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Is Kenya’s housing levy the right thing done wrong?

By Morris Kiruga, in Nairobi
Posted on Tuesday, 23 April 2019 12:11

New homes rise above the notorious Kibera slum in Nairobi. REUTERS/Thomas Mukoya

The Kenyan government is set to start collecting a 1.5% housing levy from salaried employees – the most recent indication that President Kenyatta’s government is set on working on his legacy projects.

The housing levy would amount to a substantial estimated KSh50bn ($492.7m) annually from Kenya’s 3.94 million taxpayers.

But only if it can navigate several court cases filed by the umbrella workers’ union and a consumer lobby group. The Federation of Kenya Employers executive director Jacqueline Mugo calls calls implementing the levy “unlawful”.

The revenue authority and the government announced the onset of the levy in a press release which tasked employers to start deducting it by 9 May.

The unpopular levy was announced in June last year, and although it has increased from a 0.5% proposed rate at the time, retains many of the initial aspects of the proposal:

  • employees will contribute 1.5% of their basic salary;
  • employers will contribute an equal amount;
  • both will be capped at KSh2500.

The government’s plan is to build 500,000 affordable houses in the next five years and then sell them to its citizens through mortgages or a tenant purchase scheme.

On the project website, the government says that 213,068 people have already registered for the affordable housing plan.

The houses will be built by private companies and then sold to qualified applicants determined by a lottery.

  • In the press release, it also said that those who do not get a house will be allowed to transfer their money to a pension scheme or withdraw it.
  • Curiously, the cabinet secretary for transport, infrastructure, housing and urban development, James Macharia, also said that the employer’s contribution was non-refundable.

Such details are only a small part of why the levy is unpopular with both employees and employers.

  • Kenyans already feel over-taxed, especially as the pinch of increased taxes on basic goods begins to bite: witness the deluge on the popular hashtag #ResistHousingFundLevy.
  • Last year, Kenyatta’s government introduced an 8% levy on petroleum and a 15% presumptive tax on business owners, amidst a wide range of tax increases on goods and services.
  • The principal secretary for housing and urban development, Charles Mwaura, called the levy “a very small sacrifice”.

Critics point out the advantageous timing for the administration, which needs to shore up government finances in the short-term as it struggles to meet a budget deficit and debt repayments.

  • The revenue collections will increase significantly as the tax man widens the fiscal net, with its targets set at a tax base of 7 million by 2021.

In the past few years, the tax net has grown to include landlords and small-business owners.

The Kenya Revenue Authority has also tabled plans to build an intelligence-gathering scheme that will include third-party data from mobile-money services, and punitive measures such as listing on credit-reference bureaux for tax dodgers.

Although the government has been involved in the housing market before, the affordable housing scheme is its most ambitious plan yet.

  • Its target is, on paper, a solution to a market that has mainly catered for high-income and middle-class segments.
  • It would also grow Kenya’s mortgage industry, which has stagnated at below 30,000 despite the fast growth in the overall housing sector.

Bank woes

The problem for commercial lenders is that the plan will cap mortgage rates.

  • Central Bank released draft regulations for the World Bank-funded Kenya Mortgage Refinance Company (KMRC) in February.
  • The refinance company will be restricted to long-term funding and capital-market access to mortgage lenders.

Another problem is Kenya’s rampant corruption which has led to eroded trust in public institutions.

  • There are already multiple ongoing graft cases involving the health insurance and pension funds, the two other mandatory deductions.

While the housing levy might not take effect next week because of two court orders issued in December 2018 and April 2019, it is most likely that the government will proceed to deduct the levy from its employees as a first step.

  • The levy’s most vocal opponents so far have been the Federation of Kenya Employers and the Consumers Federation of Kenya.

Bottom line: Though there are clear advantages to boosting housing for poorer households, the suspicion that elites will capture the benefits will provoke a pitched battle in the weeks to come.

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