Highlights of the Finance Bill, 2024

Foreword

In the recent past, Kenya's economy has seen slow and steady growth, with the International Monetary Fund's review projecting a growth of about 5,5% in 2024. However, global shocks such as the geopolitical tensions in Europe and the Middle East, coupled with domestic challenges such as high public debt, have made it a challenge for the country to meet its financial target, which stands at KES 3,435 billion for the 2024/25 financial year.

Through the long-awaited Finance Bill, 2024 (Bill), tabled before the National Assembly on 13 May 2024, a wide range of changes have been proposed across the different tax heads, affecting different sectors of the economy as well as the livelihoods of Kenyans.  

The Bill is in all fours with the Medium-Term Revenue Strategy FY 2024/25 to FY 2026/27 (MTRS), which was developed against a backdrop of historical decline in revenue collection. The MTRS: -

1. Highlights a wide range of tax reforms aimed at increasing the country's revenue collection to 20% of the Gross Domestic Product (GDP) from the current 16%.
2. Aims at increasing the tax compliance rate.
3. Seeks to align tax policy objectives with other Government objectives such as the enhancing the ease of doing business and
4. Aims at enhancing collaboration between Government and stakeholders in domestic revenue mobilization.

We note that the Bill mirrors the MTRS as it brings in far-reaching proposals from both tax as well as economic perspectives. Notable changes include the introduction of new taxes such as the Motor-Vehicle Tax, Minimum Top-Up Tax and Significant Economic Presence tax. In addition, the Bill introduces amendments aimed at enhancing revenue collection and tax compliance across certain sectors, including the digital space. 

Analysis of the major tax proposals

1. Income Tax

Expanded definition of digital content monetisation

Proposed amendment:

The Finance Bill, 2024 (the Bill) proposes to introduce an expanded definition of the term "digital content monetisation" to include creative works, the creation or sharing of digital content or any other material that is not exempt under the Income Tax Act (ITA).

The Bill also proposes to have the withholding tax (WHT) levied on digital content monetization for non-residents become a final tax.

Implications:

The Finance Act, 2023, introduced WHT on digital content monetization at the rate of 5% for residents and 20% for non-residents. The scope of services included offering for payment entertainment, social, literal, artistic, educational or any other material electronically through any medium or channel in the form of advertisement, sponsorship, affiliate marketing, subscription services, commission or fees from crowd funding. The implication of the Bill's proposal is to widen this scope of taxable services to bring into the tax net income generated from the creative industry which has been experiencing significant growth in the recent past.

From an East African perspective, we note that while Tanzania introduced income tax and value added tax (VAT) on digital services in 2022, the scope of taxable services covered does not include digital content monetization, and only applies to non-residents. In Uganda, non-residents deriving income from the provision of digital and electronic services are also subject to VAT and income tax. Some of these services include advertising platforms, which are also currently included in Kenya's scope of "digital content monetization".   

Proposed effective date: 1 July 2024

Updated definition of a "related person"

Proposal:

The Bill intends to clarify the meaning of a "related person" in the context of more than two persons to mean any other person who participates directly or indirectly in the management, control or capital of the business of the two persons. According to the Bill, it could also mean an individual who participates directly or indirectly in the management, control or capital of the business of the two people. It also extends to an individual who is associated to the two persons by marriage, consanguinity or affinity and the two persons participate in the management, control or capital of the business of the individual.

Implications:

The proposal seeks to clean up the ITA by harmonizing the multiple definitions of "related person" currently existing under Section 18(6) and the Eighth Schedule to the ITA.

In addition, the current definition of "related person" under Section 2 of the ITA, and as introduced by the Finance Act, 2023, only covered the case of 2 persons where one person participates in the management, control or capital of the business of the other person. In the Bill's proposal, the definition will now include third parties and individuals who participate in the management, control or capital of the business of two persons.

Proposed effective date: 1 July 2024

New definition of "royalty" to include payments obtained as consideration for the right to use software

Proposal:

The Bill proposes to introduce an expanded definition to the term "royalty". The Bill defines it to now include payments received as consideration for the right to use any software, proprietary or off-the-shelf, whether in the form of license, development, training, maintenance or support fees.

Implications:

The proposed definition seeks to classify all software-related payments as "royalties" and subject them to WHT. Currently, certain software-related payments, such as license payments made to software providers through distribution and end-user licence agreements, are not subject to WHT in Kenya, on the principle that they do not confer any intellectual property (IP) rights in the software to the payers. This practice, though contested by the Kenya Revenue Authority (KRA), is in line with the High Court's recent judgement in Seven Seas Technologies Limited v Commissioner of Domestic Taxes, Income Tax Appeal No. 8 of 2017, as well as international best practices. If adopted into law, this proposal will signal a shift from international best practices in the taxation of software payments, as captured under Article 12 of the OECD Model Tax Convention, which generally requires that such payments should only be subject to WHT if they are made as consideration for rights to the software's underlying IP rights.

We note that the proposal would also go against the practice in the region, with both Uganda and Tanzania lacking software in their respective tax laws' definition of "royalty".

Proposed effective date: 1 July 2024

Removal of the requirement for pension funds to be registered by the Commissioner

Proposed amendment:

The Bill proposes to amend the definitions of "pension fund", "provident fund" and "individual retirement fund" to provide that such funds would be deemed to be registered under the ITA if they have been registered with the Retirement Benefits Authority.

Implications:

This proposal will remove the requirement for pension and provident funds to be registered by the Commissioner for tax purposes. Presently, pension and provident funds need to be registered by the Commissioner under the Income Tax (Retirement Benefit) Rules, for them to enjoy certain benefits, including the exemption of their incomes under the First Schedule. If adopted, any fund duly registered by the industry regulator, being the Retirement Benefits Authority, would be deemed to be automatically registered for tax purposes.

The above proposal would also align our regime with our regional counterparts in Uganda and Tanzania, neither of which require retirement funds to register with their respective tax authorities.

Proposed effective date: 1 July 2024

Introduction of a new definition of donations

Proposed amendment:

The Bill proposes to introduce a definition of "donation" to mean a benefit in money in any form, promissory note or a benefit in kind conferred on a person without any consideration.

Implications:

This proposed definition is aimed at clarifying that the donations contemplated under the ITA include both cash and non-cash donations. The proposed definition will also align with the change introduced by the Finance Act, 2022 into Section 15(2)(w) of the ITA, which made both cash and non-cash donations made to charitable organisations allowable deductions. To harmonise the law, there may be need for amendments to the current Income Tax (Charitable Donations) Regulations and the draft Income Tax (Donations and Charitable Organisations Exemption) Rules, 2023, which still seem to restrict the donations covered under the ITA to only cash donations. 

Proposed effective date: 1 July 2024

Reduction in the period within which deferred realized foreign exchange losses may be claimed

Proposed amendment:

The Bill proposes to lessen the period within which a person can claim deferred realized foreign exchange losses from five to three years.

Implications:

Currently, any person whose gross interest expense paid to non-resident persons exceeds 30% of their earnings before interest, taxes, depreciation and amortization (EBITDA) is required to defer any realized foreign exchange losses in computing their taxable income. However, such deferred losses can be claimed over a period of not more than 5 years. If enacted into law, this proposal means that taxpayers will have a shorter timeframe of 3 years within which they can claim their deferred foreign exchange losses. It also means that their flexibility in managing their tax and financial affairs will be reduced. Businesses with international operations or exposure to foreign currency fluctuations will therefore need to assess the impact of the shortened deferral period on their financial performance and risk management strategies.

Proposed effective date: 1 July 2024

Expansion of the scope of taxable services offered through a digital marketplace

Proposal:

The Bill proposes to delete the definition of "digital marketplace" and replace it with a new definition which lists examples of services that are provided through a digital marketplace. These include ride-hailing services, food delivery services, freelance services, professional services, rental services, task-based services and any other service that is not specifically exempt.

Implications:

The implication of the above proposal is to expand the scope of services traded or provided through a digital marketplace that are subject to tax, to include services provided as part of the "gig economy", including ride-hailing, food delivery, task-based and freelance services. There is, however, need for clarity as to whether the services listed in the proposal, such as professional and rental services, which are already subject to tax under different regimes, would still be regarded as giving rise to income from a digital marketplace.

We note that the above proposal mirrors the scope of digital and electronic services subjected to tax in East Africa. In Uganda, for instance, cab hailing services are among the taxable electronic services. Notably, however, such services are only taxable to the extent that they are provided by a non-resident, unlike the Bill's proposal to tax income earned through a digital marketplace on both residents and non-residents.

Proposed effective date: 1 July 2024

Taxation of income received from the supply of goods to a public entity

Proposal:

The Bill proposes to treat as taxable income payments received by a person from a public entity for the supply of goods. Withholding tax will be payable on the income earned at the rate of 3% for residents and 5% for non-residents. A "public entity" is defined as a ministry, state department, state corporation, county department or agency of the national or county government.

Implications:

The Government is likely to generate additional revenue from this proposal by gaining higher visibility of the income earned from the supply of goods to public entities. In addition, given the lower margins typically attributable to the supply of goods, it is arguable that withholding tax on suppliers of goods at 3% and 5% is excessive.

The above proposal is not entirely novel, even in the region. In Uganda, public entities which pay any person for a supply of goods or services an amount exceeding UGX 1 million (approx. KES 35,000) is required to deduct WHT at 6% on the gross amount and issue a receipt to the supplier of the goods or services accordingly.  

Proposed effective date: 1 July 2024

Changes to the tax-free threshold for per diems paid to employees on official duty

Proposed amendment:

The Bill proposes to get rid of the current KES 2,000 per day tax-free threshold for per diems, and substitute it with an amount not exceeding 5% of the employee's monthly gross earnings. However, the proposed threshold will only be applicable where an employer has a policy on the payment and accounting for subsistence, travelling, entertainment or other allowances.

Implications:

The current threshold of KES 2,000 was introduced in 2006 and has remained unchanged since then. As such, the current proposal is more reflective of macroeconomic factors, including changes in the cost of living and inflation. Above said, it is arguable that the use of a flat threshold of 5% is less progressive as it could confer a greater tax benefit to higher income earners.

The above proposal would also represent an innovative change in the taxation of per diems in the region. In Tanzania and Uganda, per diems are non-taxable, to the extent that they solely relate to a reimbursement of costs incurred by employees in the course of their employment.

Proposed effective date: 1 July 2024

Changes to the minimum taxable aggregate value of non-cash benefits and meal benefits

Proposed amendment:

Usually, where an employee enjoys a non-cash benefit that is not expressly provided for elsewhere in the ITA, the value of such benefits should be included in the employee's earnings and charged to tax, subject to a minimum taxable aggregate of KES 36,000 per annum (or KES 3,000 per month). The Bill proposes to change this minimum aggregate to KES 48,000 per annum (or KES 4,000 per month).

