
The employer may choose to delay processing their payroll for a few days while waiting for the President to assent to the Bill to enact it into law. Given the uncertainties as to the timing of the President’s assent, and the need to verify the effective date of the Act prior to implementing tax changes, this option carries the risk of delayed payroll processing to the detriment of employees.
The second option, which is the preferred option, is for employers to proceed with the processing of their payroll for the month of April 2020 based on the current rates. Following the President’s assent to the Bill, an employer can then refund the amount of reduced PAYE to the employees in the May 2020 payroll, but only to the extent that the effective date of the Bill is no later than 30 April 2020 and that the new PAYE rates are confirmed to be in force before the due date of PAYE (i.e. on or before 9 May 2020).
In the unlikely event that the new PAYE rates are not announced by the time the employer remits PAYE to the KRA (i.e. on or before 9 May 2020), it is possible for an employee to seek a refund on account of overpaid PAYE after filing their 2020 employment income return (due on June 2021).
We are keenly following the progress of the Bill and will continue to keep you updated on any upcoming developments.
The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.