How The Proposed Tax changes in the Finance Bill 2024 Will affect you

By Victor MUJIDU

The published Finance Bill 2024 that was proposed by the parliament is likely to cause an economic staggery if implemented without proper amendments to the proposed tax laws, financial experts said.

Following the high intensity of global tensions, including domestic issues such as high public debt, the country could be muzzled and fail to meet its financial target of Ksh3.9 trillion for the financial year 2024-2025.

The bill proposes a wide array of tax and administrative measures that include Motor-Vehicle Tax, Minimum Top-Up Tax and Significant Economic Presence tax and amendments aimed at enhancing revenue collection and tax compliance.

“When the economy is depressed and it’s in recession, you don’t go on taxing people. You wait until the economy recovers, then you can start taxing.”

“You look for better ways of growing the economy. In fact, you give people incentives to go into business and production so that you can get more revenue and create employment. But when you start asking for money when the economy is down, businesses will move to another place,” said Billow Kerrow, a former senator for Mandera.

Economists suggest that excessive taxation can stifle economic growth, deter investment and entrepreneurship, and reduce overall tax revenue due to diminishing returns.

“I was hoping that all the things that were enacted in the Finance Act 2023 that have come to harm the economy and livelihood will be corrected in the 2024 Bill, but that is not the case.”

“Farmers, the government will be coming for you. Farmers are being targeted. Businesses in the digital market will be targeted. You who own cars and are online, the government will be coming for you again,” said Diana Gichengo, Executive Director at the Institute for Social Accountability.

The impact of tax implications on investment and business activity is another critical aspect of the Kenyan economy. High tax rates on businesses can discourage investment, innovation, and job creation, while favorable tax incentives and exemptions can attract domestic and foreign investment, stimulating economic growth.

The effectiveness of tax policies in promoting entrepreneurship, industrial development, and competitiveness in the market directly affects the country’s economic performance and business environment.

Moreover, tax implications extend beyond domestic boundaries in a globalized economy like Kenya’s. International tax treaties, transfer pricing regulations, and foreign investment incentives influence the flow of capital, technology, and expertise across borders.

The Finance Bill targets increasing excise duty from 15 percent to 20 percent on fees charged for money transfer services offered by banks, money transfer agencies, other financial service providers, and cellular phone service providers.

Similarly, the bill proposed that items that had been zero-rated for VAT would be subject to VAT at the standard rate, currently 16 percent. One of those is bread, whose price would increase by at least Ksh10 ($0.076). Others are electric bikes and buses, and solar and lithium-ion batteries.

These changes will have unintended consequences, such as encouraging informal businesses to adopt compliance-evading strategies, creating disincentives for high earners, increasing the risk of tax avoidance and evasion, and potentially stifling economic growth.

Meanwhile, as the proposals are open for public participation to incorporate public views before the Bill is assented into an Act of Parliament by July 1, 2024, the government can focus on modification to ensure that the Bill is aligning its tax policies with both international standards and domestic levels to enhance the country’s economic integration, promote trade, and strengthen its position in the global market.

The government should strike a balance between revenue generation, economic growth, and social welfare objectives to enable harnessing the potential of taxation as a catalyst for sustainable development and inclusive prosperity.

The Chairperson of Finance and National Planning Committee of the National Assembly tabled the Finance Bill 2024 (the Bill) on 13 May 2024.

The Bill proposes various changes to the Income Tax Act (ITA), the VAT Act, 2013 (VAT Act), Excise Duty Act, Tax Procedures Act, 2015 (TPA), and the Miscellaneous Fees and Levies Act among other non-tax statutes.

All the proposed changes will be effective 1 July 2024 unless stated otherwise. These measures are expected to impact differently on businesses, sectors as well as individuals. Thus, affected businesses, sectors and individuals should consult with their tax advisors on how these measures impact them.

The new proposed definition will harmonize the definition of related parties throughout the ITA.

 

Royalty

 

The Bill proposes to expand the definition of the term “royalty” by including, “any software, proprietary or off-the-shelf, whether in the form of licence, development, training, maintenance or support fees and includes the distribution of the software.”

 

This seems to have been triggered by the recent case law on treatment of “off-the-shelf software” and “distribution of software” for withholding tax purposes.

