Finance Bill 2023

INTRODUCTION

The Proposed Finance Bill 2023, was tabled by The National Treasury CS Prof. Njuguna Ndung’u, to the National Assembly on May, 4 2023 for the 1st reading.

The proposed Finance Bill aims to support the Kenya Kwanza administration’s bottom-up economic transformation agenda.

The Government aims at increasing tax revenue and expanding the tax base to fund the planned KES 3.6 trillion budget for the 2023/2024 financial year.

The Bill proposes to amend:

1.Income Tax Act,

2.Employment Act,

3.Value Added Tax Act,

4.Excise Duty Act,

5.Tax Appeals Tribunal Act,

6.Tax Procedures Act

7.Miscellaneous Fees and Levies

Capital Gains Tax (CGT)

According to the 2023 proposed Bill, earnings from the sale of shares or similar interests that draw more than 20% of their value from real estate in Kenya will be subject to tax.

i. Currently, while transferring a property, the transferor is permitted to deduct both the original purchase price and the adjusted price. The Bill proposes to change the Income Tax Act such that, in cases where property is transferred in a manner exempt from Capital Gains Tax (CGT) and is subsequently transferred in a manner subject to CGT within a period of less than five years, the second transfer's adjusted cost shall be calculated using the initial adjusted cost from the prior transfer.

ii. Due Dates -The Bill proposes to change current provisions such that Capital Gain Tax is to be paid at the earlier of;

• Receipt of the full purchase price by the vendor; and
• Registration of the transfer

Proposed effective date is 1st July 2023

 

Taxation of repatriated income

The Bill suggests lowering the permanent establishment's repatriated income tax rate from 37.5% to 30%.

The Bill proposes that when a non-resident individual does business in Kenya through a Permanent Establishment, the repatriated revenue should be subjected to tax.

The proposed effective date is 1st January 2024

Turnover Tax

Currently, residents whose turnover is KES 1 million but does not exceed KES 50 million in the year of income, pay TOT at the rate of 1% on the gross turnover.

The 2023 Bill suggests lowering the threshold to KES 500,000 and capping annual income at KES 15 million. The tax rate would rise from 1% to 3% under the proposed bill.

The proposed effective date is 1st July 2023.

Digital Asset Dax (DAT)

The Bill proposes a 3% digital asset tax. The transferor must submit a report detailing the payment's amount as this tax is based on the gross fair market value.

Non-resident individuals are allowed to register under the simplified tax regime.

The proposed effective date is 1st September 2023.

Non-deductible Allowance

According to the Bill, for a business to claim an expense for tax deduction, the invoices must be generated from the new e-TIMs system.

Currently, as long as proper proof can be provided to substantiate such deductions expenses are deductible.

The proposed effective date is 1st January 2024

Deferment of Foreign exchange losses /Interest restrictions

The Bill proposes to amend and restrict interests on international borrowings only, and non-deductible foreign exchange losses to be carried forward for a maximum of 3 years.

The Finance Act of 2022 introduced interest restriction on all loans both local and foreign.

Proposed effective date is 1st January 2024

Income tax exemption

Currently the manufacturers of human vaccine are exempted from tax. The Bill proposes to remove tax exemption for the manufacturers of human vaccine at a corporate tax rate of 10%.

The proposed effective date is 1st July 2023.

Advance tax on commercial vehicles

The Bill proposes to increase the advance tax for load capacity to a minimum of Kshs 3,000 per ton or Kshs 5,000 annually, whichever is greater.

The Bill outlines a change rate of Kshs 150 per passenger capacity per month or a minimum of Kshs 5,000 per year, whichever is greater, for saloons, minibuses, buses, station wagons, and coaches.

Currently, the advance tax is Kshs. 1,500 per ton of load capacity per year or Kshs, 2,400 per year, whichever is higher.

The advance tax is Kshs. 60 per person per month or Kshs. 2,400 per year, whichever is greater, for saloons, station wagons, minibuses, buses, and coaches.

The proposed effective date is 1st January, 2024.

