New taxes to watch as Covid wreaks havoc

The Finance Bill assented to by President Uhuru Kenyatta on June 30, allowed implementation of the tax measures that could hurt more businesses and Kenyans as well as offer some relief to some entities.

For the first time, the Finance Bill was tabled in the National Assembly for debate and approval on May 6 ahead of the budget reading. And with it, came a raft of new taxes that would enable the government to collect enough revenue to finance the Sh2.7 trillion budget.

The taxes come at a time when the pandemic is wreaking havoc on Kenyans’ pockets, who expect to be cushioned by the government.

There were some positive moves such as the lowering of the Value Added Tax (VAT) from 16 per cent to 14 per cent and 100 per cent tax relief for persons earning a gross monthly income of up to Sh24, 000.

Here are some key changes:

Home Ownership Savings Plans (HOSPs)

Income on Home Ownership Savings Plans (HOSPs) will now be subject to Home Ownership Savings Plans tax. This Act also deleted Section 22C which allowed a tax deduction of HOSP contributions of up to a maximum Sh96,000 per year and exempted interest income earned by a depositor on such deposits up to a maximum of Sh3 million.

“The deletion of HOSP provisions seeks to subject to tax income earned by financial institutions, fund managers, investment banks and building societies concerning HOSP deposits. This will reduce the income available for distribution to depositors as interest, negatively impacting their ability to purchase homes,” says financial audit firm KPMG.

Digital Services Tax

A digital service tax (DST), which shall be payable on income which is deemed to be derived or accrued in Kenya from the provision of services through a digital market place, was introduced at the rate of 1.5 per cent of the gross transaction value. This tax commences in January 2021. The Act proposed the appointment of DST agents by the Commissioner.

Public Roads Toll Act

The Act created the National Roads Toll Fund. The Fund is to be administered as provided under the Public Finance Management Act, 2012 and the regulations thereunder. This paves way for the implementation of Nairobi Expressway and Limuru–Mau Summit Road.

The two multi-billion-shilling projects are set to be done under public-private partnership (PPP), where private investors will pump their resources and then allowed to collect toll fees to recoup their investments.

For instance, in Nairobi, motorists will have to pay Sh300 to by-pass Uhuru Highway, using the Nairobi Expressway running from Mlolongo to James Gichuru Road, in Westlands.

Commission paid by counties

The Act has introduced a commission to be paid to KRA by a county where KRA has assisted it to collect revenues. The commission is capped at two per cent of the revenue collected.

The proposed amendment will provide an additional source of revenue to KRA, where it collects revenue on behalf of a county or government agency such as in the recent deal between the National Government and Nairobi County.

Tax on alcoholic drinks

Beer, Cider, Perry, Mead, Opaque beer and mixtures of fermented beverages with non-alcoholic beverages and spirituous beverages of an alcoholic strength not exceeding eight per cent will be subjected to excise duty. Spirits of undenatured ethyl alcohol, spirits, liqueurs and other spirituous beverages of alcoholic strength exceeding eight per cent are also subject to the duty. The mark was a maximum and minimum of 10 per cent respectively.

Voluntary Tax Disclosure Programme

This Act is that takes effect on January 1, 2021, will last for three years. Taxpayers will be granted immunity from prosecution and will also enjoy a waiver of penalties and interest on tax arrears arising from inadvertent instances of non-compliance that accumulated between June 30, 2015, and July 1, 2020.

According to KPMG, this will help both the taxpayer and the KRA to close out on tax periods that are legally still open to audits by the KRA.

Import declaration fee

The Act increased Import Declaration Fee (IDF) for goods imported under the East African Community Duty Remission Scheme from Sh10,000 to 1.5 per cent of the customs value.

The Act restricted the exemption from IDF for aircraft. Initially, all aircraft were exempted from IDF but now this exemption does not apply to helicopters (class 8802.11.00 and 8802.12.00) and aircraft exceeding 2,000kg. The Act has also removed IDF exemption on goods exempted for projects worth over Sh200 million which are deemed to be of public interest and goods procured under a special arrangement with the government.

“The changes will result in an increase in IDF collections on aircraft that are now not exempted. However, the proposed change will hit operators of passenger and cargo aircraft who have been the most affected by the Covid-19,” the report reads.

Minimum and instalment taxes

A new tax called the minimum tax, based on one per cent of gross income and paid on the 20th day of the fourth, sixth, ninth and 12th months, was also introduced. It attempts to tax businesses that are in a loss-making position. These payments will be made where income is not exempt under the Income Tax Act (ITA), income is not from employment, residential rent, capital gains, mining or oil exploration or subject to turnover tax, or instalment tax payable is higher than the minimum tax payable.

Instalment tax is tax paid by individual taxpayers who have a tax liability that is not fully covered under Pay As You Earn (PAYE), of over Sh40, 000 payable for any year.

Rental Income Tax

Landlords, who have been entangled in a conflict with KRA this year, will see the upper threshold for Residential Rental Income Tax increase from Sh10 million to Sh15 million per annum. The lower threshold has also been increased from Sh144,000 to Sh288,000 per annum.

This limit was extended to grant landlords with a rental income of between Sh10 million and Sh15 million the more concessional tax rate of 10 per cent.

The Government introduced a simplified income tax regime for persons with residential income between Sh144, 000 and Sh10 million annually, with effect from January 1, 2016, with Domestic Tax Department going after the landlords who had defaulted since.

Betting tax exempted

The Finance Act, 2019 introduced Excise duty on betting at 20 per cent of the amount wagered or staked, which saw key players in the betting industry exit the market, including Sportpesa and Betin. The Finance Act 2020 scraped off that tax, but the CS National Treasury Ukur Yatani has warned that he intends to re-introduce the tax within six months.

Exemption from Railway Development Levy

The Act removed the exemption on goods imported for public interest projects worth Sh200 million but extends the exemption to imports by Kenya Defence Forces, National Police Service and on currency notes.

Duty on EPZ goods for home use

The Act has introduced a 2.5 per cent additional duty in respect of goods entered for home use from export processing zones (EPZ) enterprises. The duty is in addition to customs duties applicable to the removal of products from the EPZs for home use. Only recently, the government opened up the local market for the EPZ enterprises whose export markets have been negatively impacted by the pandemic.