The Bill also proposes to increase the threshold for tax exemption for meals offered to employees in a canteen or a cafeteria operated by the employer or a third party who is a registered taxpayer from the current KES 48,000 per annum (or KES 4,000 per month) to KES 60,000 per annum (or KES 5,000) per employee.

Implications:

The proposal to increase the minimum taxable value of non-cash benefits has the potential to reduce the total taxable income of employees who benefit from any non-cash benefits whose value is below KES 48,000 per annum. It is a win for employees in the lower income earning brackets as their total taxable income will likely be reduced. The current threshold of KES 36,000 was also introduced in 2006 and is therefore not aligned with changes in the cost of living and inflation.

The proposal to increase the tax-free threshold for meal benefit provided to employees is also a welcome move, as the proposed threshold of KES 5,000 per month will be more reflective of the prevailing macroeconomic factors, However, it is crucial to note that where the value of the non-cash benefit or meal benefit exceeds the minimum taxable threshold, the entire value of the benefit becomes taxable income for the employee.

Proposed effective date: 1 July 2024

Increase in the non-taxable limit for contributions paid into registered retirement schemes

Proposed amendment:

Currently, contributions paid by employers into registered retirement schemes are not taxable on the employees, subject to a limit of KES 240,000 per annum (or KES 20,000 per month). The Bill proposes to raise the limit to KES 360,000 per annum (or KES 30,000 per month).

Implications:              

This proposal is likely to encourage people to contribute additional funds into their retirement schemes to secure their retirement knowing that a higher portion of these payments will be tax-exempt. In addition, changing the threshold from KES 240,000 per annum, which has been in existence since 2005, will also ensure that the benefit is aligned to present economic realities.

It is interesting to note that some of Kenya's neighbouring countries, such as Uganda, do not have an upper limit on the non-taxable contributions to retirement funds. Kenya may choose to adopt this route to further incentivize saving, although such a measure may be prone to abuse as employers and employees seek to reduce their tax liability.

Proposed effective date: 1 July 2024

Increase in the deductible amounts in respect of annual contributions made to a retirement benefit scheme for employers and employees

Proposed amendment:

In addition to the proposed increase of the non-taxable limit for contributions paid into registered retirement schemes, the Bill also intends to increase the deductible amounts in respect of annual contributions made to retirement benefit schemes. Currently, employees and employers can claim a deduction against taxable income in respect of their annual contributions to a Kenya-registered retirement benefit scheme. This relief is limited to the lesser of the sum of the employee's actual contributions during the year or 30% of their pensionable (taxable) income during the year or KES 240,000 per annum (KES 20,000 per month). The Bill proposes to change the latter to KES 360,000 per annum or KES 30,000 per month.

Implications:

The amendment has the potential to incentivize increased contributions by Kenyans into their pension schemes. This is due to the increased amount that can be allowed as expenses for both employers and employees.

Proposed effective date: 1 July 2024

Taxation of payments made by owners or operators of digital platforms or marketplaces

Proposed amendment:

The Bill proposes to categorize, as income accrued in or derived from Kenya, payments received from residents and non-residents who own or operate digital marketplaces or platforms or make or facilitate payment in respect of digital content monetisation, goods, property or services. The proposal defines a "platform" for this purpose as a digital platform or website that facilitates the exchange of a short-term engagement, freelance or the provision of a service between a service provider who is an independent contractor or a freelancer and a customer.

The Bill proposes to tax such income at the rate of 5% for residents and 20% for non-residents.

Implications:

The proposal has the potential to increase revenue generation, especially in recognition of the fact that the proposal captures both resident and non-resident owners or operators of digital platforms.

The proposal would also introduce a few changes into the current taxation of incomes earned through the digital space, currently achieved through Digital Service Tax (DST). First, DST is currently charged on non-resident persons who earn incomes from the provision of services or business carried out over the internet or electronic networks. The obligation to account for DST is also placed on the earner of the income. Conversely, the proposal imposes a tax on incomes earned by both residents and non-residents from digital platforms. The proposal also imposes the obligation to account for the tax on the payers, being the owners and operators of the platforms, as opposed to the actual earners of the incomes. In essence, therefore, tax on income earned from digital platforms will assume the nature of WHT. While this could plausibly enhance revenue collection from the digital space, which has been a challenge for the Government in the recent past, imposing the obligation to deduct WHT on a non-resident could present enforceability issues.   

It may also be prudent to clarify which definition will be applicable in taxing income earned through a digital marketplace or platform, noting that the Bill proposes to introduce a new definition of the term "digital marketplace" into Section 3 of the Act, as discussed above, and still proposes a new definition of the term "platform" in Section 10 of the Act.

From an East African perspective, we note that while Tanzania and Uganda also have income tax and VAT on electronic services, it only applies to non-residents and to a smaller scope of services compared to Kenya. The obligation to account for these taxes also lies on the non-resident service providers, who may not necessarily be the owners or operators of the platforms.in our view, this proposal may make Kenya less attractive in its bid to be the region's digital hub.

Proposed effective date: 1 July 2024

Introduction of a significant economic presence tax and removal of the digital service tax

Proposed amendment:

The Bill proposes to do away with DST and introduce in its place a tax known as significant economic presence (SEP) tax. The SEP tax would be levied on income earned by non-residents from business carried out over a digital marketplace. Just like DST, the SEP tax will not apply to incomes subject to WHT under the ITA, and to incomes earned by non-resident persons with a permanent establishment in Kenya.

It is intended that the SEP tax rate shall be 30% of the deemed taxable profit. The deemed taxable profit shall be twenty percent (20%) of the gross turnover earned by the non-resident person. The proposal also provides that non-residents subject to tax under the provision would be required to submit a return and pay the tax due on or before the 20^th day of each month.

Implications:

The implication of the above provision is that it raises the digital tax rate from the current 1.5% of the gross transaction value. It is not clear the threshold that will be used to determine whether an entity has significant economic presence in Kenya as to trigger SEP tax, but we note that the section empowers the Cabinet Secretary to make Regulations for its better implementation.

Comparatively, an example of an African country currently imposing SEP tax is Nigeria. The Companies (Significant Economic Presence) Order 2020 (SEP Order) specifies the threshold above which non-resident companies undertaking the specified activities would be subject to the tax. Under the SEP Order, a foreign company operating in Nigeria will be deemed to have a SEP if:

2. it derives a gross turnover or income in excess of ₦ 25 Million (approx. KES 2.24 million) or its equivalent in other currencies carrying out activities such as the streaming or downloading of digital contents to any person in Nigeria, transmission of data collected about Nigeria users, generated from their use of a digital interface, provision of goods or services directly or indirectly through a digital platform to customers in Nigeria and the provision of intermediation services through digital platforms that link suppliers and customers in Nigeria; or
3. It uses a Nigerian domain name or registers a website address in Nigeria; or
4. has a purposeful and sustained interaction with persons in Nigeria by customising its platform to target persons in Nigeria.

The nature of activities subject to the SEP Order include digital service providers and non-resident companies that provide technical, professional, management or consultancy services to customers in Nigeria.

We also note that the SEP tax is almost similar to the DST currently in existence in other East African Community (EAC) member states. In Uganda, DST at a rate of 5% was introduced in 2023 on income earned by non-residents from the provision of digital services to customers in Uganda. Tanzania also introduced a 2% DST on similar services in 2022. Above said, the proposed rate in Kenya would be higher than that applicable in these countries. 

With the proposed amendments to the taxation of incomes earned from digital marketplaces also affecting non-residents, as discussed above, it may also be prudent to harmonise the changes with the SEP tax rate to prevent the duplication of tax liabilities or obligations. A careful study should be carried out on the effectiveness of digital taxes before Kenya starts on SEP.

Proposed effective date: 1 January 2025

Introduction of a minimum top-up tax

Proposed amendment:

The Bill proposes to introduce a tax known as minimum top-up tax payable by resident person(s) or non-residents with a permanent establishment in Kenya, who are members of a multinational group with a consolidated annual turnover of EUR 750 million at the parent entity level (referred to as "covered persons"). The minimum top-up tax will be payable where the combined effective rate (ETR) in respect of that person for a year of income is less than 15%. The combined ETR shall be the sum of all the adjusted covered taxes divided by the sum of all the net income or loss for the year of income multiplied by a hundred. "Adjusted covered taxes" has been defined within the Bill as 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 and deemed profit distributions under the ITA subject to such adjustments as may be prescribed.

The amount of tax payable under this proposal shall be the difference between 15% of the net income or loss for the year of income of a covered person, and the combined ETR for the year of income multiplied by the excess profit for the covered person. The minimum top-up tax shall not be payable by public entities not engaged in business, persons whose income is exempt under paragraph 10 of the First Schedule to the ITA, pension funds, real estate investment vehicles, non-operating investment holding companies, an investment fund that is an ultimate parent entity, a sovereign wealth fund and intergovernmental organizations.

Implications:

This provision signals Kenya's intent to comply with the Global Anti-Base Erosion (GloBE) rules under the OECD/G20 BEPS Project, and in particular, Pillar 2 of the 2-Pillar Solution under BEPS Action 1, designed to ensure that MNEs pay a minimum amount of tax at 15% with respect to their global profits. This new provision is expected to enable the Government to collect additional revenue as multinationals operating in Kenya will be subject to this minimum tax, though there is still considerable debate regarding the effectiveness of the GloBE rules and the 2-Pillar solution in enhancing revenue collection for developing countries.

While the above proposal is yet to gain traction regionally and, on the continent, other countries such as Australia have implemented a domestic minimum tax applicable to multinational groups with an annual revenue of at least EUR 750 million. The proposal may witness greater adoption among other countries, although the recent passing of a resolution by the UN to begin the process of establishing a framework convention on tax at the UN level may hamper the adoption of OECD-related measures.  

Proposed effective date: 1 July 2024

Introduction of a motor vehicle tax

Proposed amendment:

The Bill proposes to introduce a tax known as a motor vehicle tax payable on each motor vehicle at the time of issuance of an insurance cover. It will be payable at the rate of 2.5% of the value of the motor vehicle, taking into account factors such as the make, model, engine capacity in cubic centimeters and the year of manufacture of the motor vehicle. However, the amount of tax payable shall be subject to a minimum of KES 5,000 and a maximum of KES 100,000.