Personal income tax

Increase of the rate of tax bracket from 30% to 35%

The Bill proposes to amend the Third schedule of the ITA on the graduated scale rates for personal tax as follows:

 

Monthly Taxable Amount

Tax Rate

Tax

On the first Kshs. 24,000

10%

2400

On the next Kshs. 8,333

25%

2083.25

On the next Kshs. 467,666

30%

140,299.8

On the next Kshs 500,000

32.5%

162,500

Income above Kshs. 800,000

35%

280,000

 

The proposed effective date is 1st July 2023

Increase of the rate of tax bracket from 30% to 35%

The Bill proposes to amend the Third schedule of the ITA on the graduated scale rates for personal tax as follows:

The proposed effective date is 1st July 2023

Tax relief on post-retirement medical fund contributions

The Bill proposes to create a new section 31A that will allow residents to receive post-retirement medical fund relief equal to 15% of the amount of contribution paid to a maximum of KES 60,000.

The proposed effective date is 1st January 2024.

Reimbursement of expenditure incurred by public officers on official duties.

The Bill proposes to amend the ITA by introducing a new paragraph 5(4) (fa) to reimburse an expenditure incurred by a public officer on official duty and any amount of any assets purchased.

The proposed effective date is 1st July 2023

Tax free treatment on mileage reimbursement by an employee from their employer.

The Bill proposes to amend ITA by adding a new paragraph 5(2)(a)(iv) to allow workers who travel for work-related purposes to be reimbursed for their expenses incurred at a standard mileage rate certified by the Automobile Association of Kenya.

The proposed effective date is 1st July 2023

Tax treatment of club entrance and subscription fees paid by an employer on behalf of an employee

The Bill proposes to delete Section 16(2)(v) of the ITA, and add a new paragraph 5(2) (fa) to allow taxation of an employee with regard to club admission and subscription fees, which constitute deductible costs in determining the employer's taxable corporate income.

The proposed effective date is 1st January 2024

EMPLOYMENT ACT PROPOSED AMENDMENTS

National Housing Development Fund

The Bill proposes to introduce a new Section 31B in the Employment Act, 2007 that:

(1) An employer shall pay to the National Housing Development Fund in respect of  every  employee,  where  the  employer’s  contribution  matches  the employee’s  contribution  of  1.5% of the  gross  pay.

(2) The benefits to an employee shall accrue as follows:-

a) The contributions accrue to the employee and shall be utilized to finance the purchase of a property under the affordable housing scheme for employees who qualify; or

b) Incase an employee does not qualify for affordable housing after seven years have passed or they reach retirement age, they can either:-

I. Transfer their contributions to a pension scheme registered with the Retirement Benefits Authority;

II. Transfer their contributions to any person registered and eligible for affordable housing under the National Housing Development Fund; or

III. Transfer their contributions to their kin.

IV. To receive their contributions in cash:

In cases where the contributions are paid out in cash, the amount shall be included in the contributor’s taxable income for the year and be subjected to tax at the prevailing rates.

(3) All contributions shall get a return based on the return on the Fund.

The effective date is upon issuance of the NHDF regulations by the Cabinet Secretary  Ministry  of  Lands,  Public  Works,  Housing  and  Urban Development.

VALUE ADDED TAX ACT PROPOSED AMENDMENTS

Liquid Petroleum Gas (LPG)

The Bill proposes to exempt LPG.

Currently LPG is at the rate of 8% VAT, the rate came into effect with the Finance Act of 2022, which reduced the LPG tax from 16% to 8%.

The proposed effective date is 1st July, 2023

VAT rate on petroleum products

The Bill proposes to amend section 5 of the VAT Act by subjecting petroleum products to a standard rate of 16%.

The proposed effective date is 1st July, 2023

Expansion of VAT obligations for suppliers of services without a fixed place of business in Kenya

The Bill proposes to amend section 8 (2) of the VAT Act by replacing the word "not a registered person" and replacing with the phrase "a registered or unregistered person."

The Bill proposes VAT registration for all non-resident suppliers who do not have a place of business in Kenya.

