Overview
The tax amnesty commences on 1st September 2023 and shall remain in force until 30th June 2024.
The three-judge bench of Justices Kathurima M’Inoti, Agnes Murgor, and John Mutivo found that Parliament failed to follow the laid-out procedure of legislation by introducing new Sections without conducting public participation.
Significant Changes under the Finace Act 2023
The following were some of the notable tax changes introduced by this Act.
1.0 Income Tax
- Pay As You Earn (PAYE) – The Act introduced higher taxation for persons earning over 500,000 per month, attracting up to 32.5% of tax and 35% for persons earning above Kshs.800,000 per month as the maximum tax.
- Reimbursements mileage/transport – The Act allowed reimbursement of amounts received as mileage/transport claims by employees on official duties based on the approved rates by the Automobile Association of Kenya (AA Kenya). Any amounts above the approved rates will be treated as a taxable benefit to the employee.
- Deferment of foreign exchange losses/Interest restrictions – The Act amended and restricted interest on international borrowings only, and non-deductible foreign exchange losses carried forward (for a maximum of 5 years for forex loss and 3 years for interest).
- Turnover Tax (TOT) – The Act lowered the TOT threshold to Kshs. 1,000,000 and capping annual income at Kshs. 25 million. The tax rate increased from the previous 1% to 3 %.
- Digital Asset Tax – The Act introduced a 3% digital asset tax. The platform owner or the person who facilitates the exchange or transfer of a digital asset must deduct the tax and remit it to the Commissioner within 5 working days of making the deduction.
- Motor Vehicle Advance Tax – An increase in advanced tax levied on commercial vehicles, including pick-ups and trucks, to Kshs. 2,500. The rate increased from the previous Kshs. 1,500 for saloons, minibuses, buses, station wagons, and coaches. The rate changed to Kshs. 100 per passenger capacity per month or a minimum of Kshs. 5,000 per year, whichever is greater. The rate rises from the previous rate of Kshs. 60 per person per month or 2,400 per year, whichever is greater.
2.0 Tax Procedures Act
- Electronic Tax Invoices – The act granted the Commissioner the authority to set up an electronic system for issuing tax invoices and maintaining stock data. This system will generate invoices for all VAT – obligated taxpayers.
- Commissioner to refrain from recovering interest, penalties, or fines – The Act removed the Commissioner’s powers to collect or recover penalties, interest, or fines on tax debt in cases where the taxpayer had already paid the full amount of principal tax owing before December 31, 2022.
- Tax amnesty programme – The Act granted a person the right to apply to the Commissioner for an amnesty of interest, penalties or fines on the unpaid tax, provided all unpaid principal taxes were paid by June 30, 2024, for the amnesty to take effect.
- Appointment of rental income tax agents – The Act gave the Commissioner the authority to appoint an agent to collect rental income tax and remit it to the Commissioner.
- Rental Income Tax – Rental income tax was reduced from 10% to 7.5%.
- Offset or refund of overpaid tax – The Act allowed taxpayers to apply for refunds of overpaid tax against the taxpayer’s future tax liabilities and outstanding tax liabilities. The Commissioner is to ascertain and determine the application within 120 days of failure to which the application was to deemed to have been ascertained and approved.
- Settlement of dispute out of Court or Tribunal – The Act amended the time period within which a court or tribunal grants the parties permission to resolve their differences outside of the Court of Tribunal, as applicable. The parties must reach a settlement within 120 days of the date of Court or tribunal grants permission, as opposed to the prior 90 days.
- Penalty for failing to comply with the electronic tax system – The Finance Act 2023 required taxpayers to comply with the electronic tax system. Failure to comply would result in a fine of one million shillings or ten times the amount of tax owed, whichever is higher.
- General provisions relating to penalty – The Act deleted the provision that allowed the taxpayers to apply for remission of penalty and interest. Consequently, the Commissioner and Cabinet Secretary of National Treasury & Economic Planning no longer had the authority to grant waivers of penalties and interest.
3.0 Value Added Tax (VAT)
- VAT rate on petroleum products – The Act amended section 5 of the VAT by increasing the rate on petroleum products to a standard rate of 16% from 8%.
- BPO Services – The Act deleted the word “BPO” services from the VAT Act, Second Schedule. Prior to the enactment of the Finance Act 2023, VAT Act provided a standard rate of exported taxable services except, for business process outsourcing (BPO) activities, which are listed in the Second Schedule as zero-rated supplies.
- The exportation of taxable services – The Act zero-rated the exportation of taxable services from the previous standard rate.
4.0 Excise Duty
- Deletion of inflation adjustment – The Act repealed Section 10 of the Excise Duty Act which empowered the Commissioner to adjust the excise duty rate on excisable goods on October 1 of every year to account for inflation.
- Railway Development Levy – The Act reduced the railway development levy on all goods imported into the country for home use to 1.5% from 2% of the customs value of the goods. The importer must pay when the goods are entered for home use.
- Excisable Services – Telephone and internet data services were subjected to excise duty at a rate of 15% from 20% of their excisable value. Excise duty in fees charged for money transfer services by the money transfer agencies such as banks and other financial lenders changed to 15% from 20% of their excisable value.
- Excise on Gaming, Lottery, Betting – Excise duty on betting, gaming and Excise duty on lottery(excluding charitable lotteries) increased to 12.5% from 7.5%. The Act introduced a 15% excise duty on fees for advertising alchoholic beverages, gambling, lotteries, and prize competition on television, print media, billboards and radio. Excise duty as per the Act 2023 is payable to the Kenya Revenue Authority within 24 hours.
5.0 Affordable Housing Levy (AHL)
The Court of Appeal found that the Housing Levy was no longer an issue since it had a new law (The Affordable Housing Act, 2024) enacted into law in 2024.
This means that the AHL is still in operation as it was not anchored on the Finance Act 2023.
Conclusion
Throughout the Attorney General’s Office, the Government of Kenya on 2nd August 2024 appealed against the Court of Appeal ruling. With this development, we wait to see whether the Supreme Court will grant the Government stay orders as they prosecute their appeal.
We will be updating you on any new developments in the coming weeks.