As the fiscal year 2023 unfolds, Kenya’s financial landscape is set for substantial modifications with the introduction of the proposed Finance Bill. This legislative document, curated by the Kenya Treasury Secretary, aims to bring about significant changes in the country’s taxation system.
Overview of the Finance Bill 2023
The Finance Bill of 2023, presented to the Kenyan Parliament, is an integral part of the country’s financial budgeting process. The Bill, once subjected to public participation, will spark debates in Parliament. Following this, the Bill is expected to be signed into law by the end of June 2023. It primarily aims to reform several tax laws, including the Income Tax Act, VAT Act 2013, Excise Duty Act, Tax Procedures Act 2015, and the Miscellaneous Fees and Levies Act. The Bill also includes amendments to non-tax regulations.
Fundamental Changes Proposed in the Bill
Business and Individual Tax Reforms
Reinterpretation of Winnings
The “winnings” term is redefined in the Bill to denote the payout from betting, gaming, lottery, prize competition, gambling, or similar transactions under the Betting, Lotteries and Gaming Act. The new definition does not account for the amount staked or waged, aiming to clear any ambiguity around the taxation of payout on staked and waged amounts.
Taxation of Digital Content Monetization
Acknowledging the growth and monetization opportunities in the digital economy, the Bill proposes a 15% withholding tax on income generated by resident individuals from digital content monetization. This sphere encompasses offering entertainment, educational, artistic, social, or any other material electronically through various mediums, including social media platforms and website advertisements.
Amendment to Turnover Tax (TOT)
The Finance Bill 2023 proposes to reduce the lower limit of persons eligible to pay TOT from KES 1 million to KES 500,000 and decrease the upper limit from KES 50 million to KES 15 million. Concurrently, it also aims to increase the turnover tax rate from 1% to 3%. The proposed reforms will help in expanding the tax base by including small enterprises previously excluded due to the minimum turnover threshold.
Taxation of Digital Assets
The Bill proposes a 3% tax on income generated from the transfer or exchange of digital assets. The responsibility of deducting this digital asset tax and submitting it to the Commissioner within 24 hours after deduction lies with the platform owner or the person facilitating the transfer or exchange.
Non-Deductibility on TIMS/e-TIMS VAT Noncompliance Invoices
The Kenya Revenue Authority (KRA) has been strengthening compliance with the electronic tax invoicing system through the Tax Invoice Management System (TIMS) and e-TIMS. The Bill proposes to disallow the deductibility for corporate income tax on any expenditure or loss where the supporting invoices of the transactions are not generated from an electronic tax invoice management system, except for transactions exempted in accordance with the TPA.
Taxation of Branches/Permanent Establishments (PE)
The proposed Bill introduces a branch/PE repatriation tax in addition to tax chargeable on the branch’s income. The proposal also seeks to reduce the corporate tax rate for branches from the 2024 year of income, which may serve as an incentive to offset the newly introduced branch/PE repatriation tax.
Withholding Tax on Local Sales Promotion, Marketing, and Advertising Services
The Bill proposes a 5% withholding tax (WHT) on local sales promotion, marketing, and advertising services offered by resident individuals. This move is aimed at improving the Government’s cash flow while also expanding the tax base.
Withholding Tax on Rental Income
The Bill also proposes that all individuals receiving rental income on behalf of the owner deduct and remit withholding tax to the Commissioner within 24 hours after deduction if the Commissioner has appointed the person as an agent in writing. This change aims to curb tax evasion by landlords and enhance revenue collection from rental income.
Capital Gains Tax
The Bill proposes several changes to the capital gains tax, including taxation of capital gains realized on the sales of shares or comparable interests, and the introduction of capital gains tax where a property is transferred in a non-taxable transaction but is subsequently transferred in a taxable transaction within less than five years.
Introduction of Intellectual Property Income
The Finance Bill 2023 introduces restrictions on the intellectual property income that would be subject to tax at a preferential rate. This proposal aims to attract investors in the intellectual property space into Kenya.
Indirect Transfers of Interest in Licensee or Contractor
The Bill proposes that a licensee or contractor notify the Commissioner when there is a 20% or more change in the underlying ownership of the contractor or licensee. This proposal will ensure the government’s active participation in the decision-making process of such companies.
Definition of Market Value of Shares Clarified
The Finance Bill 2023 aims to redefine the market value of shares to mean either the mid-market value on the date the option was exercised by the employee where the shares are fully listed on a securities exchange operating in Kenya, or the price which the shares might reasonably be expected to fetch on sale in the open market when the option is exercised.
Increased Rate for Personal Tax
The Bill proposes to increase the highest tax band for personal taxes to 35% for employees earning more than KES 500,000 monthly (KES 6,000,000 annually).
Residential Rental Income
The Bill proposes to reduce the rate of tax with respect to residential rental income from 10% to 7.5% of the gross rental receipts of a taxable resident person.
National Housing Development Fund
The Bill proposes to introduce contributions to the National Housing Development Fund. The employer shall remit 3% of the employee’s monthly basic salary as the employer’s contribution and the employee’s contribution.
Exemption of Liquified Petroleum Gas (LPG) from VAT at 8%
The proposal enhances the affordability of LPG in addition to promoting environmental preservation. However, LPG suppliers will not be eligible for input VAT deduction arising from supplying the LPG. This might lead to the additional cost being passed on to the final consumers.
Clarification on the Place of Supply
The Bill proposes to amend Section 8(2) of the VAT Act by replacing the words “not registered person” with “a registered or unregistered” person. The proposal seeks to clarify that the place where a nonresident supplier provides services shall be deemed to be in Kenya, whether the services are provided to a registered or unregistered person.
Clarification on Claim of Input VAT
The Bill proposes to amend Section 17(2) of the VAT Act to clarify that a registered person may not claim input tax if both (i) documentation is lacking and (ii) the supplier has not declared the sales invoice in the return. This proposal aligns with the implementation of the TIMS because the purchaser should be able to confirm that the supplier has declared the supplies before the purchaser claims input.
Expansion of the Scope of Taxable Supplies to Include Compensations for Loss
The Bill proposes that compensation arising from loss of taxable supplies should be treated as a taxable supply and the resultant VAT should be declared such that:
- If the compensation includes value added tax, the compensation shall be declared, and the value added tax thereon remitted to the Commissioner
- If the compensation does not include value added tax, the compensation shall be declared and subjected to VAT and the tax remitted to the Commissioner
The implication of this is that insurance compensation will therefore attract VAT at the standard rate if it relates to taxable goods.
Amendment of Status of Various Supplies
The Bill proposes to impose VAT on several products at the standard rate (16%). It also proposes to amend the VAT status of the following products from Taxable (16%) to Exempt. The Bill proposes to amend inbound international sea freight services offered by a registered person from 16% to 0%. Changing from taxable at 16% to zero-rated status will mean that taxpayers dealing in these supplies will be eligible for VAT refunds.
Excise Duty Act
Adjustment of the Specific Rate of Excise Duty
Section 10 of the Act, which allows the Commissioner to implement an annual inflation adjustment of the specific rates of excise duty, is now repealed.