Why some NGOs are exempted from income tax

By Walter Mutwiri and Joseph Oyongo

Most non-governmental organisations take the view they are exempt from income tax in Kenya by virtue of their status.

Unfortunately, this is not the case.

It is always important for such organisations to take appropriate legal steps to obtain a valid income tax exemption. They should too adhere to the laid down procedures to ensure validity of the exemption. This guards against exposure to back taxes including penalties and interest.

It is, however, possible that some organisations do not need to apply for a tax exemption because they are exempt organisations or they earn income that is expressly set out as exempt income in Kenya. This is in line with provisions of section 13 (1) of the Income Tax Act (ITA) and as detailed in the First Schedule of the ITA.

Where an organisation or its income is not expressly exempt from tax under the First Schedule of the ITA, it can proceed to apply for an income tax exemption by lodging an application to the Commissioner of Domestic Taxes.

CALCUlATE TAX

However, this paragraph is quite restrictive and empowers the commissioner to grant income tax exemptions only to institutions, body of persons or irrevocable trusts of a public character established in Kenya.

The paragraph also provides other conditions that need to be fulfilled to the Commissioner’s satisfaction before an income tax exemption can be granted. The business generating income to be exempted is carried on in the course of the actual execution of the purposes specified in the application.

In the recent past, this important tax exemption facility has been abused by various organisations. This has led to the introduction of certain rules by the Commissioner to curb the abuses going forward.

In a public notice last year, the Commissioner directed that an income tax exemption certificate issued under Paragraph 10 of the First Schedule to the ITA shall be valid for a period of three years from the date of issue and is subject to renewal upon expiry of this period.

The notice mentioned that all certificates issued previously under Paragraph 10 without expiry dates are invalid. In the absence of a valid tax exemption, an organisation that was previously exempt from tax is now required to calculate tax on its taxable income and account for the same to Kenya Revenue Authority (KRA).

NGOs and other organisations that have valid income tax exemptions are under obligation to file nil tax returns in cases where all their income is not taxable.

Persons who make payments such as interest and training fees to organisations that are otherwise tax exempt need to be more vigilant. This is because the public notice referred to above states that any person in possession of a certificate whose validity has expired is not eligible to be treated as a tax-exempt person.

WITHHOLDING TAX

Government rarely grants blanket tax exemptions hence the need to confirm what income is not taxable and what is taxable. Failure to deduct withholding tax on qualifying taxable payments would expose the payer to back taxes and potential penalties.

Walter Mutwiri is a Tax manager and Joseph Oyongo is a Tax consultant, Deloitte Kenya.

The views expressed in this article are the author’s and not necessarily those of Deloitte Kenya.