 

Introduction of withholding tax

 

The Bill seeks to introduce withholding tax on supply of goods to a public entity at a rate of 3% and 5% for resident persons and nonresident persons respectively.

 

De minimis withholding tax threshold

 

The Bill seeks to eliminate the minimum threshold of 24,000 Kenyan Shillings (KES 24,000) set on payment for management, professional, contractual or training fee rendered by a resident person.

 

This seems to imply that withholding tax applies to all such payments regardless of the amount paid to the supplier.

 

Export processing zones

 

The Bill proposes to remove a penalty of KES 2,000 per day for each day an export processing zone enterprise fails to submit a return or late submission of a return.

 

Deferment of realized foreign exchange losses

 

The Bill proposes to reduce the carryforward period for foreign-exchange losses from five to three years from the year the foreign exchange loss is realized, for entities with gross interest paid or payable to a nonresident person that exceeds 30% of the person’s earnings before interest, taxes, depreciation and amortization (EBITDA) in any year of income.

 

This seeks to align the deferment period of realized foreign exchange losses with that of restricted interest expense. The provision will have adverse effect on taxpayers who will not have exhausted the foreign exchange losses carried forward over the three-year period.

 

Income tax exemptions

 

The Bill proposes to repeal tax exemptions on the following:

Income, other than income from investments, of an amateur sporting association

Income of a registered trust scheme

Income or principal sum of a registered family trust

Income of the National Housing Development Fund

Capital gains relating to the transfer of title of immovable property to a family trust

Income earned by an individual who is registered under the Ajira Digital Program for three years beginning 1 Jan 2020

Amounts withdrawn from the National Housing Development Fund to purchase a house by a contributor who is a first-time homeowner

The Bill proposes to repeal an income tax exemption on interest income earned from all listed bonds, notes or other similar securities used to raise funds for infrastructure and other social services that have a maturity of at least three years. Tax will be withheld at the rate of 5% on these interest income from these bonds.

This proviso does not, however, affect applicable bonds, notes or other similar securities that were/will be listed prior to the commencement of the proviso. Additionally, the Bill does not impose withholding tax on interest paid to nonresident persons.

 

The Bill proposes to repeal an income tax exemption on interest income earned from all listed bonds, notes or other similar securities used to raise funds for infrastructure, projects and assets defined under Green Bonds Standards and Guidelines, and other social services that have a maturity of at least three years. Withholding tax at the rate of 5% will apply.

This proviso does not, however, affect applicable bonds, notes or other similar securities that were/will be listed prior to the commencement of the proviso.

 

Additionally, the Bill does not impose withholding tax on interest paid to nonresident persons.

 

The Bill provides that gain on transfer of property within a special economic zone is exempt when conducted by a licensed special economic zone developer, enterprise or operator.

The Bill provides that a nonresident contractor, subcontractor, consultant or employee in relation a project financed through a 100% grant, under an agreement between the Government and a development partner, shall be exempt from income tax to the extent provided in the Agreement.

Any other income earned by that nonresident contractor, subcontractor, consultant or employee not directly related to the project shall however be subject to income tax.

 

Introduction of motor vehicle tax

 

This Bill proposes to introduce motor vehicle tax at a rate of 2.5% of the value of the motor vehicle provided that the tax payable shall not be less than KES 5,000 but shall not exceed KES 100,000.

 

The value of the motor vehicle shall be determined on the basis of the make, model, engine capacity in cubic centimeters and year of manufacture of the motor vehicle. The KRA is expected to issue guidelines for purposes of determining the value of a motor vehicle.

 

An insurer of the motor vehicles shall collect and remit motor vehicle tax within five working days after issuing a motor vehicle insurance cover.

 

An insurer that fails to comply shall be liable to pay a penalty equivalent to 50% of the uncollected tax and the actual amount of the uncollected tax.

 

The Bill proposes to exclude an ambulance, a motor vehicle owned by the national government, county government, Kenya Defence Forces, National Police Service, National Intelligence Service or a person exempt from tax under Privileges and Immunities Act.

 

Penalty on underpayment of installment tax

 

The Bill proposes to repeal the provision that imposes a penalty of 20% on underpayment of installment tax.

 

This will harmonize the penalty with the TPA, which provides for a penalty of 5% of unpaid tax.

