Detailed Changes introduced by the Tax Bill 2024

Background

The Finance Bill, 2024 (the Bill) was published and gazetted on the 9^th of May 2024. It proposes various amendments to some laws in Kenya including the Excise Duty Act, Income Tax Act, Tax Procedures Act and the Value Added Tax Act, Miscellaneous Fees and Levies Act, Affordable Housing Act, Industrial Training Act, Data Protection Act, Public Finance Management Act and Kenya Revenue Authority Act.

The Excise Duty Act

The Excise Duty Act has the following proposed changes (Proposed effective date: 1^st July 2024):

1. A new provision to the effect that goods in the Excise Duty Act shall be classified by reference to tariff codes in compliance with the East African Customs Union Protocol.
2. Introduction of excise duty on vegetable oil. The Bill introduces excise duty at the rate of 25% on the following vegetable oils:
   • Palm oil and its fractions, whether or not refined, but not chemically modified;
   • Sunflower -seed, safflower or cotton-seed oil and its fractions whether or not refined, but not chemically modified;
   • Other fixed vegetable or microbial fats and oil including jojoba oil and their fractions whether or not refined, but not chemically modified;
   • Margarine; edible mixtures or preparations of animal, vegetable or microbial fats or oils or of fractions of different fats or oils of Chapter 15 of the EAC CET HS Codes.
   • The introduction of this excise duty will increase the prices of vegetable oils in the market.
3. Introduction of excise duty on certain plastics under tariff heading 3923.30.00 (Carboys, bottles, flasks etc.) and 3923.90.90 (other articles of plastic for the conveyance or packing of goods, plastics, stoppers, lids, caps and other closures of plastics). These plastics are currently excise duty payable when imported, therefore, the amendments will increase the prices of the end products.
4. Introduction of excise duty on coal at the rate of 5% of the value or Kshs. 27,000 per metric tonne whichever is higher. This facilitates the reduction of greenhouse gas emissions.
5. The Bill introduces a timeline of fourteen days of receipt of the required document for the Commissioner to make a decision on the application for excise duty license. This will accelerate the licensing process.
6. An Excise Duty Tax will be applied to services offered on Digital Platforms in Kenya by non-residents offering the services including internet services, lending and money transfer services, and gambling services.
7. Grant remission of excise duty for spirits made from agricultural products (excluding barley) grown in Kenya. The Deadline for Payment of Excise Duty for Licensed Alcoholic Beverage Manufacturers has been increased from one day to 5 days from the transfer of the alcoholic beverages from the stock rooms.
8. Increase in the rate of excise duty for telephone and internet data services, imported sugar confectionery, money transfer services by banks, money transfer agencies and other financial service providers, betting, gaming, prize competitions and lotteries.
9. Family Trusts, which gained popularity partly because they provided a means of inheriting property without taxation are also to be subjected to income tax.
10. All interest earned from infrastructure bonds held by residents are to be taxed whereas those held by non-residents will remain exempted.

The Income Tax

The Bill proposes the following changes under the Income Tax:

