TAX NEWS - June 2010

Kenya Tax: Experts Want Pension Fund Made Eligible for Tax Relief

Asset managers want pension savings made eligible for tax relief in order to rope in more workers in retirement schemes.

Zimele Asset Management, in a proposal to Finance minister Uhuru Kenyatta, argues the incentive would increase disposable income and stimulate spending while bolstering national savings for future investments.

"People have to make the trade off between saving and spending but with such a proposal, there would be no trade off and people would save more," say Zimele analysts.

The policy shift would support other incentives already in place such as tax free pension contribution of up to Sh240,000 per year granted workers.

However, retirement benefits are taxed upon liquidation at rates similar to income tax if an individual retires before the recognised age of 55 years.

The rates are however lower after 55 years and there are no taxes on income and benefits for those aged 65 years and above.


Retirement kitty

The implication is that the Kenya Revenue Authority (KRA) would directly earn less since the pension relief would eat up the tax payable to the authority, but according to analysts from Zimele Asset Management the authorities would still get their dues.

"It (the pension relief) increases disposable incomes and therefore expands the taxable base for indirect taxes," says an analyst from Zimele. Economists also welcome the move to create pension relief.

Nelson Wawire of Kenyatta University's Department of Applied Economics says that more disposable income has a multiplier effect on the economy and therefore the government will collect more revenue as the economy expands.

Revenue authorities would be able to recoup their dues through taxes charged from consumption such as value added tax (VAT).

But Dr Wawire has a caveat to the proposal to introduce the pension relief. Increase in disposable income can boost the economy if there are no rigidities on the supply side, he says.

"More disposable income can stimulate the economy only if there is a capacity to meet the new demand for goods and services," says Dr Wawire.

"If the government collects less money it will have to priorities its services," says Dr Wawire.