 

Investment allowance

 

The Bill proposes an investment allowance on the acquisition of a spectrum licence by a telecommunications operator at the rate of 10% per annum in equal installments.

 

Spectrum licenses that were purchased or acquired before 1 July 2024 will enjoy the investment allowance only on the unamortized portion over the remaining useful life of the spectrum license.

 

Change of accounting period

 

The Bill seeks to provide a cutoff period within which the KRA may approve an application by a taxpayer on change of an accounting year end. Under the Act, the KRA is expected to respond within six months.

 

The Bill proposes that if the six months period lapses without KRA’s response, the application is deemed as allowed.

 

Rates of tax

 

The Bill proposes to repeal the preferential corporate income tax rate of 15% for companies that have constructed at least 100 residential units annually subject to approval by the Cabinet Secretary responsible for housing.

The Bill seeks to increase the tax rate on income of a nonresident ship owner or an air transport operator where there is no reciprocal arrangement or treaty to 3% from 2.5% of the gross amount received.

The Bill seeks to repeal s34 of the Income Tax Act (ITA), which was a copy of the Third Schedule — providing rates of tax — other than relating to the transfer of interest in a person which will be guided by the Ninth Schedule.

Digital marketplace

 

The Bill seeks to amend the definition of digital marketplace for purposes of determining income which deemed to be accrued or derived from Kenya to mean:

 

An online or electronic platform that enables a person to sell or provide goods, property or services including –

Ride hailing services

Food delivery services

Freelance services

Professional services

Rental services

Task-based services

Any other service that is not exempt from tax under the Income Tax Act

The proposal aims to bring under the ambit of taxation services that were not expressly provided in the ITA.

 

Diminution allowance

 

The Bill proposes to introduce a diminution allowance on the amount considered as representing the diminution in value of any implement, utensil or similar article employed in the production of gains or profits not being machinery or plant at the rate of 100% in that year of income.

 

Imposing WHT on digital marketplace/platform owners

 

The Bill would provide that where a resident or a nonresident person who is the owner or operator of a digital marketplace or platform makes or facilitates payment in respect of digital content monetization, goods, property or services, the amount thereof shall be deemed to be income that accrued in or was derived from Kenya.

 

It then imposes WHT on income deemed to have accrued in or derived from a digital marketplace made to resident and nonresident persons at the rate of 5% or 20% for resident persons and nonresident persons, respectively.

 

Replacing Digital Services Tax with Significant Economic Presence Tax

 

The Bill proposes the replacement of Digital Services Tax (DST) with the Significant Economic Presence (SEP) tax.

 

SEP tax will be payable by a nonresident person who earns income from the provision of services through a digital marketplace.

 

It excludes the following persons:

 

Nonresident persons who offer the services through a permanent establishment

Income earned by nonresident persons from certain telecommunication services as well as certain specific listed services

The taxable profit shall be deemed to be 20% of the gross turnover. The deemed taxable profit will be subject to income tax at the rate of 30%.

 

The tax is payable by the 20th day of the month following provision of the service.

 

The Bill grants the Cabinet Secretary of the National Treasury powers to make regulations to aid the implementation of SEP tax.

 

SEP is a concept that extends the traditional tax nexus rules to include a taxable presence based on significant digital engagement with a country’s economy. It establishes a corporate tax liability based on the level of economic engagement within a jurisdiction even in the absence of physical presence.

 

Effective date: 01 January 2025

 

Personal Tax

 

Eliminating “wife’s employment income” definitions

 

The Bill seeks to repeal the definition of the following terms:”wife’s employment income,” “wife’s professional income,” “wife’s professional income rate,” “wife’s self-employment income” and “wife’s self-employment income rate.”

 

These definitions were rendered irrelevant following the repeal of Section 45 of the ITA by the Finance Act, 2023, which previously provided that a wife’s income is assessable on her husband.

 

Deletion of retirement schemes registration requirement with the KRA

 

The Finance Bill 2024 seeks to scrap the requirement that individual retirement funds, pension funds and provident funds must be registered with the Commissioner to be deemed as registered for tax purposes. The Bill now proposes that such schemes must be registered with the Retirement Benefits Authority (RBA).

 

This is a welcome change, as it seeks to harmonize the registration requirements given that such schemes will only need to register with the specific body that is set up to specifically monitor the running of retirement benefit schemes in Kenya.