1. Repeal of the provision relating to Digital Service Tax which applies at the rate of 1.5 % of the gross transaction value and replace it with the Significant Economic Presence Tax. The Significant Economic Presence Tax is proposed to be payable by to non-resident whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace. The proposed effective tax rate for the Significant Economic Presence Tax will be equivalent to 6% of the gross turnover increasing from the current rate of 1.5%. The implementation of this amendment should therefore be consistent with international law practices. (Proposed effective date: 1^st January 2025)
2. New tax known as Minimum Top-Up Tax payable by a resident person or a person with a permanent establishment in Kenya who is a member of a multinational group where the combined effective tax rate for that person for the year is less than 15%. For this tax to apply, the group should have a consolidated annual turnover of Seven Hundred and Fifty Million Euros (EUR 750 million) or more in the consolidated financial statements of the ultimate parent entity in at least two of the four years of income immediately preceding the relevant year of income.  The combined effective tax rate shall be the sum of all the adjusted covered taxes, divided by the sum of all net income or loss for the year of income multiplied by a hundred. The Minimum Top-Up Tax shall not apply to public entities engaged in business, tax exempt persons, non- operating investment holding companies, pension funds, sovereign wealth fund, real estate investment vehicle that is an ultimate parent entity and investment fund that is an ultimate parent entity. (Proposed effective date: 1^st July 2024).
3. Introduction of Motor Vehicle Tax to be collected by the insurer at the time of issuing the insurance, to be charged at the rate of 2.5% of the value of the motor vehicle. The value of the motor vehicle will be determined based on factors such as make, model, engine capacity and year of manufacture. The proposed tax amount shall be a minimum of Kshs 5,000 and maximum of Kshs 100,000 payable on each vehicle. This tax should be remitted to KRA within five working days of issuing the insurance cover failure to which will give rise to a penalty of 50% of the tax due. The proposed tax will bring about double taxation for commercial vehicles which are already subject to advance tax under section 12A of the Income Tax Act. This will discourage motor vehicle owners from taking comprehensive insurance. (Proposed effective date: 1^st July 2024).
4. Introduction of Withholding Tax on income and payments made or facilitated by residents and non-residents who own or operate digital marketplaces or platform at the rate of 5% for residents and 20% for non-residents for income generated from the monetization of content like film productions and online performances.
5. Empowerment of the Commissioner to engage in advance pricing agreements (valid for five years) with a taxpayer who undertakes transaction with a related party and /or transactions with a person operating in preferential regime where the transfer pricing rules are required to be complied with. This creates a business-friendly environment.
6. Repeal affordable housing relief and post-retirement medical fund relief.
7. The Introduction of a compulsory withholding tax for suppliers of goods to public entities at the rate of 3% for residents and 5% for non residents.
8. Set resident withholding tax rates in respect of interest arising from specified securities with a maturity of at least three years that are used to raise funds for infrastructure and other social services at 5% and 15% interest paid to non-residents. This implicates the tax net taxpayers who have been enjoying tax exemptions to reduce effective tax rates.
9. Definition of Royalties expanded to include payments made for use of software, whether proprietary or off-the-shelf, license, development, training, maintenance or support fees including distribution of the software. This results from various cases that have been ruled in favour of the taxpayer since the distribution of software is not subject to withholding tax where the distributor does not exploit any right in the software.
10. Remove the corporate tax rate for a company that constructs at least four hundred residential units annually.
11. Capital Gains Tax (CGT) exemption on transfer of assets to a company where an individual holds 100% shareholding. Currently, such transfer is exempted from CGT where 100% shareholding of the company is held by spouses or spouse or their child or children.
12. Foreign exchange losses subject to interest restrictions will be deductible within a period of three years from the date the loss is realized instead of the current five years. This means that companies subject to interest restrictions with respect to non-resident loans will deduct foreign exchange losses within three years from the date of realization.
13. The Bill aims at exempting from tax gains derived transfer of property within a specified economic zone by a licensed developer, enterprise or operator. This brings about clarity to investors who consider setting up within the Special Economic Zone framework.
14. Deletion of the withholding tax threshold of Kshs. 24,000 applicable on payments to resident persons. The withholding tax will now apply to all income and payments to resident persons irrespective of the amounts.
15. The monthly pension payments of retiree’s are to be exempted from income tax.
16. Contributions to the Social Health Insurance Fund (SHIF), Housing Levy Fund and other categories of contributions are to be computed when generating Personal Reliefs for Tax Payers.
17. The Bill repeals various exemptions applicable to Trusts including:

• Exemption on the income of any registered trust scheme;
• Exemption relating to the income or principal sum of a registered family trust; and
• Exemption from CGT arising from transfer of immovable property to a family trust.

The Tax procedures Act

The Bill proposes to make changes to the procedure of reporting, assessing and paying taxes in the following ways:

1. Amendment that in respect of applications for tax agents licenses, in addition to the applicant making the application in the prescribed form they have to be recommended by the Tax Agents Committee.
2. Information to be contained in the electronic tax invoice includes the words “TAX INVOICE”, name, address and PIN of the supplier, the serial number of the tax invoice, date and time of the issuance of the tax invoice, description of the supply and any other prescribed information.
3. Deletion of the provision that currently excludes the application of withholding VAT on zero-rated supplies and registered manufacturers whose value of investment in the preceding year from 1^st July 2022 is at least Kshs. 3 billion.

This amendment would mean that businesses supplying zero-rated supplies will be afflicted by 2% withholding VAT on their invoices in respect of their zero-rated supplies.

