Companies shift to contract workers in face of perverse taxation regime – Jijenge Credit

Kenya’s new tax package threatens to loosen the local labor market, with employers in many sectors confronting a truly tight equilibrium for the first time in decades and facing the prospect of workers leaving for greener pastures or taking up spare gigs.

And with the unemployment rate at historic high, Kenyan workers are bracing for a decreased bargaining power according to new predictions by micro- lending firm Jijenge Credit Ltd.

“What you will see as some of the taxation measures begin to take effect this month, is a radical evaluation of employment contracts between employers and their staff,” offered economist and the firm’s Chief executive, Peter Macharia in an interview last week.

Macharia, like most observers, says that many employers will be forced to tweak their contracts to fit within the increased tax commitments endorsed in the Finance Act 2023.

The new law has seen a sharp increase in employees and employers’ monthly contributions to both the National Social Security Fund (NSSF) and the National Hospital Insurance Fund (NHIF) for instance, in what Macharia believes will discourage most employers’ ability to match.

Employees earning above Sh500,000 will now pay 32.5 percent in taxes, and those making above Sh800,000 will pay 35 percent. Combined with a new housing tax of 1.5 percent and a medical insurance tax of 2.5 percent, the new burden will see some Kenyans part with about 40 percent of their income.

As a result, most employers may be forced to re-hire their own staff on a short contract model to avoid the looming tax burden on their side.

Its long-term implication, Macharia says, will see reduced contributions to the Kenya Revenue Authority (KRA) keen to finance a Sh3.6 trillion budget for a country spending in excess of Sh1.5 trillion on recurrent expenditure alone.

The Finance Act 2023 was passed by President William Ruto on June 26, 2023, with most of the changes taking effect from July 1, which is the Government’s fiscal year, while a few will be effective from September 1 and January 1, 2024.

Similarly, tax on small businesses, meant to increase the number of taxpayers will also hurt loss-making businesses and could push such firms to render their employees redundant in the face of a tough business environment worsened by higher energy tariffs for manufacturers.

National figures show that the unemployment rate stood at 5.5 percent in 2022 from 5.74 percent a year earlier, a 0.01 percent increase from 2020, according to estimates by Statista and Macrotrends respectively. This is higher than the long-term average of 4.22 percent.

Unemployment rate refers to the share of people who want to work but cannot find jobs.