Antoinette Nyirankinahamira works at one of the guest houses in western Rwanda as a waiter. She told The New Times she earns Rwf40, 000 per month as a net income – after tax has been deducted from her gross salary, estimated at around 50,000.

Nyirankinahamira is one of at least 165,500 formal workers in Rwanda, who are set to benefit from tax exemption for a monthly [gross] income not exceeding Rwf60,000, according to the Ministry of Finance and Economic Planning (MINECOFIN).

The development comes after the law establishing taxes on income that was passed by Parliament on September 15, 2022, which among others, provides for the increase of the taxable monthly income cap to Rwf60,000 (or Rwf720,000 per year) from the previous Rwf30,000 (or Rwf360,000 per year) that was set in 2005.

The new law is expected to come into force on the date of its publication in the Official Gazette of the Republic of Rwanda.

Indeed, under the tax law enacted in 2018, income not exceeding Rwf30, 000 per month is not taxed, that ranging from Rwf30,001 and Rwf100,000 has to pay 20 per cent tax rate, while earnings above that are taxed 30 per cent.

"The move not to tax any income of up to Rwf60,000 is helpful to workers because this pay is small and should not be subjected to tax, given that prices at the market have increased drastically, resulting in the rise of the cost of living,” Nyirankinahamira said.

Giving an example of how inflation justifies the need to support low-income earners, she pointed out that the price of a sack of rice (25 kilogrammes) used to cost Rwf16,000 in 2020, but almost doubled to at least Rwf30,000 currently.

In May 2022, MINECOFIN indicated that the Cabinet approved the Medium Term Revenue Strategy that includes among other reforms, change in PAYE bracket.

PAYE stands for pay as you earn – an income tax that is determined by how much one earns and directly deducted from their pay.

This provision, it said, will be implemented in two phases, where for the first year of the commencement of the law (phase 1), the tax-free threshold will be doubled from Rwf30,000 to Rwf60,000. This move will benefit at least 165,500 formal workers, or 30 per cent of around 541,241 formal workers in Rwanda as of June 2022.

According to MINECOFIN, all sectors and activities of the Economy have formal workers who earn below Rwf60,000.

More specifically, it indicated, there is more in manufacturing activities (tea and coffee factories’ employees), in administrative activities, support service activities (security companies, hospitals (cleaners) and district employees), and agriculture activities (tea company employees).

Moreover, in the second year since the law comes into force, (phase 2), MINECOFIN said, workers who earn (Rwf60,001-Rwf100,000) will be taxed at the rate of 10 per cent instead of 20 per cent, and those who earn (100,001-200,000) taxed at the rate of 20 per cent instead of the current 30 per cent.

The Phase 2 incentive is estimated to benefit at least 107,500 formal workers (20 per cent of total formal workers).

"To summarise, the new proposal will benefit at least 273,000 formal workers which represent more than 50 per cent of total formal workers,” MINECOFIN observed.

However, for those who earn more than Rwf200,000 per month, the imposed tax rate will remain 30 per cent.

Meanwhile, before the Parliament adopted the law, labour unions had advocated for the increase of the taxable cap to at least Rwf100,000 monthly, which they argue could help many low income workers to afford at least the basic standard of living, including food, transport, and accommodation.

"Raising of the taxable income from Rwf30,000 to Rwf60,000 is a good step, but, we wanted that to increase to at least Rwf100,000 so that the move helps more workers,” Africain Biraboneye, the General Secretary of Rwanda Workers’ Trade Union Confederation (CESTRAR) told The New Times.

"Sometimes, requests are not fully granted. But, we will continue to make advocacy, to show that it is very necessary [to increase the tax-free income, especially when it is feasible,” he said.

How was the taxable income threshold set?

MINECOFIN observed that the taxable income threshold is determined from the analysis of the formal labour and the country’s economic situation.

To get to the threshold of Rwf60,000, it said, it considered inflation in Rwanda, from 2005 (the last time the brackets were set) to 2018, pointing out that this inflation was estimated at around 112 per cent. In other words, [as of 2018], prices had more than doubled since the brackets were last set [in 2005], it explained.

In addition, the Government’s capacity to forego more revenue while meeting other competing priorities was considered.

Govt to forego over Rwf43 billion in tax under the reform

According to MINECOFIN, to implement the tax reform, the government will forego more than Rwf43 billion for the 2 years (including Rwf20.7 billion for phase 1 consisting of the tax waiver on the small-income earners, and Rwf22.5 billion for phase 2, which is about tax cut.

Regarding how the government will cover the tax collection gap that could be created by such a situation, MINECOFIN said that the Medium-Term Revenue Strategy (MTRS) approved by the Cabinet in May 2022, proposes a set of other tax policy reforms that are expected to fuel the economic recovery and boost the revenue collection. This is a three-year strategy that runs from 2021 through 2024.

The MTRS package is estimated at 1 percentage point tax to GDP (gross domestic product), MINECOFIN showed – or Rwf109 billion more revenues, considering 2021 when Rwanda’s GDP was estimated at Rwf10,944 billion, according to data from the National Institute of Statistics of Rwanda.