The insurer will be responsible for collecting and remitting motor vehicle tax within five working days after issuing a motor vehicle insurance cover. Failure to remit the tax would attract a penalty equivalent to 50% of the uncollected tax, as well as the actual amount of unpaid tax. This penalty would be payable by the insurer.

Finally, the motor vehicle tax shall not be payable in respect of vehicles owned by the national or country governments, the disciplined forces, and persons exempt from tax under the Privileges and Immunities Act. The proposal also grants the Commissioner the discretion to prescribe guidelines for purposes of determining the valuation of a motor vehicle.

Implications:

This proposal is in line with the Government's Medium Term Revenue Strategy, under which the Government aimed to introduce an annual tax on all motor vehicles.  However, as currently drafted, the proposal offers little certainty on how the value of each motor vehicle will be determined, and who shall bear the attendant costs. In addition, while the motor vehicle tax may enable the Government to collect additional revenue, another implication of the introduction of motor vehicle tax is the likelihood of a reduction in the trading volumes within the automobile industry in Kenya.

It appears that the introduction of motor vehicle tax is meant to also combat climate change. In Uganda, there is an environmental levy imposed on used imported vehicles which are 8 years or older. In Tanzania, there is a tax payable when a vehicle changes ownership from one person to another.

The introduction of the motor vehicle tax through the ITA however appears misplaced because there is no income that is derived by merely owning a vehicle.

Proposed effective date: 1 July 2024

Diminution in value of capital expenditure not enjoying investment allowances

Proposed amendment:

The Bill proposes to introduce a Section 15(2) (gb) into the ITA, to allow for the deductibility of amounts representing the diminution in value of any implement, utensil or article employed in the production of gains or profits, but which does not qualify as plant or machinery enjoying investment allowances under the Second Schedule.

Implications:

This proposal is aimed at correcting a drafting error in the Finance Act, 2023, which deleted a similar provision under Section 15(2)(g) of the ITA.

Proposed effective date: 1 July 2024

Contributions to the Social Health Insurance Fund and the Affordable Housing program to be tax deductible

Proposed amendment:

The Bill proposes to amend Section 15(2) into the ITA, to allow for the deductibility of contributions made to the Social Health Insurance Fund (SHIF) and, for employees, the housing levy deducted towards the Affordable Housing program. The proposal also aims to allow for the deductibility of contributions to post-retirement medical funds, subject to a limit of KES 10,000 per month.

Implications:

This proposal is aimed at ensuring that employers and employees treat contributions to the recently-established Social Health Insurance Fund and the Affordable Housing program as tax deductible items. This will help in alleviating the tax impact on the contributors to these funds. For employees, the proposal to treat SHIF and Housing Levy as tax deductible will result in a relatively lower Pay As You Earn (PAYE) since currently, only pension contributions are treated as tax deductible expenses.

Proposed effective date: 1 July 2024

Introduction of advance pricing agreements to avoid transfer pricing disputes

Proposed amendment:

The Bill proposes to enable the Commissioner to enter into advance pricing agreements with taxpayers who trade with related entities through relationships that would ordinarily trigger transfer pricing. The arm's length price shall be determined in accordance with the advance pricing agreement entered into with the Commissioner. The agreement shall be valid for a period of five (5) consecutive years.

Implications:

The proposal will provide greater certainty on the nature of transfer pricing method that should be adopted by entities. It will also mitigate the possibility of disputes and facilitate the financial reporting of potential tax liabilities. We note that this proposal is currently in force in other neighbouring jurisdictions, including Tanzania which has specific regulations governing advance pricing agreements under their Transfer Pricing Regulations. Similarly, in Uganda, their Transfer Pricing Regulations of 2011 contain detailed provisions on the application, approval and cancellation of advance pricing agreements between taxpayers and the revenue agency. As such, there may be need to enact further regulations, should this proposal be adopted, to ensure that the agreements are properly governed and insulated from abuse.

Proposed effective date: 1 January 2025

Clarification on the taxation of members' clubs and trade associations

Proposed amendment:

The Bill proposes to amend Section 21 of the ITA by deleting the definition of the phrase "gross investment receipts", which are currently defined as a club's or trade association's gross receipts in respect of interest, dividends, royalties, rents, other payments for rights granted for use or occupation of property, or capital gains.

Implications:

The proposal is aimed at cleaning up Section 21 to align it with the changes introduced in the taxation of members' clubs and trade associations by the Finance Act, 2023. Specifically, the Finance Act, 2023 provided that members clubs and trade associations shall be deemed to be carrying on a business, and their gross receipts would be deemed as business income, save for fees earned from their members, including joining fees, welfare contributions and subscriptions. With this being the current tax treatment, the existing definition of "gross investment receipts" is redundant.

From a regional standpoint, clubs and trade associations are also deemed to be carrying on a business in Tanzania. However, where at least 75% of their income is derived from their own members, in the form of payments such as entrance fees and subscriptions, the clubs and associations are exempt from tax. Notably, this was the tax treatment of clubs and trade associations in Kenya before the amendments introduced by the Finance Act, 2023, as mentioned above. However, in our view, the current treatment in Kenya of taxing any income earned by clubs and trade associations, beyond fees earned from their members, presents a simplified approach to computing the taxable income of these entities.

Proposed effective date: 1 July 2024

Applications for adjustments of accounting periods to be deemed allowed where they are not determined within a period of six months

Proposed amendment:

Usually, taxpayers have the discretion to determine their financial year-end, provided it is a 12-month period. However, any changes in this must be determined by the Commissioner upon prior approval. The approval is sought by way of a written application which the Commissioner should decide upon within a period of six (6) months. The Bill proposes to deem as allowed an application that is made by taxpayers and not decided on by the Commissioner within the statutory six-month period.

Implications:

This proposal will promote efficiency for taxpayers and curb instances when they are left stranded on account of the Commissioner's failure to render a determination within the statutory six-month period.

Proposed effective date: 1 July 2024

Removal of the affordable housing relief

Proposed amendment:

The Bill proposes to do away with the affordable housing relief provided for under section 30A of the Income Tax Act.

Implications:

The proposed removal of this relief is to prevent the granting of a double tax relief to taxpayers, with the proposed introduction of affordable housing levy contributions as a tax-deductible expense for employees.

Proposed effective date: 1 July 2024

Contributions made to the National Hospital Insurance Fund do not qualify for relief

Proposed amendment:

The Bill proposes to introduce an amendment to section 31 of the ITA by deleting paragraph V of subsection 1 which qualified contributions made to the National Hospital Insurance Fund for insurance relief. Effectively, contributions made to the National Hospital Insurance Fund will not benefit from the insurance relief provided for under the section.

Implications:

The effect of this proposal is that no insurance relief shall be applicable in relation to contributions made to the national health insurer, the SHIF, which will replace the National Health Insurance Fund. The proposed removal of this relief is to prevent the granting of a double tax relief to taxpayers, with the proposed introduction of SHIF contributions as a tax-deductible expense for employees.

Proposed effective date: 1 July 2024

Repeal of the penalty for late filing and payment of installment tax

Proposed amendment:

The Bill proposes to repeal section 72C of the ITA which provides for the penalty for late filing and payment of installment tax.

Implications:

This proposal is aimed at cleaning up the legal provisions on the imposition of late filing and late payment penalties, which are currently contained under the Tax Procedures Act, 2015 (TPA). The proposed repeal is also a welcome move that would reduce the penalties in relation to installment taxes from 20% under the ITA to 5% under the TPA.

Proposed effective date: 1 July 2024

Repeal of investment allowances for capital expenditure incurred on bulk storage and handling facilities supporting the Standard Gauge Railway (SGR) operations

Proposed amendment:

The Bill proposes to delete Section 133(6) of the ITA, which currently provides for an extension of the accelerated investment allowance rate of 150% granted under the repealed Second Schedule to the ITA, to capital expenditure incurred on bulk storage and handling facilities supporting SGR operations.

Implications:

The presumed aim of the existing accelerated investment allowance rate was to incentivize investment in bulk storage and handling facilities to support SGR operations. With the intended repeal of this incentive, it is likely that investment in these sectors will be less attractive.

Proposed effective date: 1 July 2024

Repeal of tax exemptions applicable to amateur sporting associations

Proposed amendment:

The Bill proposes to do away with the existing income tax exemption applicable to amateur sporting associations whose sole or main object is to foster and control outdoor sport and whose members consist of only amateurs or affiliated associations whose members are amateurs.

Implications:

This proposal has the implications of increasing the tax revenue generated from amateur sporting activities in Kenya. On the downside, it will burden amateur sporting organisations as they will be subject to income tax on their earnings. Notably, amateur sporting associations remain tax-exempt in other countries in the region, including Uganda.

Proposed effective date: 1 July 2024

Repeal of the tax exemption applicable to registered trust schemes 

Proposed amendment:

There is a proposed deletion of the income tax exemption for registered trust schemes, defined within the ITA as a trust scheme for the provision of retirement annuities and which has been registered with the Commissioner.

Implications:

The proposal to tax registered trust schemes will no doubt empower the Government to collect additional revenue from income generated by trust schemes. However, this move will also lower the incentive structure for individuals considering participation in registered trust schemes for retirement planning.  

Proposed effective date: 1 July 2024

Change in the tax rates applicable on disbursement of deemed income to beneficiaries           

Proposed amendment:

The Bill proposes to delete the current tax rate applicable to the disbursement of deemed income to beneficiaries of trusts, which is 25%.

Implications:

The removal of the 25% tax rate for deemed income disbursed to beneficiaries means that the applicable rates will likely be the graduated PAYE rates for individuals, which will cushion beneficiaries getting less income from trusts while at the same time resulting in increased revenue collection from high net-worth individuals. 

Proposed effective date: 1 July 2024

Taxation of interest income accruing from infrastructure bonds, notes or similar securities

Proposed amendment:

The Bill proposes to get rid of the exemption currently applicable to interest income accruing from listed bonds, notes or similar securities used to raise funds for infrastructure and other social services that have a maturity of at least three (3) years. According to the Bill, this exemption will only apply to securities that were listed before the date that the provision will come into force, being 1 July 2024. The Bill proposes to impose WHT on such interest income at the rate of 5% for residents.  

Implications:

This provision might discourage investments in listed infrastructure bonds, notes or similar securities. It also comes against the backdrop of the National Treasury seeking to limit competition between infrastructure bonds, which are currently tax-free, and standard bond issuances; in addition to the proposal to limit infrastructure bond issuances to retail investors.

We note that the proposal also seeks to tax interest income earned from such bonds at 5% for residents, with no clarity on the tax rate applicable for non-residents. This may be perceived as unfair for resident investors, amidst the Government's stated aim to promote Kenyans' participation in the trading of securities.