4. Require the Commissioner to refrain from assessing or recovering an unpaid tax if it is impossible to recover an unpaid tax or there is undue difficulty or expense.
5. Where a tax payer objects to the issuing of a Tax assessment, the time the Commissioner of Domestic Taxes has to render a decision on the objection has been increased from 60 days to 90 days.
6. The proposed law clarifies the time-limit within which tax payers who have made over-payments are allowed to seek a refund. Over-payments for income tax refunds can be claimed up to 5 years from the date of over-payment whereas any other tax has a time limit of 6 months.
7. The computation of days to determine statutory time limits for various activities has been changed from calendar days to business days, that is, weekends and public holidays are not to be counted.
8. Require integration of the electronic tax system with the data management and reporting system for purposes of submission of electronic documents.
9. Employees working remotely outside Kenya are required to have a Pin.

The proposed effective date for Tax Procedure amendments is 1^st July 2024.

The Value Added Tax Act

The Bill proposes amendments to the Value Added Tax (VAT) Act, 2013 by introducing VAT on some goods and services that were previously exempted or zero rated for VAT. The changes include:

1. The time of supply for exported goods shall be the time when the registered person is in possession of the required export confirmation document.
2. Deletes some instances when refunds of excess input VAT can be made. This includes excess input VAT relating to withholding VAT or where the input VAT arises from supplies made to official aid funded project approved by the Cabinet Secretary. Excess input VAT arising from the above circumstances will not be claimed as a refund but will be carried forward to the upcoming tax period.
3. Deletes the provision which allows a registered person making both taxable and non-taxable supplies to claim 100% input VAT where the value of the taxable supplies exceed 90% of the total supplies and disallows input VAT where the value of the taxable supplies is less that 10% of the total supplies. This means that registered persons making taxable and non-taxable supplies will only claim VAT on the input VAT relating to taxable supplies.
4. An increase of the threshold required for mandatory VAT registration from Kshs 5 Milli on to Kshs 8 Million.
5. Change the supply or importation of various goods including gluten bread and unleavened bread from zero-rated to standard rate VAT.
6. The Bill proposes to exempt from VAT the transfer of Business as a Going Concern (TOGC). The current standard VAT rate for TOGC is at 16%. This will make it easier and flexible for internal restructurings and mergers and acquisitions. The transfer should relate to a business and the business should be a going concern before the transfer for it to qualify as a TOGC.
7. Change in the supply and supply of various services from exempt supplies schedule to standard rate VAT and moving some supplies from the zero-rated supplies schedule to exempt supplies. This will impact industries and sectors such as the tourism, healthcare, aviation, renewable energy, financial, manufacturing, e-mobility, agriculture and food sectors.

The Miscellaneous Fees & Levies Act

Amendments in the Miscellaneous Fees and Levies Act (Effective date of amendment: 1^st July 2024) include the following:

1. Increase the import declaration fee from 2.5 % to 3%
2. Revision of goods subject to Export and Investment Promotion Levy. New categories include cement clinker, bars and rods of iron or non-alloy steel, sacks and bags having a base width of 40cm or more, milk and cream of fat content by weight exceeding 1 % but not exceeding 6%, alcoholic beverage categories like Vodka, as Milk and Milk Products, wooden furniture for office, kitchen and bedrooms among other products.
3. Introduction of a Levy known as Eco Levy on specified goods manufactured in or imported into Kenya such as diapers, plastic packing materials, telephone sets and automatic data processing machines and units.
4. Exemption of raw materials and machinery used in the manufacture of mosquito repellent from railway development levy inputs and import declaration fee inputs.

Other Amendments

1. The Bill seeks to amend the Data Protection Act (DPA) to exempt the processing of personal data by KRA from the provisions of the DPA where the disclosure is necessary for the assessment, enforcement or collection of any tax or duty under a written law.
2. Amendment of the Affordable Housing Act to repeal the restriction on ownership and transfer of an affordable house. This amendment was made to prevent sidetracking of the main objective to provide affordable housing where the unit owners could turn it into a business venture.
3. The Kenya Revenue Authority Act is amended to remove mandate of collecting charges and fees payable under the Civil Aviation Act from KRA after the transfer of the mandate to Kenya Civil Aviation Authority.
4. The Bill amends the Public Finance Management Act to provide for the implementation of accrual accounting in Government.
5. The Industrial Training Act is amended to extend the provisions of the Tax Procedures Act to the Act with regard to the collection of the training levy.