 

Deductions in respect of contributions to pension funds and individual retirement fund.

 

The Bill seeks to amend allowable limit with respect to contributions made to registered pension funds, provident funds and individual retirement funds from KES 240,000 per annum (KES 20,000 per month) to KES 360,000 per annum (KES 30,000 per month) for both the employee and employer.

 

This is a welcome change as it increases the tax-deductible amounts for both employees and employers and is likely to encourage a culture of saving.

 

Proposed change to taxation of per diem

 

The Bill proposes to amend section 5(2)(a)(iii) of the ITA to revise the per-diem benefit for employees who travel outside of their ordinary workplace.

 

The Bill proposes to change the tax-exempt portion of the per diem from the first KES 2,000 per day to no more than 5% of the monthly gross earnings of an employee. However, the bill carries a proviso that this shall only apply where an employer has a policy governing the payment and accounting measures for the per diem issued.

 

Non-cash benefits

 

The Bill proposes to increase from KES 36,000 to KES 48,000 the limit on non-cash benefits provided to employees. This cap applies to any non-cash benefit for which a prescribed treatment has not been outlined in the ITA.

 

Meals

 

The Bill seeks to increase the exempt value of meal benefit from KES 48,000 to KES 60,000 per employee. The meal should be provided in a canteen or cafeteria operated or established by the employer or provided by a third party who is a registered taxpayer.

 

Tax exemption on reimbursements to public officers

 

The Bill proposes that any amounts granted to a public officer as a reimbursement of expenses incurred in the course of official duties shall not be considered as income subject to tax. Further, it provides that the reimbursement will not be taxable notwithstanding the ownership or control of any assets purchased.

 

Tax allowable deductions

 

The Bill seeks to designate the following employee contributions as deductible in determining their taxable employment income:

 

Contributions made to the Social Health Insurance Fund in accordance with the Social Health Insurance Act, 2023

Employee deductions towards affordable housing levy in accordance with the Affordable Housing Act, 2024

Contributions to a post-retirement medical fund subject to a limit of KES 10,000 per month

In addition, the Bill seeks to repeal the following tax relief measures:

 

National Hospital Insurance Fund (NHIF) relief, which is granted at 15% of the NHIF premiums subject to a cap of KES 60,000 per annum

Affordable housing relief, which is granted at 15% of the contributions subject to a cap of KES 108,000 per annum

Post-retirement medical fund relief, which is granted at 15% of the amount of contribution subject to a cap of KES 60,000 per annum

Mortgage interest deduction

 

The Bill proposes to increase the allowable deduction for mortgage interest from specified financial institutions from KES 300,000 to KES 360,000.

 

Exempt retirement income

 

The Bill seeks to repeal the exemption from income tax of monthly pension granted to a person who is 65 years of age or more. In its place the bill seeks to exempt pension benefits received from a registered pension fund, registered provident fund, registered individual retirement fund or National Social Security Fund by a person who:

 

Has attained the retirement age as set out by the rules of the fund

Retires before attaining the retirement age due to ill health

Withdraws from the fund after 20 years from the date of registration as a member of the fund

The Bill also lengthens from 15 years to 20 years the period that a taxpayer must wait after joining the fund to make a withdrawal made from a registered pension fund, registered provident fund, registered individual retirement fund or National Social Security Fund exceeding the tax-free amount. Standard individual income tax will be imposed on withdrawals that fail to meet these requirements.

 

Personal Identification Number (PIN) requirement for remote workers

 

The Bill proposes that employees working remotely outside Kenya for an employer in Kenya should have a KRA PIN.

 

By implication, the burden is on employers to ensure that employees they engage have active PINs even they are working remotely.

 

Proposed change in pay as you earn (PAYE) compliance dates

 

The Bill proposes to amend the TPA to the effect that in calculating the period for submitting a tax return and the payment of a tax shall not include Saturdays, Sundays or public holidays. Currently, PAYE is due by the ninth day of the subsequent month.

 

This proposal implies that the PAYE compliance due dates ought to be calculated based on the working days only.

 

This change is likely to lead to greater uncertainty in tax administration as the tax due date may fall on different dates each month.