The move to impose tax on listed infrastructure bonds in Kenya may also lead to investment in competing economies, such as Uganda, where interest earned from such infrastructure bonds is tax-exempt.

Proposed effective date: 1 July 2024

Taxation of interest income accruing from Green Bonds

Proposed amendment:

The Bill proposes to delete the exemption currently applicable to interest income accruing from Green Bonds that have a maturity of at least three (3) years. Green Bonds refers to listed bonds, notes or similar securities used to raise funds for infrastructure and other social services, as defined under Green Bonds Standards and Guidelines. According to the Bill, only Green Bonds that were listed before the date that the provision will come into force, being 1 July 2024, will be exempt from tax.

Implications:

As with the proposed taxation of interest income from infrastructure bonds, this proposal might discourage investments in Green Bonds.

Proposed effective date: 1 July 2024

Income tax exemption of pension benefits from registered pension providers

Proposed amendment:

Currently, monthly pension payments received by retirees above sixty-five years of age are exempt from tax. The Bill proposes to expand this exemption to cover the payment of pension benefits provided by registered pension, provident or individual funds and the National Social Security Fund upon attainment of the retirement age. The exemption will also extend to persons who retire prior to attaining the retirement age due to ill health or those who withdraw from the fund after twenty years from the date of registration as a member of the fund.

Implications:

This proposal seeks to incentivize saving in registered pension schemes, by offering the guarantee that upon attaining retirement age, or saving for at least 20 years, the pension benefits withdrawn shall be tax exempt. It also aligns with the Government's goal in the MTRS to exempt withdrawals from pension schemes from tax, in a move that would make contributions, investment income and withdrawals tax exempt ("exempt-exempt-exempt").

Regionally, lumpsum payments from a retirement fund are tax-exempt in Uganda. In Tanzania, retirement payments are deemed to be part of taxable income on the individual employees.  

Proposed effective date: 1 July 2024

Taxation of incomes of family trusts

Proposed amendment

The Bill proposes to subject to tax the income or principal sum of a registered family trust. These incomes are currently tax-exempt.

Additionally, transactions involving the transfer of title of immovable property to a family trust are presently exempt from capital gains tax (CGT). The Bill proposes to get rid of this exemption, effectively making such transfers subject to CGT.

Implications

The tax exemption of the income of registered family trusts, as well as the transfer of immovable property to family trusts, were introduced by the Finance Act, 2021, with the ostensible aim of incentivizing the use of trusts in succession and estate planning.

While the deletion of these exemptions has the potential to increase the revenue collected from such arrangements, this proposal will eventually discourage the use of registered family trusts as a vehicle to transfer assets between family generations.

Proposed effective date: 1 July 2024

Taxation of income earned by individuals registered under the Ajira Digital Program

Proposed amendment

The Bill proposes to get rid of the tax exemption currently applicable to individuals registered under the Ajira Digital Program. The exemption was meant to cover three years from 1 January 2020.

Implications

It is an indicator that the program has come to an end or has not attracted as many young people as initially planned, and hence there is no longer need for the incentive.

Proposed effective date: 1 July 2024

Taxation of the income of the National Housing Development Fund

Proposed amendment:

The Bill proposes to delete the tax exemption of the National Housing Development Fund's income.

Implications:

With the Affordable Housing Fund now replacing the National Housing Development Fund, the proposal seeks to delete an exemption that is no longer necessary in law.

Proposed effective date: 1 July 2024

Limitations to the income tax exemption for non-residents under projects financed through 100% grant to the Government

Proposed amendment:

The Bill proposes to restrict the above exemption to just income that is directly related to the project being executed.

Implications:

Currently, non-resident contractors, subcontractors, consultants, or employees involved in the execution of a project entirely financed through a 100% grant under an agreement between the development partner and the Government of Kenya are exempt from tax. This is pursuant to an amendment that was introduced into the ITA by the Finance Act 2023.  This proposal will ensure that the exemption is not taken advantage of and utilized as a means of evading tax that would ordinarily be payable.

Proposed effective date: 1 July 2024

Exemption of gains on transfer of property within a special economic zone by a licensed developer, enterprise or operator

Proposed amendment:

The Bill proposes to amend the existing exemption of gains on transfer of property within a special economic zone (SEZ) to clarify that the exemption shall apply to gains derived from the transfer of property within a SEZ by a licensed special economic zone developer, enterprise or operator.

Implications:

This proposal seeks to clarify that gains on the transfer of property by licensed SEZ developers, enterprises or operators shall be tax-exempt. The exemption was introduced by the Finance Act, 2023, but contained a drafting error which made it ambiguous.

Regionally, SEZ entities enjoy tax breaks and incentives in countries such as Tanzania. In Nigeria, all approved enterprises operating within a free trade zone are exempt from all federal, state and local government taxes, levies and rates. The exemption of gains on transfer of property in Kenyan SEZs will therefore ensure that Kenya remains competitive in attracting investment in the region. However, whether such incentives will remain in Kenyan law in the near future remains uncertain, with the National Assembly currently undertaking a re-evaluation of the tax incentives granted to SEZ entities, in collaboration with the National Treasury and the KRA.  

Proposed effective date: 1 July 2024

Investment allowance to be applicable to capital expenditure incurred on spectrum licenses by telecommunication operators

Proposed amendment:

The Bill proposes to introduce investment allowance on the purchase or acquisition of spectrum licenses by a telecommunication operator. Spectrum licenses refer to frequency bands used by companies such as television and radio broadcasters as well as cellular network operators to manage their performance more efficiently. However, where the license is acquired before the effective date, being 1 July 2024, the deduction shall be restricted to the unamortized portion over the remaining useful life of the spectrum license.

Implications:

The granting of investment allowance on spectrum licenses is an auspicious move for telecommunication operators, and if adopted, should incentivize further investment in such assets. In Nigeria, a wide range of incentives such as capital allowance deductions have been made available for start-ups licensed by the National Information Technology Development Agency. Introducing investment allowance on capital expenditure incurred on spectrum licenses therefore compliments the growing importance of telecommunication, innovation and technology and will potentially position Kenya as a market leader in the sector,

Proposed effective date: 1 July 2024

Deletion of the post-retirement medical fund relief

Proposed amendment:

The Bill proposes to do away with the post-retirement medical fund relief that was introduced by the Finance Act 2023.

Implications

The proposed removal of this relief is to prevent the granting of a double tax relief to taxpayers, with the proposed introduction of post-retirement medical fund contributions as a tax-deductible expense for employees.

Proposed effective date: 1 July 2024

Taxation of incomes earned by companies constructing residential units

Proposed amendment:

Currently, companies that have constructed at least one hundred residential units annually are subject to a lower corporate tax rate of 15% in that year of income, subject to the approval of the Cabinet Secretary responsible for housing. The Bill proposes to do away with this reduced tax rate.

Implications

The aim of the reduced tax rate was to incentivize companies to construct residential houses in support of the Government's affordable housing agenda, which was a key pillar of the then-administration's Big Four plan. The proposed removal of the reduced tax rate is therefore seemingly contradictory to the current administration's affordable housing plan. However, the proposal seems to reflect the Government's aim to rationalize tax reliefs and exemptions, as articulated in the MTRS.

Proposed effective date: 1 July 2024

Increased tax rates for non-resident ship owners, charterers or air transport operators where there is no reciprocal arrangement or treaty

Proposed amendment:

The Bill proposes to impose income tax at the rate of 3% on gains made by non-resident ship owners, charterers or air transport operators when they call at any port or airport in Kenya, where there is no reciprocal arrangement or treaty that exempts Kenyan shipowners, charterers or air transport operators. Currently, the rate applicable is 2.5%. Further, the limitation on the existence of a reciprocal treaty does not currently exist.

Implications:

The proposal, in line with the rules of reciprocity, seeks to ensure that non-resident shipowners, charterers or air transport operators are taxed in Kenya, where their country of residence has no agreement extending the exemption of such incomes to Kenyan residents.

Proposed effective date:1 July 2024

Non-resident withholding tax rate for digital content creators to be a final tax

Proposed amendment:

          The Bill proposes to make the withholding tax payable by non-resident content creators a final tax.

Implications:

The proposal aligns with the general treatment of withholding tax paid by a non-resident person without permanent establishments in Kenya.

Proposed effective date: 1 July 2024

Removal of withholding tax applicable to withdrawals made from pension funds after 20 years

Proposed amendment:

The Bill proposes to do away with withholding tax applicable to withdrawals made from pension funds after the expiry of twenty years from the date of joining the pension fund. However, the Bill proposes to retain the graduated scale for the taxation of withdrawals made before the expiry of twenty years. Currently, the number of years covered under the ITA is fifteen years.

Implications:

            This proposal aligns with the Government's plan to encourage savings for retirement.

Proposed effective date: 1 July 2024

Withholding tax on management, professional, training and contractual fees

Proposed amendment:

The Bill proposes to do away with the minimum aggregate value on management, professional, training and contractual fees that triggers withholding tax. Currently, the value is KES 24,000 per month.

Implications:

The removal of KES 24,000 as the minimum value on which withholding tax is payable on payments for management, professional, training and contractual fees will enable the Government's collection of additional revenue. However, it will also increase compliance obligations by subjecting even de minimis payments to WHT.

We note that Kenya's neighbours in Tanzania and Uganda do not have thresholds for the imposition of WHT on management or professional fees paid to their residents.

Proposed effective date: 1 July 2024

5% CGT rate for entities certified by the Nairobi International Financial Centre Authority as having met the specified criteria

Proposed amendment:

The Bill proposes to impose a CGT rate of 5% on entities provided the Nairobi International Financial Centre Authority (NIFCA) certifies that: they have invested at least KES 3 billion shillings in at least one entity incorporated or registered in Kenya within a period of two years; and the transfer of the investment is to be made after five years of the date of investment.

Implications:

Currently, the ITA provides that for firms certified by the NIFCA, and which have invested at least KES 5 billion and transfer such investment after five years, the rate of CGT shall be the prevailing rate at the time the investment was made. The Bill proposes to amend this position to clarify that the CGT rate applicable for NIFCA-certified firms shall be 5%. It also reduces the investment threshold to KES 3 billion.

Such proposals to incentivize investment in the NIFC are aimed at making Kenya, and specifically the NIFC, a desired investment destination. The proposed application of a 5% CGT rate will no doubt attract huge investments into the country.  If properly implemented, it has the potential to make Kenya the doorway through which to invest in Africa. It further enhances the attractiveness of Nairobi as an investment hub, noting that in Rwanda, angel investors investing a maximum of USD 500,000 in a start-up are exempt from CGT.