The proposed effective date is 1st July 2023

Restriction on input tax under Section 17 of VAT Act

The Bill proposes to amend the word "or" from Section 17 of the VAT Act and replace it with the word "and".

Section 17 of the VAT Act states that an individual cannot deduct input tax until the first tax period in which they possess the required documents or until the registered supplier has declared the sales invoice in a return.

Proposed effective date is 1 July 2023

VAT registration threshold not to be applicable to persons supplying imported digital services

The Bill proposes to amend Section 34 of the VAT Act to replace the existing clause with a new clause. It mandates that all suppliers of imported digital services, regardless of the supplies threshold, must register for VAT for the services provided online or through a digital marketplace.

The proposed effective date is 1st July 2023

Record keeping of transactions now not limited to Kenya

The Bill proposes to amend section 43 of the VAT Act by deleting the words “in Kenya

Currently Section 43 of the VAT Act provides that taxpayers are required to keep a record of every transaction in Kenya for a period of five years.

The proposed effective date is 1st July, 2023

VAT exemptions on some goods

The Bill proposes to exempt a number of items from VAT these are:

•  Medicaments that contain alkaloids or their derivatives and are packaged in measured doses, or packaging for retail sale
•  On a backing, prepared diagnostic or laboratory reagents, whether or not on a backing, whether or not shown in the form of malaria and blood grouping kits;
•  Vaccines for human and veterinary medicine;
•  Other medicaments, containing hormones or other products of heading no. 29.37, not put up in measured doses or in forms or packings for retail sale;
•  Other, medicaments containing hormones or other products of heading no. 29.37 containing corticosteroid hormones, their derivatives or structural analogue of tariff;
•  Chemical contraceptive preparations based on hormones, other products of heading no.29.37, or spermicides;
•  All goods relating to chapter 88 which deals with aircraft, spacecraft, and parts thereof;
•  Taxable goods for the direct and exclusive use in the construction and equipping of specialized hospitals with a minimum bed capacity of one hundred, approved by the Cabinet Secretary upon recommendation by the Cabinet Secretary responsible for health, who may issue guidelines for determining eligibility for the exemption; and
•  All tea sales intended to increase value prior to export are subject to Commissioner of Customs approval.

The proposed effective date is 1st July, 2023

VAT exemption on taxable services under the special operating framework

The Bill proposes to amend paragraph 34 of Part II of the First Schedule by deleting the words "goods" and substitute these with the word "services".

Currently, the Act allows a business operating under a special operating framework agreement with the Government, to purchase taxable items, inputs, and raw materials locally or imported.

The proposed effective date is 1st July, 2023

Introduction of VAT at the zero rate on inbound international sea freightservices under the special operating framework

The Bill proposes to introduce part A of the Second Schedule to the VAT Act to include paragraph 26, that would designate inbound international sea freight offered by a registered person as a zero-rated supply.

The proposed effective date is 1st July, 2023

Change of status from exempt to standard rated (16%)

The First Schedule of the VAT Act exempts some supplies. The Bill proposes to delete all the goods and services listed in the exemption schedule such as:

a) Taxable services recommended by the Cabinet Secretary in charge of issues pertaining to recreational parks, for direct and exclusive use in the construction of tourism facilities, recreational parks of fifty acres or more, convention and conference facilities.

b) Plant, machinery and equipment used in the construction of a plastics recycling plant.

c) The supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than ten percent in weight

The proposed effective date is 1st July, 2023

Change of Services/goods from zero to exempt

The Bill proposes to change the status of some supplies from zero-rated to exempt.

a) The provision of inputs or raw materials (made locally or imported) to Kenyan  pharmaceutical  manufacturers  for  the  production  of medicines, as may from time to time be approved by the Cabinet Secretary in consultation with the Cabinet Secretary in charge of matters pertaining to health.

b) All inputs and raw materials, whether domestically produced or imported, are provided to producers of agricultural pest control products on the advice of the Cabinet Secretary who is currently in charge of Agriculture.

c) Agricultural pest control products.

d) Transportation of sugarcane from farms to milling factories.