 

International tax

 

Introduction of minimum top-up tax

 

The Bill proposes the introduction of a minimum top up tax payable by a covered person where the combined effective tax rate (ETR) in respect of that person for a year of income is less than 15%.

 

The combined ETR for a covered person shall be the sum of all the adjusted covered taxes divided by the sum of all net income or loss for the year of income, multiplied by 100.

 

The amount of tax payable shall be the difference between 15% of the net income or loss for the year of income for the covered person and the combined ETR for the year of income, multiplied by the excess profit of the covered persons.

 

Adjusted covered taxes in this regard refers to taxes recorded in the financial accounts of a constituent entity for the income, profits or share of the income or profits of a constituent entity where the constituent entity owns an interest and includes taxes on distributed profits, deemed profit distributions subject to such adjustments as maybe prescribed.

 

Covered person means a resident person or a person with a permanent establishment in Kenya who is a member of a multinational group and the group has a consolidated annual turnover of €750m or more in the consolidated financial statements of the ultimate parent entity in at least two of the four years of income immediately preceding the tested year of income.

 

Net income or loss means the sum net income or loss for the year of income after deducting the sum of the losses of a covered person as determined under a recognized accounting standards in Kenya.

 

Excess profit means the net income or loss of a covered person for the year of income less 10% of the employee costs and 8% of the net book value of tangible assets. Provided that the employee cost and book value of tangible assets maybe adjusted as prescribed in the Regulations to be issued with respect to the minimum top-up tax.

 

Minimum top-up tax shall not be payable by the following persons/entities:

 

A public entity that is not engaged in business

A person whose income is exempt from tax under the provisions of the First Schedule to the Kenya Income Tax Act

A pension fund and the assets of that pension fund

A real estate investment vehicle that is an ultimate parent entity

A nonoperating investment holding company

An investment fund that is an ultimate parent entity

A sovereign wealth fund

An intergovernmental or supranational organization, including a wholly owned agency or organ of the intergovernmental or supranational organization

Proposed effective date: 01 January 2025

 

Introduction of Advance Pricing Agreements

 

The Bill proposes to introduce an advance pricing agreement (APA) regime for taxpayers engaging in related party transactions. The proposed APA regime will allow taxpayers and tax authorities to agree on the pricing to be applied to related party transactions covered under the agreement for a maximum of five years.

 

Proposed effective date: 01 January 2025

 

Preferential capital gains tax rate

 

The Bill seeks to provide certainty on the applicable capital gains tax (CGT) rate for firms that are certified by the Nairobi International Financial Centre Authority (NIFCA). The Bill proposes a 5% capital gains tax rate subject to both of the following conditions:

 

Firm has invested at least KES 3b in at least one entity incorporated or registered in Kenya within a period of two years.

The transfer of the investment is to be made after five years of the date of investment.

The proposal reduces the minimum investment threshold, which was previously stipulated as KES 5b, and provides a specific CGT rate which is lower than the prevailing CGT rate.

 

Proposed effective date: 01 January 2025

 

Value added tax (VAT)

 

Clarification on the time of supply of exported goods

 

The Bill proposes to amend Section 12 of the VAT Act by inserting the following new subsection after subsection (4): “The time of supply for exported goods shall be the time when the registered person is in possession of the required export confirmation documents.”

 

Suppliers (exporters of goods) will be expected to have all the prerequisite export documentation before declaring the supply in the VAT return.

 

Eliminating offset of other taxes against Withholding VAT credits

 

The Bill proposes to delete Section 17(5)(c) of the VAT Act to remove the right of taxpayers to offset any other tax payable against the Withholding VAT (WHVAT) credits.

 

This implies that WHVAT credits will be payable directly to the taxpayer without a provision to offset against other taxes, as the provision on application for refunds of excess WHVAT still exists in law.

 

Scrapping the 24-months limit for lodging VAT refunds on excess input tax

 

The Bill proposes to delete Section 17(5)(d) of the VAT Act and in effect removing the requirement for VAT refund applications be applied within 24 months from the date the tax became due and payable.

 

This is a welcome change because VAT refunds will no longer be time-barred.

 

Eliminating excess input tax refunds for manufacturers in official aid funded projects

 

The Bill proposes to delete Section 17(5)(e), which entitles manufacturers making taxable supplies to official aid funded projects (exempt) to apply for a VAT refund for excess input over output tax.