Proposed effective date: 1 January 2025

Penalty for export processing zone entities where they delay in or do not file returns for the period they are exempt from corporation tax

Proposed amendment:

The Bill proposes to do away with the existing penalty under the ITA as applicable to export processing zone (EPZ) entities that fail to file their returns by the required time or do not file at all.

Implications:

The proposal is aimed at cleaning up the ITA to ensure that the applicable penalty for all entities including EPZ entities is in the TPA, not the ITA.  EPZ entities' failure to file returns will be contained in the TPA, 2015. Consequential to this, the Bill also introduces into the TPA a penalty of KES 20,000/= per month for each month or part thereof that an EPZ enterprise fails to submit a return as required by the ITA.

Proposed effective date: 1 July 2024

2. Value Added Tax (VAT)

Introduction of a definition of "Tax invoice"

Proposed amendment:

The Bill proposes to introduce a new definition of a tax invoice to include an electronic tax invoice issued in accordance with Section 23A of the TPA.

Implication:

The discernible purpose of the amendment is to align last year’s introduction of the requirement for all business to issue electronic tax invoices through the electronic tax invoice management system (eTIMS), vide Section 23A into the TPA, with the current requirement under Section 42 of the VAT Act to issue tax invoices. By defining a “tax invoice” as an invoice issued under eTIMS, the proposal would in essence make it mandatory to issue an eTIMS invoice under Section 42 of the VAT Act.

Proposed effective date: 1 July 2024

Time of supply for exported goods

Proposed amendment:

The Bill proposes to set the time of supply for exported goods as the time when the registered person is in possession of the required export confirmation documents.

Implication:

The implication of the amendment is to shift the time of supply for exported goods from the general rules under Section 12(1) to the possession of export documents. The general rules prescribe that the time of supply is the earlier of (a) the invoice date; (b) date of payment; or (c) date of delivery of the goods. While the proposal lacks certainty on what “export confirmation documents” refers to, we note that the VAT Regulations, 2017 expound on the documentation required as proof of exportation of goods, including a copy of the invoice, bill of lading, road manifest or airway bill, and certified export or transfer entries.

In our view, this proposal's enactment could have limited impact on VAT payable by exporters, since the exportation of goods is zero-rated under the Second Schedule to the VAT Act. Nonetheless, it may create ambiguity for exporters regarding when to declare the exports for VAT purposes in their returns, which would also have an impact regarding their claiming of input VAT.

In East Africa, we note that both Uganda and Tanzania do not have specific rules governing the time of supply for exported goods.  

Proposed effective date: 1 July 2024

Refund of excess input VAT

Proposed amendment:

The Bill proposes to exclude the following persons from seeking refunds of excess input VAT: (a) persons with excess input VAT arising from tax withheld by an appointed tax withholding agent which may be applied against any tax payable or is due for refund under the TPA; and (b) approved manufacturers in respect of input VAT incurred in making taxable supplies to an official aid funded project.

The Bill also proposes to exclude manufacturers from claiming input VAT in respect of taxable supplies made to an official aid funded project.

Implication:

The proposed amendment's impact will be to limit those who can get a refund of excess input VAT to only the registered persons falling under Section 17(5)(a) and (b) of the VAT Act. These persons include those with excess input VAT arising from making zero-rated supplies; and those with excess input VAT from tax withheld by appointed withholding agents. As such, every other party will have to bear the excess input VAT as a cost.

For manufacturers making supplies to official aid funded projects, the proposal may increase their cost from a tax perspective. This is because the VAT Act presently exempts from VAT any taxable goods and services supplied to an official aid funded project, with the implication that the suppliers of these goods and services, such as manufacturers, would be unable to claim input VAT.

Proposed effective date: 1 July 2024

Determination of input tax deductible

Proposed amendment:

The Bill proposes to delete the provision that provides for the threshold for the apportionment of deductible input tax, where the input tax is incurred in respect of mixed supplies (i.e., both taxable and exempt supplies). Currently, the provision allows taxpayers to deduct all the input VAT incurred where the taxable supplies are more than 90% of the total mixed supplies.

Implication:

For VAT-registered taxpayers, this proposal would compel them to apportion input tax attributable to mixed supplies using the formula in subsection (6), i.e., only the input VAT attributable to the proportional share of taxable supplies would be deductible. As such, no further reliance would be placed on the current threshold of 90:10, which allows full input VAT deduction where the taxable supplies exceed 90% of the total supplies. We also note that this proposal is in line with the Government's policy objective in the MTRS to limit the abuse of the 90:10 input VAT apportionment threshold.

Regionally, we note that both Uganda and Tanzania have a threshold for the apportionment of input VAT incurred in mixed supplies. In Uganda, the threshold is met where taxable supplies exceed 95% of all supplies, while in Tanzania, the threshold is set at 90%.

Proposed effective date: 1 July 2024

Refund of Tax on Bad debts

Proposed amendment:

The Finance Act, 2023, amended the VAT Act to require taxpayers to repay the Commissioner any refunded VAT on bad debts, in circumstances where the taxpayer subsequently recovers the debt. The repayment period to the Commissioner is sixty (60) days from the date of recovery, and in default, an interest of 2% per month would be payable. The Bill proposes to delete these provisions from the VAT Act.

Implication:

The proposal is aimed at cleaning up the ambiguity introduced by the Finance Act, 2023 into the VAT Act's provisions on refund of VAT on bad debts. The VAT Act already provided for a repayment period of thirty (30) days and an interest of 2% per month.

Proposed effective date: 1 July 2024

Increase in VAT registration threshold

Proposed amendment:

The Bill proposes to increase the threshold set for a person to register under the Act from, KES 5 million to KES 8 million if in the course of a business, the value of taxable supplies or services made in a period of 12 months exceeds the threshold.

Implication:

The current threshold of KES 5 million, which was last revised in 2007, has been eroded due to inflation over time. As such, the low threshold has compelled many smaller businesses to register and account for VAT, which has increased compliance costs for taxpayers, and increased tax administration costs for the KRA. Accordingly, increasing the threshold to KES 8 million reduces the number of small businesses required to register for VAT, thus alleviating the compliance burden on smaller enterprises, and enhancing the efficiency of the VAT system.

In East Africa, the VAT registration threshold is TZX 200 million (approximately KES 10.1 million), while that of Uganda is UGX 150 million (approximately KES 5.22 million). Given the comparative sizes of these economies and the strengths of their respective currencies, it is apparent that Kenya's current VAT registration threshold of KES 5 million is quite low, and its upward revision is indeed a welcome move.

Proposed effective date: 1 July 2024

Certain financial services to be standard-rated

Proposed amendment:

The Bill proposes to exclude the following financial services from VAT-exemption:

1. Issuing of credit and debit cards.
2. Telegraphic money transfer services.
3. Foreign exchange transactions, including the supply of foreign drafts and international money orders.
4. Cheque handling, processing, clearing and settlement, including special clearance or cancellation of cheques.
5. Issuance of securities for money, including Bills of exchange, promissory notes, money, and postal orders.
6. The assignment of a debt for consideration.
7. The provision of the above financial services on behalf of another on a commission basis.

Implication:

Subjecting the above financial services to VAT will make them more expensive for the customers of financial institutions, as the additional cost will likely be passed on to the final consumer. The proposal may also be seen as an attempt to tax transactions which the KRA has been unable to tax due to adverse court decisions, particularly on VAT on interchange fees arising from card transactions.

Regionally, the fact that most financial services would be standard rated, would be in line with the VAT treatment of financial services in some EAC member states. In Tanzania, for example, financial services are taxable at the standard rate, In Uganda, the supply of financial services is VAT-exempt, including some of the services in the Bill's proposal, such as transactions involving negotiable instruments and foreign currency transactions.

Proposed effective date: 1 July 2024

Certain insurance services to be standard-rated

Proposed amendment:

The Bill proposes to limit the exemption of VAT for insurance services, to insurance and reinsurance premiums.

Implication:

The proposal seeks to tax insurance-related services, other than premiums, at the standard rate of 16%. This would result in a higher cost of these services for consumers, as the cost would be passed on to them. However, we expect that insurance agency and brokerage services will remain exempt from VAT, following the High Court's decision of 2021 in Association of Kenya Insurers (AKI) v Kenya Revenue Authority & 2 others; Insurance Regulatory Authority (IRA) & another (Interested Parties) [2021] eKLR.

In East Africa, both Uganda and Tanzania have only granted VAT exemption to specified insurance services, including health insurance, life insurance, micro-insurance, reinsurance and aircraft insurance. Other insurance-related services are therefore subject to VAT.

Proposed effective date: 1 July 2024

VAT exemption of transfer of business as a going concern ("TOGC")

Proposed amendment:

The Bill proposes to exempt from VAT the transfer of business as a going concern (“TOGC”).

Implication:

The proposal seeks to reduce the cost of business restructuring, as it will eliminate the significant VAT cost currently experienced by entities seeking to restructure their affairs through transactions such as mergers and acquisitions. However, there may be need to develop Regulations or enhance the proposal to help determine what transactions would qualify as TOGC.

The exemption of TOGC would also align Kenya with other EAC member states and therefore enhance its competitiveness, since TOGC is exempt from VAT in Uganda and Tanzania.

Proposed effective date: 1 July 2024

Change in VAT treatment of betting, gaming and lotteries services

Proposed amendment:

The Bill proposes to delete the VAT exemption of betting, gaming and lotteries services.  

Implication:

The proposal reflects the recent trend by the Government to tax activities perceived to have negative societal impacts to the society, especially among the youth, such as betting and gambling. However, subjecting betting and gambling to VAT at 16%, excise duty on the amount staked at 20% and withholding tax on winnings at 20% could be perceived as excessive, punitive and discriminatory taxation of one sector to the exclusion of others.

Proposed effective date: 1 July 2024

Change in VAT treatment for materials used in packaging and labelling products.

Proposed amendment:

The bill proposes to delete the VAT exemption on;

3506. Pressure sensitive adhesive of tariff numbers 3506.91.00.
3507. Plain polythene film/LPDE of tariff number 3921.19.10
3508. Plain polythene film/PE of tariff number 3921.19.10
3509. PE white 25-40gsm/release paper of tariff number 4811.49.00.

Implication:

The proposal directly affects the businesses engaged in the production of packaging and labelling products, since the imposition of VAT on the materials will likely increase their operational costs. Such businesses would now be forced to seek alternative sources for these materials or adjust procurement strategies to mitigate the impact of VAT on their operations. This comes in the wake of the government's drive to go green and can be seen as a deterrent to environmental harm.

Proposed effective date: 1 July 2024

Change in VAT treatment for certain materials used in hygiene or absorbent products

Proposed Amendment:

The bill proposes to delete the VAT exemption on ADL 25-40gsm of tariff number 5603.11.00.

