New statutory deductions for Kenya’s Social Health Insurance Fund (SHIF) and housing levy have pushed workers’ payslip cuts to unprecedented levels of 40-45% of gross pay, exceeding deduction rates in many Western countries and leaving some workers with less than a third of their gross pay after loan obligations.
The implementation of the 2.75% SHIF deduction last moth, following the 1.5% housing levy introduced in July 2023, along with increased NSSF contributions, has significantly reduced workers’ disposable income and purchasing power, leading to
a 15-20% decline in retail and consumer goods sales, as per the Federation of Kenya Employers.
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The impact is reflected in the KRA’s data showing a rare 2.89% year-on-year decline in average gross monthly pay for private sector workers to Sh75,781 between June and September, the first of such reduction in three decades. This drop in paye has forced companies to pause hiring or shift to casual employment. Stanbic Kenya Purchasing Managers Index, however, fears that the declining demand for goods and services, will arguably cause collapse of several businesses
The misalignment in KRA’s means of collecting revenue, juxtaposed with its fiscal ambitions, is a recurring dilemma rooted in the historical over-reliance on formal sector taxation.
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This echoes a colonial-era legacy where payroll levies formed the backbone of revenue systems in highly structured economies-systems ill-suited to Kenya’s 80% informal workforce.
In the entire world, progressive economies have pivoted toward consumption-based taxation, leveraging its non-discriminatory nature to distribute the tax burden
more equitably across all income strata.
An alternative strategy could involve implementing a universal levy or consumption tax, such as a marginal increase in VAT or an excise duty on non-essential goods. This method would distribute the financial burden more equitably across the population, ensuring consistent revenue streams without stifling economic activity.
Such a shift could alleviate pressure on formal sector employees while maintaining the government’s fiscal objectives, highlighting a need for innovative policy solutions that align with Kenya’s unique economic structure.
Failure to address these systemic issues will only exacerbate existing inequalities and hinder Kenya’s development goals.