The proposed effective date is 1st July, 2023

VAT exemption on BPO services

The Bill proposes to change the export of taxable BPO services from the VAT Act Second Schedule and adding it in the First Schedule.

Currently, the VAT Act provides 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 proposed effective date is 1st July, 2023

Transfer of business as a going concern

The Bill proposes to exempt the transfer of a going concern companies, by adding paragraph 36 to Part II of the First Schedule of the VAT Act.

Currently, VAT is charged at a normal rate of 16% when a business is transferred as a going concern.

The proposed effective date is 1st July, 2023

EXCISE DUTY ACT PROPOSED AMENDMENTS

Excisable Services

a) Telephone and internet data services shall be charged excise duty at a rate of 15% from 20% of their excisable value.

b) Excise duty in fees charged for money transfer services by the money transfer agencies such as banks and other financial lenders shall be 15% from 20% of their excisable value.

c) Excise duty on fees charged for money transfer services by cellular phone service providers shall be 15% of their excisable value from 12%.

d) Excise duty on other fees charged by financial institutions shall be 20% of their excisable value.

The proposed effective date is 1st July, 2023

Excise on Gaming, Lottery, Betting

a) Excise duty on betting is proposed to be 20% from 7.5% of the amount wagered or staked.

b) Excise duty on gaming proposed to be 20% from 7.5% of the amount wagered or staked.

c) The Bill proposes an increase in the excise duty on prize competitions from 7.5% to 20% of the entry fee or other fee levied is recommended.

d) The Bill proposes to charge a 15% excise duty on fees for advertising alcoholic beverages, gambling, lotteries, and prize competitions on television, print media, billboards and radio.

The proposed effective date is 1st July, 2023

Excise on digital lenders

The Bill proposes to impose a 20% excise duty on any amount charged on loan by digital lenders.

The proposed effective date is 1st July, 2023

Payment Due Dates

Excise duty on betting and gaming that are provided through a platform or another medium must be paid to the Kenya Revenue Authority within 24 hours.

The proposed effective date is 1st July 2023

Deletion Of Inflation Adjustment

The Bill proposes to repeal Section 10 of the Excise Duty Act which empowers the Commissioner to adjust the excise duty rate on excisable goods on 1st October of every year to account for inflation.

The proposed effective date is 1st July 2023

Other Changes On Excise Duty Rates And Introduction Of New Items

The proposed effective date is 1st July, 2023

Goods/Services

Proposed Rate

Powdered juice

Kshs. 25 per kg

Human hair and other products of heading 6703

5%

Wigs, false beards, eyebrows and eyelashes, switches and the like, and other products of heading 6704

5%

Artificial nails of tariff no. 3926.90.90

5%

Imported cement

10% of the value or KShs.1.50  per  kg, whichever is higher

Furniture that is imported but not furniture from East African Community Partner States that complies with the East African Community Rules of Origin

30%

Imported cellular phones *Proposed to be reclassified from excisable services to excisable goods

10%

Imported paints, varnishes and lacquers of heading 3208, 3209 and 3210

15%

Imported Test liner of heading 4805.24.00

25%

Imported fluting medium of heading 4805.19.00

25%

Imported articles of plastic of tariff heading 3923.30.00 and 3923.90.90

10%

Pasta of tariff 1902 whether cooked or not cooked or stuffed (with meat or other substances) or otherwise prepared, such as spaghetti, macaroni, noodles, lasagne, gnocchi, ravioli, cannelloni, couscous, whether or not prepared

20%

Sugar confectionary of heading 17.04

Kshs. 42.91 per kg

Imported white chocolate (heading 1704), as well as chocolate and other food preparations (tariff numbers 1806.31.00, 1806.32.00, and 1806.90.00) that contain cocoa

Kshs. 257.55 per kg

Condensates per 10001@ 20degC

N/A

Fees charged by payment service providers licensed under the National Payment Systems Act, 2011 (other than cellular phone service providers)

15%

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