Implication:

This proposal has the impact of increasing the cost of procuring these materials, which will affect both manufacturers and consumers alike since the materials are used in products like diapers, sanitary napkins, or adult incontinence products.

Proposed effective date: 1 July 2024

Change in VAT treatment for aircraft and aircraft parts

Proposed amendment:

The Bill proposes to standard-rate the following aircraft and aircraft  parts, which are currently exempt from VAT or zero-rated:

8802. Aeroplanes and other aircraft of tariff heading 8802.30.00 of an unladen weight exceeding 2,000kg but not exceeding 15,000 kg.
8803. Spacecraft (including satellites) and suborbital and spacecraft launch vehicles of tariff heading 8802.60.00.
8804. All goods and parts thereof of Chapter 88, which chapter covers aircraft, spacecraft and parts thereof.
8805. Direction-finding compasses, instruments and appliances for aircraft.
8806. Hiring, leasing and chartering of aircraft excluding helicopters.

The Bill also proposes to exempt from VAT parts of aircraft and spacecraft of Chapter 88.

Implication:

The implication of the above proposals is to subject aircraft and spacecraft to VAT at the standard-rate. However, we note that the proposal aims to retain the VAT-exemption of parts for aircraft and spacecraft.

The Finance Act, 2023, introduced the exemption of all aircraft, spacecraft and parts thereof from VAT and Railway Development Levy (RDL), with the presumed intention of reducing the operational costs for Kenyan-based airlines. With the Bill proposing to standard-rate aircraft and spacecraft just one year later, such airlines will encounter increased importation costs. The proposal also signals policy incoherence and uncertainty in the tax regime.

Proposed effective date: 1 July 2024

Change in VAT treatment of goods and services used by local film producers

Proposed amendment:

The Bill proposes to delete the VAT exemption for goods imported or purchased locally for use by local film producers and filming agents.

The Bill also proposes to standard-rate services imported or procured locally for use by the local film producers or local film agents.

Implication:

The proposal, if enacted, will subject to tax goods and services used in local film production, thus increasing their cost and the expenses incurred by local film producers. This could potentially disincentivize local film production, despite the Government's stated aim of encouraging areas of artistic expression which could potentially provide a source of living for Kenya's youth.

Proposed effective date: 1 July 2024

Change in VAT treatment of the supply of ordinary bread

Proposed amendments:

The Bill proposes to change the VAT status of the supply of ordinary bread from zero rated to the standard rate.

Implications:

This proposal has the impact of increasing the price of bread and hence affecting affordability of the good. In turn this could lead to changes in consumption patterns.

Proposed effective date: 1 July 2024

Change in VAT status of the supply of electric buses, electric bicycles and solar and lithium-ion batteries

Proposed amendments.

The Bill proposes the change of the supply of electric buses, electric bicycles and solar and lithium-ion batteries, from its current zero-rated status to the standard rate.

Implications:

The government through the Finance Act 2023, introduced green incentives that enabled the supply of these goods to be zero rated. Removing such incentives, a year later, will affect various investments by increasing operation costs and could potentially scare away future investors due to reduced investor confidence, as such changes create uncertainties. In addition, the standard-rating of electric vehicles, solar and lithium-ion batteries, is in apparent contradiction to the Government's aim to promote green and more ecofriendly energy use. Notably, these proposals are also contrary to the MTRS, which aims to review tax incentives that promote use of green energy including promoting electric vehicles that are environmentally friendly and support the transition to a green economy.

Proposed effective date: 1 July 2024

Change in VAT status for certain goods and services to standard rated

Proposed amendments:

Implications:

The standard-rating of the above goods and services will increase their cost, which will erode the incentives granted to specific sectors and potentially limit their growth. For instance, the standard-rating of locally assembled cars for the transportation of tourists, as well as goods used in the construction of tourism facilities, will increase the costs for operators in the tourism sector. Given that this sector has just recently rebounded from the ravages of the Covid-19 pandemic and a global recession, the standard-rating of these goods could be ill-advised.

Similarly, the standard-rating of the transportation of sugarcane from farms to milling factories, which is currently zero-rated, seems ill-advised and counter to the Government's initiatives to revive the sugar sector.

The standard-rating of inbound international sea freight also contravenes international best practices in the taxation of international sea freight, and could result into potential double-taxation, since the freight value is included in computing the customs value of imported goods for VAT purposes.

Finally, the fact that most of these changes are occurring less than a year since the Finance Act, 2023 either exempted or zero-rated the respective goods or services signals policy incoherence and uncertainty, which does not bode well for Kenya's tax regime.

Proposed effective date: 1 July 2024

Change in VAT status for certain goods and services zero-rated to VAT-exempt

Proposed amendments:

The Bill proposes to change the VAT status of the following items from zero-rated to VAT-exempt:

1. All inputs and raw materials whether produced locally or imported, supplied to manufacturers of agricultural pest control products upon recommendation by the Cabinet Secretary for the time being responsible for agriculture.
2. Agricultural pest control products.
3. Bioethanol vapour (BEV) Stoves classified under HS Code 7321.12.00 (cooking appliances and plate warmers for liquid fuel
4. Electric motorcycles

Implications:

Changing the status of the above items from zero-rated to exempt would preclude the suppliers of these items from claiming and deducting input VAT. This could increase the cost of these items in the market, which would be inauspicious for consumers of items such as agricultural pest control products. The VAT-exemption of BEV stoves and electric motorcycles also casts doubt over the Government's aim of promoting green energy use, since the suppliers of these items will shoulder increased input VAT cost.

Proposed effective date: 1 July 2024

VAT-exemption of standard rated goods

Proposed amendments:

The Bill proposes to exempt the following goods from VAT, which are currently subject to VAT at the standard rate:

1. Inputs and raw materials used in the manufacture of mosquito repellent on recommendation by the Cabinet Secretary responsible for matters relating to health.
2. Mosquito repellent
3. Tea packaging material
4. Micronutrients, foliar feeds and bio-stimulants of Chapter 38

Implications:

The VAT exemption of the above items will provide some relief for taxpayers, by potentially reducing their cost in the market. The exemption of mosquito repellents and inputs used in their manufacture could also be linked to the recent heavy rains and anticipated mosquito infestation in the affected areas. The exemption of tea packaging material and micronutrients is evidently aimed at incentivizing growth in the agricultural sector by targeting the reduction in the cost of inputs.

Proposed effective date: 1 July 2024

Clean up of the First Schedule to the VAT Act in relation to Petroleum products.

Proposed amendment:

The Bill proposes to delete Section B in Part II of the First Schedule. This section currently provides a list of the petroleum products subject to VAT at 8%.

Implication:

The proposal essentially intends to clean up the VAT Act, since the Finance Act, 2023 amended the VAT rate of the petroleum products from 8% to 16%.

Proposed effective date: 1 July 2024

Other amendments

Proposed amendment:

The Bill proposes to introduce and define "original equipment manufacturer" as a manufacturer of parts and subassemblies, who owns the intellectual property rights in the parts or subassemblies.

The Bill also proposes to limit the VAT exemption enjoyed by companies engaged in business with the Government under a special operating framework agreement to only those agreements entered into before 1 July 2017.

Implication:

The inclusion of a specific definition on "original equipment manufacturer" provides clarity on the persons who enjoy VAT exemption on locally manufactured passenger motor vehicles, since currently, the exemption is limited to manufacturers who acquire at least 30% of their parts from original equipment manufacturers in Kenya.

The limitation of VAT exemption regarding companies under a special operating framework agreement with the Government to only agreements entered into before 1 July 2017 also appears to be discriminatory and without apparent justification.

Proposed effective date: 1 July 2024

3. Excise Duty

Classification of goods

Proposed amendment:

The Bill proposes to classify goods by reference to the tariff codes set out ln Annex 1 to the Protocol on the Establishment of the EAC Customs Union and in interpreting that Annex, the general rules of interpretation set out in the Annex shall apply.

Implications:

By referencing the tariff codes set out in Annex 1 to the Protocol on the Establishment of the EAC Customs Union, the Bill aims to standardize the classification of goods within the region. This can streamline trade procedures by providing a common framework for identifying and categorizing of goods.

Proposed effective date: 1 July 2024

Imposition of Excise Duty on services provided by non-residents through a digital platform

Proposed amendment:

The Bill proposes to charge Excise Duty on excisable services offered in Kenya by a non- resident through a digital platform and mandates the payment to be made by the non-resident person offering the service.

Implications:

Taxing excisable services offered in Kenya by non-resident entities through digital platforms can potentially increase Government revenue as it captures economic activity that was previously not taxed. However, this proposal could be viewed as excessive, particularly for non-residents with no permanent establishment in Kenya, since their services are still subject to tax under other regimes such as WHT, DST and the proposed SEP tax. From an enforceability perspective, the KRA may also struggle to collect excise duty from non-residents due to a lack of visibility, which is a challenge they have encountered with other taxes such as DST and VAT on digital and electronic supplies.

This proposal may also necessitate the amendment of the place of supply and charge to tax provisions of the Excise Duty Act, since they currently provide that excisable services are those supplied from a place of business of a licensed person in Kenya.

We note that the Bill as it is does not specify the particular rate that will apply to excisable services offered through a digital platform by non-residents. We therefore expect that the current rates applicable to excisable services will apply.

Proposed effective date: 1 July 2024

Excise duty remission on spirit made from agricultural products grown in Kenya

Proposed amendment:

Currently, the Excise Duty Act empowers the Cabinet Secretary to remit excise duty in respect of beer or wine made from agricultural products grown in Kenya. The Bill proposes to expand this scope of items to include spirits.

Implications:

The expansion of scope of alcoholic products that can enjoy excise duty remission to include spirits is a welcome move for manufacturers and consumers in this sector. It can also help spur the procurement of local agricultural produce needed in the manufacture of spirits.

Proposed effective date: 1 July 2024

Relief for raw materials used in the manufacture of other excisable goods

Proposed amendment:

The Bill proposes to remove the excise duty relief currently afforded to licensed manufacturers, where excise duty paid on raw materials imported or manufactured in Kenya can be offset against the excise duty payable on finished goods.

The Bill also proposes to eliminate the relief afforded to the suppliers of internet data services, where such persons can offset the excise duty paid in respect of bulk data purchase from the excise duty payable on internet data services supplied to the final consumer.

Implications:

The proposed removal of this relief is an inauspicious development for manufacturers, suppliers of internet data and final consumers alike. This is because in the absence of the relief, the excise duty incurred by the suppliers will become an extra cost, which will likely be passed on to the consumer, thus increasing the overall cost of the goods and services.

