Assented into law on 13th September 2016, the Finance Act, 2016 (the Act) is expected to advance the theme for this year’s budget, “Consolidating gains for a prosperous Kenya.” The amendments to tax legislation such as the Excise Duty Act, 2015 (the Excise Duty Act), Income Tax Act, Cap. 470 (the Income Tax Act), Special Economic Zones Act, 2015 (the Special Economic Zones Act), Tax Procedures Act, 2015 (the Tax Procedures Act) and VAT Act, 2013 (the VAT Act), are targeted towards enhancing growth of certain key sectors including agriculture, construction, health, manufacturing, and tourism. The Government has also been on a campaign to improve the living standards of Kenyans by alleviating poverty and most importantly creating a regulatory framework that is geared towards protection of the environment, all evident in these amendments.
Excise Duty Act, 2015
The amendments to the Excise Duty Act, 2015 are mainly targeted towards the manufacturing sector and consequently the following items are now exempt from excise duty:
- Locally Assembled Motor vehicles
- Kerosene that is intended for industrial use
- Plastic bags and sacks, however, plastic shopping bags are still excisable at KES 120 per kg
Income Tax Act, 2012
Employment income
The Government has taken a give and take approach when it comes to personal taxation. It has expanded the PAYE tax while increasing the personal relief amount by a meager ten percent (10%) entitled to an individual taxpayer from KES 13, 944 to KES 15, 360 per annum. Furthermore, individuals earning low incomes (of maximum KES 121, 969 per annum) will not be subjected to tax on any bonuses, overtime or retirement benefits they receive.
Construction sector
In an effort to encourage real estate developments to mitigate the housing problem in Kenya, a company that constructs at least 400 residential units annually, will be subject to corporation tax at the rate of 15% for that year of income. This is subject to the approval of the cabinet secretary for housing. In the event that the company is involved in different business activities, the rate of fifteen percent (15%) will only apply to the turnovers from its housing construction activities.
“Family matters”
It is now possible to transfer properties or assets between spouses, former spouses, immediate family, including as part of a divorce of separation settlement) or a company where the spouse and immediate family members hold one hundred percent (100%) shareholding without having any capital gains taxation, which was initially applicable at the rate of five percent (5%).
Tax Procedures Act, 2015
Third party returns
Under the Tax Procedures Act, 2015 the Commissioner may now require a taxpayer to furnish the Kenya Revenue Authority with returns showing such information as the Commissioner may prescribe.
Rental income
For a while now the Government has realised that despite the development of residential houses, very few landlords have been declaring their rental income. The Tax Procedures Act, 2015 has been amended to the effect that the Commissioner shall not assess principal, tax and penalties on a taxpayer before and during the year 2013. Moreover no penalties and interest will be raised in respect of 2014 and 2015, where the income is in respect of the gain or use of property earned by an individual, where the returns for the same years have been submitted latest 30th June, 2016.
Amnesty on income earned outside Kenya
In order to encourage repatriation of money for re-investment in Kenya, the Government will grant a tax amnesty to taxpayers who own assets and businesses in other jurisdictions. However, the taxpayer has to file income tax returns for the year 2016 by the end of the year. It is important to note that the Government has given assurances not to investigate or follow up on the source of income and assets.
Refund of overpaid tax
The Commissioner shall repay overpaid taxes within a period of two years from the date of application for the refund, failure of which the amount due shall (or part thereof that remains unpaid for a period of two years shall attract an interest of one percent (1%) per month).
Introduction of timelines
New timelines have been introduced in respect of certain actions to be undertaken by the Commissioner. Firstly, where a taxpayer has been unable to pay tax due and has notified the Commissioner of the same, the Commissioner shall, in writing accept, cancel, amend or reject the notification within thirty (30) days. A taxpayer’s application to the Commissioner for a refund of overpaid taxes, has to be made within five (5) years from when the tax was paid. On the other hand, the Commissioner shall notify the taxpayer, in writing of the decision in relation to the application within ninety (90) days of receiving the application.
Special Economic Zones Act
There have been amendments to the Special Economic Zones Act to provide that tax incentives in respect of special economic zones shall be provided for under the country’s tax statutes, being the East African Community Customs Management Act (No. 1 of 2005), Income Tax Act, and the VAT Act.
VAT Act
Tourism Sector:
The VAT Act, has now defined a hotel to include, “service and apartments, beach cottages, holiday cottages, game lodges, safari camps, bandas or holiday villas, and other premises or establishments used for similar purposes..”, bringing all such establishments within the VAT net. This however does not apply to premises with a lease that exceeds one month, student accommodation and medical staff quarters. In addition, any supply of taxable goods intended for the direct or exclusive use for construction of tourism facilities, recreational parks of at least fifty (50) acres, convention or conference facilities will be exempt from VAT upon recommendation by the Cabinet Secretary for tourism. In order to encourage both domestic and international tourism, the park entry fees paid by tourists will now be exempt from VAT. Furthermore, any commissions earned by tour operators will be exempt.
Health Sector
A good healthcare system is key to any economy, in Kenya the system has mainly been dominated by public hospitals. In order to encourage more private individuals to invest in this sector by constructing medical facilities, the Government has now exempted from VAT any goods that are used for direct and exclusive use in the construction of specialised hospitals, with accommodation facilities upon recommendation by the Cabinet Secretary for Health.
Manufacturing Sector
In an effort to reduce the cost of production for the manufacturing sector, petroleum products will remain exempt for VAT purposes for another twelve (12) months after September, 2016. These include aviation spirits, gas oil, kerosene, motor spirits and liquid gas.
Agricultural Sector
In an effort to boost the agricultural sector, some specific raw materials used in the manufacture of animal feeds will now be exempt from VAT, it is anticipated that this will make animal feeds more affordable for farmers and reduce their cost of production.