 

This implies that manufacturers making taxable supplies to official aid funded projects will only be able to offset any excess input tax against subsequent VAT liabilities with no option to apply for a refund.

 

Removal of the 90/10 Rule for claiming input tax

 

The Bill proposes to delete Section 17(7), which provides that where the taxpayer makes 90% of taxable supplies, the entire input tax is deductible but where the taxable supplies are 10% or less of the total supplies no input tax is deductible.

 

Eliminating manufacturers’ deduction for input tax for on taxable supplies made to official aid funded projects

 

The Bill proposes deletion of Section 17(8) of the VAT Act, which entitles manufacturers making taxable supplies to official aid funded projects to make a deduction for input tax with respect to these supplies.

 

This implies that manufacturers making taxable supplies to official aid funded projects will not be able to claim input tax.

 

Proposal to increase the VAT registration threshold to KES 8m

 

The Bill proposes to increase the VAT registration threshold from KES 5m to KES 8m.

 

Amending status of various supplies

 

The Bill proposes to amend the VAT status of the following products from exempt to taxable:

The removal of exemptions implies that consumers of the above supplies are likely to incur additional costs in respect of VAT. Companies that were only providing these services and therefore not registered for VAT may now be required to register and account for VAT in Kenya.

 

The Bill has sought to align the following items under the First Schedule of the VAT Act, Part 1.

 

Paragraph 49 will be amended to remove “all goods and parts thereof listed under Chapter 88” and substitute them with “only parts of aircrafts from Chapter 88.” This change means that only parts of aircrafts from Chapter 88 will be considered exempt from VAT. Consequently, the exemption will no longer apply to other goods, including spacecrafts, that fall under Chapter 88.

Paragraph 113 will be amended by including the words “until completion of the projects under development,” as follows:

Specialized equipment for the development and generation of solar and wind energy, including photovoltaic modules, direct current charge controllers, direct current inverters and deep cycle batteries that use or store solar power, upon recommendation to the Commissioner by the Cabinet Secretary responsible for matters relating to energy until completion of the projects under development.

 

This implies that the exemption will only apply to ongoing projects under development.

 

The Bill seeks to amend Paragraph 144, Part I of the First Schedule to the VAT Act, 2013 to include the definition of an “original equipment manufacturer” to mean “a manufacturer of parts and subassemblies who owns the intellectual property rights in the parts or sub-assemblies.”

 

The Bill seeks to remove exemptions on taxable goods/input/raw materials from companies operating under Special Operating Framework (SOFA) with government from 01 July 2017.

 

The Bill further seeks bring into the ambit of VAT insurance services other than insurance and reinsurance premium.

 

The Bill proposes to amend the VAT status of the following goods/services from Taxable (16%) to Exempt:

Key changes

 

The Bill proposes the repeal of the relief for excise duty paid on raw materials used in manufacturing other excisable goods. This implies the excise duty paid on raw materials becomes an extra cost to ultimately increase the ex-factory selling price of the excisable product.

 

The Bill expands the scope of excisable services to include services offered in Kenya by nonresident persons through a digital platform. Services offered through a digital platform are currently charged VAT at 16% and Digital Services Tax at 1.5%.

 

The Bill proposes the extension of the timeframe for licensed manufacturers of alcoholic beverages to pay excise duty from 24 hours to 5 working days upon removal of goods from the stockroom. This will reduce on the administrative burden of daily management of tax payments.

 

Changes to the rates of excise duty

 

The Bill proposes a new excise duty structure for motorcycles, with a rate of 10% of the value or KES. 12,952.83 per unit, whichever is higher.

 

The Bill proposes exemption from excise duty for several products, including eggs, onions, potatoes, and cement clinker if they originate from EAC partner states and meet the EAC rules of origin.

 

The Bill proposes excise duty on all plastic products of tariffs 3923.30.00 and 3923.90.90 whether locally produced or imported into Kenya.

 

The Bill proposes 25% excise duty on various vegetable oils, including common products like palm, sunflower, and cottonseed oil (HS codes 1511, 1512, 1515, and 1517). The excise duty shall apply to both refined and unrefined (crude) products. Additionally, manufacturers may no longer offset the tax on raw materials after the repeal of Sec 14, further increasing costs.

Additional information: EY & The East African