Proposed effective date: 1 July 2024

Timeline for issue of Excise Duty License for manufacturers and suppliers of excisable services

Proposed amendment:

Under the Excise Duty Act, importers, manufacturers and suppliers of excisable goods and services are required to apply for an excise duty license from the Commissioner. The Bill proposes that the Commissioner shall, within 14 days of receipt of all the required valid documents, consider an application for a license on the specified activities and either grant or refuse to grant a license to the applicant.

Implications:

The proposed 14-day timeline does not presently exist in the law. This proposal is therefore welcome as the Commissioner is obligated to consider taxpayers' applications within a definite timeframe. This indicates a time-bound process to expedite the application review.

Proposed effective date: 1 July 2024

Payment of Excise Duty for manufacturers of alcoholic beverages

Proposed amendment:

The Bill proposes to change the timelines for manufacturers of alcoholic beverages to remit excise duty from 24 hours upon removal of the goods from the stockroom to within 5 working days.

Implications:

Increasing the payment period from 24 hours to 5 working days provides licensed manufacturers with a longer timeframe to fulfill their financial obligations to the Commissioner. This adjustment acknowledges the administrative constraints, cashflow problems and practical difficulties that have plagued manufacturers within the shorter timeframe, since its introduction in 2023.

That said, the proposed 5 working days could still be inadequate as they are likely to result in the same situation as currently obtains, where manufacturers are compelled to remit excise duty on products for which they are yet to receive payment. Given that excise duty is a tax that should be borne by the final consumer, and not the manufacturers, it may be prudent to increase the timelines to prevent manufacturers from paying excise duty on unpaid products.

Proposed effective date: 1 July 2024

New Excise Duty rates for specified goods and services

Proposed amendments:

The Bill proposes to have the following amendments:

Implications:

The increased excise duty rates on the excisable services, in particular, money transfer, telephone and internet data services, betting and gaming are likely to increase the cost of accessing these services for the final consumers.

Proposed effective date:

(c), (d) and (e): 1 September 2024

Remainder: 1 July 2024

Exempt Excisable Goods for official use by the disciplined forces

Proposed Amendment:

The Bill proposes to exempt the National Intelligence Service (NIS) from payment of Excise Duty when importing goods for official use.

Implications:

The exemption acknowledges the unique role and requirements of the National Intelligence Service in safeguarding national security. It ensures that the NIS can access necessary equipment and resources without financial burdens that might impede their operations.

Proposed effective date: 1 July 2024

Other Proposed amendments

Proposed amendments and their implications

1. The Bill proposes to limit the scope of motorcycles subject to excise duty to only electric motorcycles of tariff 87.11.60.00 other than motorcycle ambulances and locally assembled motorcycles.
   
   The implication of this is to bring into the tax net electric motorcycles, in anticipation of their increased uptake in Kenya, following active promotion of electric motorcycles and vehicles by the Government.
2. The Bill further proposes to exclude certain imported goods from excise duty, where such goods are originating from an EAC Partner State and subject to the EAC Rules of Origin. These include imported cartons, boxes, and cases, of corrugated paper or paperboard, folding cartons, skitters labels of paper and paper board; as well as imported onions, eggs, potatoes, potato crisps and potato chips.
   
   This proposal aims to encourage trade within the East African Community by reducing trade barriers and facilitating the movement of goods between member states. In addition, this will ensure that the products are available at affordable prices, particularly where Kenya lacks capacity to meet local demand.
3. The Bill further proposes to have all articles of plastic of tariff heading 3923.30.00 and 3923.90.90 at the rate of 10%. These plastics include articles for the conveyance and packing of goods, e.g., bottles and flasks. Currently, only imported plastics of this nature are excisable but going forward locally manufactured plastics will be subject to duty,
   
   The implication of this is that taxing plastic materials may serve environmental objectives by discouraging their use and encouraging alternatives that are more environmentally friendly. Plastics are known for their adverse environmental impacts, including pollution and harm to wildlife, so taxation can help address these concerns by reducing production and consumption.
4. The Bill further proposes to exempt imported clinker from excise duty.
   
   The likely impact of this is to incentivize local cement manufacturers by reducing the tax expenditure they incur in importing clinker, which is a major input for cement manufacturers. However, this proposal may not augur well for local clinker producers, who will likely face increased competition from cheaper imported clinker.
5. The Bill also proposes to tax the advertisement of alcoholic beverages, betting, gaming, lotteries and prize competitions on the internet and social media platforms. Currently, only advertising on traditional media, such as television, print media, billboards and radio stations, is covered.
   
   The implication of this is to subject internet and social media advertisements to excise duty, where the material being promoted relates to gambling or alcoholic beverages,
6. Lastly the Bill proposes to define original equipment manufacturer as a manufacturer of parts and subassemblies who owns the intellectual property rights in the parts or subassemblies.
   
   The implication of this is that the inclusion of a specific definition provides legal clarity and can help in ensuring consistent interpretation of the term across different contexts.

Proposed effective rate: 1 July 2024

4. Miscellaneous Fees and Levies

Import declaration fee increased from 2.5% to 3% and a portion of it (20%) to be used in revenue enforcement programmes and initiatives

Proposed amendment: 

The Bill proposes to increase the rate of import declaration fees from 2.5% to 3%.

Implications:

While the Government will no doubt collect additional revenue with this proposal, importers will incur additional costs bringing in goods and will pass the costs down to the consumers, resulting in inflationary pressure on the economy.

Proposed effective date: 1 July 2024

Introduction of the Eco Levy

Proposed amendment:

The Bill proposes to introduce the Eco Levy payable on specific goods such as machinery, telephone sets, broadcasting apparatus, rubber tyres, diapers, batteries or dry cells and plastic packaging material, to ensure that the manufacturers and importers of the goods pay for their negative environmental impacts. The rate applicable for each good will be set out within the fourth schedule to the Miscellaneous Fees and Levies Act, 2016. Please refer to the table below for a list of the specific goods affected and the proposed Eco Levy that will apply to each. In the case of locally manufactured goods, the Levy will be paid at the time the goods are removed from the excise stock room and in the case of imported goods, the levy will be paid at the time of entry of the goods into the country.

The proposal further grants the Cabinet Secretary the discretion to make Regulations for the better implementation of the Eco Levy.

Implications:

This move is intended to curb negative externalities on the environment, by making those who manufacture or import "pollutant" substances pay for their effect on the environment. This aligns with the polluter pays environmental principle which is the commonly accepted practice that as a matter of fairness, those who engage in environmental pollution should bear the costs of managing the pollution. An example of an East African country imposing environmental levy is Uganda, which charges it on various items like old cars and machines to lessen pollution and destruction of the environment. In Rwanda, the levy is imposed on imported goods that come packaged in plastic material or single-use plastics. This move therefore aligns Kenya with what its neighbours are doing, over and above the potential it has in promoting environmental sustainability and attainment of net zero.

Proposed effective date: 1 July 2024

Import declaration fees and railways development levy exemption for inputs, raw materials and machinery used in the manufacture of mosquito repellant

Proposed amendment:

The Bill proposes to exempt from import declaration fees and railway development levy inputs, raw materials and machinery used in the manufacture of mosquito repellant.

Implications:

This proposal is aimed at reducing the costs incurred by the manufacturers of mosquito repellants, thereby incentivizing their business activities, and potentially reducing the cost of the products in the market. This could also be informed by increased mosquito infestation following the recent heavy rains in the country.

Proposed effective date: 1 July 2024

New rates of Export and Investment Promotion Levy

Proposed amendment:

The Bill proposes to amend the Third Schedule to the Miscellaneous Feed and Levies Act by changing the rate of investment promotion levy and updating the list of goods subject to the levy. Currently, the rates applicable range between 10% and 17.5%. The Bill proposes to change the rate to 3% for a majority of the subject goods, while imposing 10% on cement clinker and billets, and 20% on leather and footwear as per the table below.

Implications:

The reduced rate of Export and Investment Promotion Levy from 17.5% is a welcome move for importers of the subject items as the previous rate was significantly high. Importers of articles of leather and footwear will, unfortunately, incur additional tax, in a move possibly intended to stimulate the growth of the local leather and shoe industry. 

Proposed effective date: 1 July 2024

5. Tax Procedures

Application for tax agent license

Proposed amendment:

The Bill proposes the establishment of a Tax Agents Committee through Regulations under the TPA. The Tax Agents Committee's role shall include recommending applicants for registration as tax agents by the Commissioner, as well as recommending the cancellation of a tax agent's license.

Implication:

Currently, the TPA provides no mechanism for the constitution or composition of the Tax Agents Committee. The proposal is therefore a welcome one, as it will provide a framework for the constitution and operation of the committee, through Regulations under the TPA. The Tax Agents Committee will likely be composed of individuals with expertise and experience in tax law, accounting, and related fields. Their insights and knowledge can contribute to informed decision-making regarding tax agents' license applications and cancellations.

Regionally, Uganda has a similar Tax Agents Registration Committee, comprised of representatives from the fields of accounting, law, economics, finance and taxation. This committee's role is to register tax agents in Uganda, maintain a register of tax agents and cancel tax agent licenses, where required.

Proposed effective date: 1 July 2024

Electronic Tax Invoices

Proposed amendment:

The Bill proposes to introduce the elements that must be contained in an electronic tax invoice;

1. the words “TAX INVOICE”.
2. the name, address, and PIN of the supplier.
3. the name, address, and PIN, if any, of the purchaser.
4. the serial number of the tax invoice.
5. the date and time which the tax invoice was issued and the date and time which the supply was made if it is different from the date the tax invoice was issued.
6. the description of the supply including quantity of the goods or the type of services.
7. the details of any discount allowed at the time of supply.
8. the consideration for the supply.
9. the tax rate charged, and total tax amount of tax charged; and
10. any other prescribed information

Implication:

By specifying the required elements of an electronic tax invoice, the amendment aims to standardize invoicing practices across taxpayers. This ensures consistency and clarity in the information provided, facilitating compliance with tax regulations. We note that the proposed requirements are a replication of the requirements under the repealed Regulation 9 of the VAT Regulations, 2017, as well as the VAT (Electronic Tax Invoice) Regulations, 2020.

