The decision by the Kenya Revenue Authority (KRA) to backdate the new taxes to July 1 has left tax agents with a compliance nightmare as employers brace for a double hit later this month remitting the taxes that were uncollected due to an earlier suspension by a court.
The taxes unremitted within the five-day window are technically attracting penalties for non-compliance following the decision by the (KRA) to apply the taxes from the effective date under the Finance Act 2023.
The Tax Procedures Act of 2015 imposes a one percent penalty for late tax payments per month or part of a month the amount remained unpaid.
Among those who will be the hardest hit are commercial banks who in 2022 collected Sh37.3 billion, accounting for 25.2 percent of all withholding tax collected by the KRA, according to a survey conducted by the audit firm, PwC.
Interest expenses on deposits are the main driver of withholding tax in the banking sector.
Total sector payments on interest payments grew by 12.5 percent between 2021 and 2022 to Sh153.1 billion.
The Finance Act 2023 revised the date for remitting withholding taxes from the 20th day of the following month to five working days after collection.
“The following changes have been effected on withholding tax payment procedures to comply with the Finance Act 2023, effective from July 1st, 2023.
The due date for the payment is now five working days from the date of payment to the supplier/withholdee. This has taken into account weekends and holidays and the system will automatically impose late payment penalty and interest as provided by the Tax Procedures Act for all late payments,” the KRA states in an internal memo on iTax enhancements.
The Kenya Bankers Association (KBA) has taken issue with the change in the window for remitting withholding tax collection to the KRA and says the change saddled its members with high compliance costs.
The industry lobby says it is banking on further engagement with the Treasury and the National Assembly to explore how this can be addressed to meet the sector’s needs.
“The public participation in the Finance Act did yield some good outcomes. That is not to say that there are no challenges. The five days provision for remittance of withholding tax collections is problematic, it is not working and I guess it would be good if we pick this up in the ongoing conversations and see how to make the implementation business-friendly and less costly and more efficient,” the KBA Tax Committee chairperson, Peter Mungai, told the Business Daily.
The National Assembly has, however, rebuffed calls for engagement with KBA on the subject of changing the timeline for the remittance of withholding tax collections to the KRA.
Finance and Planning Committee chairman Kimani Kuria said the tax agents were fighting the five working days provision to ensure a steady supply of funds to meet their day-to-day operations.
“Agents collect this money on behalf of the government. Why do they want to continue holding withholding tax collections until the 20th of the next month? It is because they use these collections to finance their businesses as part of their working capital,” Mr Kuria told the Business Daily.
Employers, meanwhile, must now backdate deductions covering the 1.5 percent housing levy and a higher rate of pay-as-you-earn (PAYE) for workers earning more than Sh500,000 monthly.
The directive is presenting both an administrative nightmare for accounting departments and payroll managers and cash-flow challenges.
Employers are required to, for instance, remit the housing levy within nine working days, implying the deduction must be made August 11, or face fines of two percent of the amount due.
But with employers having paid July salaries, which was before the lifting of conservatory orders against the Finance Act 2023 on July 28, employers will likely remit the deductions from day-to-day cash-flows before recovering the balances from employees at the end of the month.
“We find ourselves in the unfortunate situation where the majority of employers have already prepared their payrolls for July 2023. The new rates were not factored in as the High Court has suspended the implementation of the Finance Act, 2023,” the Federation of Kenya Employers Executive Director, Jacqueline Mugo, told the Business Daily.
“We are asking the government to consider the financial and administrative challenges employers are facing and allow arrangements that will enable employers to remit the July affordable housing levy together with the August levy.”
Employers are expected to update their payroll systems to align with the new tax deductions, including new PAYE rates.
For its part, the KRA has begun rolling out new templates for employers and employees for the purposes of submitting tax returns and making the correct tax payments.
Yesterday, the taxman issued a circular detailing the enhancements brought by the 2023 Finance Act changes, including filings for PAYE.
“This particular return has been updated to affect the new PAYE bands as per the Finance Act 2023. These changes have also been effected on the unified payroll return with effect from July 1, 2023,” says the circular.
The PAYE return sheet has been updated to include deductions to the affordable housing levy, with the charge being automatically computed at 1.5 percent of the gross salary of the employee which is matched up with the employer’s share of contribution.
Last Friday, the Court of Appeal lifted an order suspending the implementation of the Finance Act 2023 after the Treasury Cabinet Secretary Prof Njuguna Ndung’u successfully argued that the exchequer was losing upwards of Sh500 million daily from the freeze.