The above requirements, read together with the obligation to issue electronic invoices via eTIMS as introduced by the Finance Act, 2023, have parallels in the region.  In Tanzania, the Tax Administration Act, 2015, makes it mandatory for taxpayers, except those specifically excluded by law, to issue fiscal receipts or invoices using electronic fiscal devices. Such fiscal receipts and invoices should contain particulars similar to those under the proposal, such as the full name and address of the supplier and recipient of the supply, description of the goods or services provided and tax PINs. In Uganda, it is also mandatory for all VAT-registered taxpayers to enrol onto and implement the Electronic Fiscal Receipting and Invoicing Solution ("EFRIS"), which system transmits transaction data to the revenue authority in real-time and generates electronic receipts and invoices, much like Kenya's eTIMS. The electronic receipts and invoices are also required to have similar details on the supplier, recipient, goods and services supplied and tax PINs.

Proposed effective date: 1 July 2024

Enforcement of agency notices

Proposed amendment:

The Bill proposes to introduce a validity period of 1 year for an agency notice issued by the Commissioner, to a person owing money to a taxpayer, to pay the amount owing /will be owed to KRA.

The Bill further proposes to amend Section 42 to allow the Commissioner to issue agency notices where a taxpayer has appealed against an assessment specified in a decision of the Tribunal or court.

Implications:

Introducing a validity period of 1 year for the notice is an inauspicious development for taxpayers, since having an agency notice being valid for 1 year may be prone to abuse by the KRA.

Further, the proposal to allow the Commissioner to issue agency notices even where a taxpayer has appealed an adverse court or Tribunal decision is inimical to justice, as the KRA will have the power to enforce a notice in respect of an ongoing tax dispute.

Comparatively, we note that Tanzania has no sunset date on an agency notice, since an agency notice issued by the revenue authority only ceases to have effect once the tax is paid, or upon cancellation by the revenue authority. In addition, both Uganda and Tanzania do not have limitations on circumstances in which the Commissioner can issue an agency notice, unlike in Kenya where an agency notice can only be issued in certain circumstances, such as where a taxpayer has not duly objected to, or appealed against, an assessment or adverse judgement.

Proposed effective date: 1 July 2024

Reinstatement of the abandonment of unpaid tax due to doubt or difficulty in recovery

Proposed Amendment:

The Bill proposes to re-introduce the Commissioner's discretion to abandon tax liability where there is doubt or difficulty in recovery of the unpaid tax. Under this proposal, once the Commissioner determines that unpaid tax is impossible to recover, he may abandon the tax with the Cabinet Secretary's prior written approval.

The Cabinet Secretary may also direct the Commissioner to take any action as the Cabinet Secretary may deem fit in respect of the unpaid taxes, or obtain the courts' directions in respect of the case. Finally, the Commissioner is mandated to submit an annual report of the unpaid tax abandoned every year to the Cabinet Secretary, which report shall subsequently be submitted to Parliament for scrutiny.

Implication:

This proposal seeks to re-introduce the relief of abandonment of tax, which was deleted from the TPA by the Finance Act, 2023. While this relief is pegged entirely on the discretion of the Commissioner to determine that a tax liability is difficult to recover, as well as on the Cabinet Secretary's approval, it offers some reprieve for taxpayers struggling to settle their liabilities. However, it may also be prudent to reinstate the granting of waivers of penalties and interest on unpaid tax, which was also deleted from the TPA by the Finance Act, 2023.

Repeal of the Value Added Tax Withholding exemptions.

Proposed Amendment:

The Bill proposes to remove the VAT withholding exemptions granted to the taxable value of zero-rated supplies, as well as registered manufacturers whose value of investment in the preceding three years from 1 July, 2022 is at least three billion.

Implication:

The proposal to remove the exemption of zero-rated supplies is likely aimed at cleaning up the withholding VAT regime, since from a practical perspective, it is not possible to withhold 2% VAT on a supply whose VAT rate is 0%.

As for the registered manufacturers whose value of investment in the preceding three years from 1 July 2022 is at least three billion, their exemption's deletion broadens the application of VAT withholding tax. This change ensures consistency in tax treatment across different types of taxpayers and prevents potential loopholes or preferential treatment.

Proposed effective date: 1 July 2024

Offset or Refund of Overpaid Taxes

Proposed amendment:

The Bill proposes a deletion of subsection 1 of Section 47 and substituting it with a proviso that enables a taxpayer who has overpaid a tax under any tax law, to apply to the Commissioner in the prescribed form to offset the overpaid tax against the taxpayer's outstanding tax debts and future tax liabilities; or for a refund of the overpaid tax;

• in the case of income tax, within five years from the date on which the tax was overpaid; or
• in the case of any other tax, within six months from the date on which the tax was overpaid.

Implications:

The main implication of this proposal is that for taxes besides income tax, including excise duty, the time limit for refund applications would be limited to 6 months. Currently, only VAT is limited to 6 months.

This proposal, if enacted, would be counter to the practice in other comparable countries. In Tanzania, for instance, refund applications can be submitted within three years for all taxes, subject to a few limitations on items such as excess input VAT.

Proposed effective date: 1 July 2024

Objection to a tax decision

Proposed amendment:

The Bill proposes the deletion of Section 51(4A) and substitutes it with a provision that seeks to disallow an objection that has not been validly lodged and the taxpayer fails to provide the information specified by the Commissioner within the stated period.

Further the Bill proposes to increase the time period due to the Commissioner, to issue an objection decision from 60 days to 90 days.

Implication:

Increasing the time for the Commissioner to make an objection decision to 90 days provides KRA with adequate time to thoroughly review objections and consider relevant information before making decisions. This ensures fairness and transparency in the objection process, as decisions are based on comprehensive assessments of the issues involved. However, it is arguable that the granting of an additional 30 days to the Commissioner to issue a decision, while still retaining taxpayers' timelines for lodging objections at 30 days, is unfair to taxpayers.

Comparatively, the timelines for issuing an objection decision are 90 days in Uganda, and 6 months in Tanzania.

Proposed Effective date: 1 July 2024

Integrating with KRA's Data Management and Reporting Systems

Proposed amendment:

The Bill proposes to grant the Commissioner, by notice in writing, the ability to compel a person to integrate with the revenue authority's authorised electronic tax system- for the purposes of submission of electronic documents including detailed transactional data in a prescribed manner.

The Bill further proposes a penalty of an amount not exceeding KES 2 million for every month or part thereof that the failure continues, to a person who fails to comply with this notice.

Implication:

Mandating the integration of an electronic tax system indicates a shift towards modernizing tax administration and embracing technology. This transition may require investments in infrastructure, training, and technology adoption, impacting both taxpayers and tax authorities.

This proposed amendment further signals the continuing push by the Government to get real-time access to taxpayer data, following the KRA's recent integration with betting companies for real-time excise duty remission, as provided by Section 36A of the Excise Duty Act which was introduced by the Finance Act, 2023. The Government has also recently issued notices to various digital lenders for them to commence integration of their systems with KRA. That said, we note that the proposal does not specify which party shall bear the cost of integration of systems. This could be applied to mean that taxpayers should shoulder the cost, which would increase the cost of tax compliance, and further dent the efficiency of the tax regime in Kenya.

Proposed effective date: 1 July 2024

Computation of time for the submission of documents and payment of tax

Proposed amendment:

The Bill proposes to establish rules for the computation of time in relation to;

1. submitting or lodging a tax return, application, notice, or other document
2. the payment of a tax; or
3. taking any other action under a tax law.

Under the proposal, where such actions need to be undertaken within a specific period, such period shall not include Saturdays, Sundays or public holidays.

Implication:

Clear and consistent computation periods instill confidence in taxpayers regarding the fairness and predictability of the tax system. The exclusion of Saturdays, Sundays, and public holidays ensures uniformity in calculating deadlines and reduces ambiguity regarding compliance requirements.

Proposed Effective Date: 1 July 2024

Registration for Remote Employees Working Outside Kenya.

Proposed amendment:

The Bill proposes the introduction of registration of an employee working remotely outside Kenya for an employer in Kenya, as a transaction that requires a KRA PIN.

Implications:

By mandating remote workers to obtain a KRA PIN, the government aims to maximize revenue collection by ensuring that all individuals deriving income from Kenya contribute their fair share of taxes. Since the income of remote employees is derived from activities in Kenya, collecting tax through the KRA PIN requirement ensures that the tax base accurately reflects the economic activity occurring within the country.

Proposed Effective date: 1 July 2024     

6. Data Protection Act

Disclosure of personal data for tax enforcement purposes

Proposed amendment:

The Bill proposes to amend the Data Protection Act, 2019, to exempt its application from the processing of personal data where it is necessary for the assessment, enforcement or collection of any tax or duty under a written law.

Implications:

This provision is aimed at granting the KRA near-unfettered access to taxpayer data, for a complete view of the taxpayers' economic transactions through data analysis. It has the potential to enhance compliance as verification of taxpayer affairs will be made easier. However, there are data privacy concerns that would apply if KRA is exempted from the provisions of the Data Protection Act, 2019.

Proposed effective date: 1 July 2024

7. Affordable Housing Act

Proposed amendment:

The Bill proposes the deletion of Section 54 of the Affordable Housing Act, which provides that a purchaser of an affordable housing unit may not sell their units by contract, agreement or otherwise, except with the prior written consent of the Affordable Housing Board.

Implications:

If enacted into law, this proposal will allow the owners of affordable housing units to sell their units without any inhibition or control. While it may be viewed as a reinforcement of the freedom to contract and the right to property, this proposal may be prone to abuse.

Proposed Effective Date: 1 July 2024

8. Industrial Training Act

Proposed amendment:

The Bill proposes to amend the Industrial Training Act by including the Tax Procedures Act within Section 5B (2).

Implications:

This proposal is intended to empower the Commissioner to exercise the powers conferred upon him by the TPA when it comes to the collection of training levies and any other duty conferred upon him by the Industrial Training Act.

Proposed Effective Date: 1 July 2024

9. Public Finance Management Act

Proposed amendment:

The Bill proposes the amendment of Section 194 of the Public Finance Management Act (PFMA) by making it a mandate of the Accounting Standards Board to prescribe a framework for the implementation of accrual accounting in Government; and to prescribe a risk management framework. The framework for implementation of accrual accounting is to provide for a three-year transition period from the date of commencement of the Finance Act, 2024.

Implications:

This proposal is aimed at operationalizing recent developments to change public sector accounting from the cash to the accrual basis of accounting, with the aim of enhancing fiscal reporting and the recognition of revenues and expenses.

Proposed effective date: 1 July 2024

10. Kenya Revenue Authority Act

Proposed amendment:

The Bill proposes the deletion of the Civil Aviation Act Cap 394 as part of the laws relating to revenue.

Implications:

The implication of this proposal would be to exclude all duties, levies, charges or other monies collected under the Civil Aviation Act from the remit of the KRA, insofar as the assessment, collection and accounting for such amounts is concerned.

Proposed effective date: 1 July 2024