The Finance Act has also given rise to major changes in the taxation regime which mirror the developments in the country’s economy and reflect the Government’s intention of ensuring such development is supported by a sufficient tax regulatory framework. The significant changes made to taxation legislation include:
Income Tax Act(ITA)
Through the Act, the Government seeks to tap into taxation of real estate income and more specifically rental income, to supplement the national budget. It has introduced Residential Rental Income Tax which will be payable by a resident person for rental income which is less than KES 10 million, in any particular year of income. Rental income will be taxed at the rate of 10% of the gross rental receipts. This means that no expenses, including interest expense shall be deducted. Landlords however have an option to elect not to pay Rental Income Tax. This can be done by notifying the Commissioner in writing. The move is not surprising given that Kenya’s property market has seen tremendous growth over the last couple of years, and is expected to remain strong in coming years.
Kenya’s budding film industry has received a major boost. Through the passing of the Act, subject to an amendment of Section 35 of the ITA, payments made by filming agents and producers(who have been approved by the Kenya Film Commission) to actors and crew members of films for an appearance or performance for purposes of entertaining an audience in Kenya will no longer be subject to withholding tax. The benefits don’t end there; any building that is in use for the training of film producers, actors or crew, shall be allowed a capital deduction at the rate of 100%.
High youth unemployment rates remain a challenge; every year, universities release thousands of Kenyan graduates into the job market. To motivate companies to take in these graduates as apprentices(and in an effort to help enhance their skills and give them a better chance at securing employment). The Act will give a tax rebate to any employer who engages at least 10 apprentices for a period of between 6 and 12 months. The Cabinet Secretary will however make regulations on administration of this rebate by making a notice in the Kenya Gazette.
Seen as one of the country’s key economic drivers, the shipping sector is one of the areas the Government is seeking to develop. More specifically it wants to encourage private entities to invest in the shipping sector. Subsequently, the shipping investment deduction has been increased from 40% to 100% on the purchase of a ship of 125 tons.
Transfer of Shares
Since 1st January 2015 upon the re-introduction of Capital Gains Tax(CGT), the transfer of shares in companies that are listed and those that are not was subject to CGT, at the rate of 5%. Sadly, this re-introduction adversely affected some key sectors in the economy including the Nairobi Securities Exchange(NSE). In an effort to mitigate these adverse effects, the Act has amended the ITA, so that the transfer of shares listed on the NSE and any other Securities Exchange that is licensed by the Capital Markets Authority(CMA) is no longer subject to CGT. It is important to note that the transfer of shares that are not listed will still be subject to CGT at the rate of 5%. It is noteworthy, that this will only take effect on 1 January 2016 and will only apply to securities transferred after this date.
Transfer of land
The ITA has been amended to the effect that if an individual transfers land whose transfer value is less than KES 3 million, the gain will not be subjected to CGT. This also applies to the transfer of agricultural land which is less than 50 acres, where it is located in a municipality, gazetted township or an area gazetted by the Minister(Cabinet Secretary of Land, Housing and Urban Development) to be an urban area.
There is great news for companies which are in a tax loss position; the Act has extended the period of utilisation of tax losses from a period of 5 years to 10 years. This legislative move will help boost the level of economic activities in Kenya by ensuring that companies have the necessary cash flow to make further investments.
As a growing economy Kenya has seen a substantial increase in its exports; to encourage investment specifically, in Special Economic Zones, the Government through the Act will tax such companies to a corporate income tax at the rate of 10% for the first 10 years and thereafter 15% for another 10 years. In addition, dividends received by Special Economic Zone Enterprises’(SEZE) developers and operators will also be exempt from taxation. An SEZE company will also be taxed at the reduced rate of 25% for the first 5 years when it introduces its shares through listing or any securities via introduction.
Deduction of Input Tax
The KRA currently owes taxpayers VAT refunds in the billions of shillings. In an effort to ensure prompt claims for refunds the VATA has been amended so that a taxpayer may claim a refund if the excess arises from the supply of zero-rated supplies. In addition, the claim for such refunds must be made within 12 months from the date the tax becomes due and payable.
Apart from Government ministries, departments and agencies, any person appointed by the Commissioner can now withhold tax of 6% upon purchasing taxable supplies and remit the same to the Kenya Revenue Authority(KRA). The 6% will be withheld on the taxable value. On a related note, the KRA Commissioner also has the right to appoint and revoke the appointment of a withholding VAT agent, where he deems it fit to do so.
The Act has made a few changes on supplies which are no longer exempt supplies this includes vaccines for human medicine, several medicaments with varying specifications. On the other hand, some items have been added to the list of exempt supplies including among others aircraft parts, plastic bag biogas digesters, biogas, leasing of biogas producing equipment, as well as:
- Taxable goods, excluding motor vehicles, imported or purchased for direct and exclusive use in implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury
- Taxable goods imported or purchased for direct and exclusive use in the construction and infrastructural works in industrial and recreational parks of 100 ha or more approved by the Cabinet Secretary for the National Treasury
- Goods imported or purchased locally for use by local film producers or film agents subject to approval by the Cabinet Secretary
- Inputs or raw materials locally purchased or imported by manufacturers of agricultural machinery and implements upon approval by the Cabinet Secretary responsible for industrialization
Under the Act supply of services that are exempt from VAT also include:
- Taxable services for direct and exclusive use in implementation of official aid funded projects
- Taxable services for direct and exclusive use in construction and infrastructural works in industrial and recreational parks of 100 ha or more
- Services imported or procured locally for use by local film producers or film agents
- Supply of sewerage services by national and county government
- Supply of taxable services to SEZEs, developers and operators
Under the Act zero-rated supplies additionally include:
- Goods purchased by duty free shops by passengers departing to places outside Kenya
- Supply of taxable services in respect of goods in transit
- Inputs or raw materials supplied to pharmaceutical manufacturers for manufacturing medicaments
- Left hand vehicles subject to certain provisos
- The medicaments excluded from the exempt supplies schedule(see VAT exempt supplies above)
Stamp Duty Act(SPA)
Real Estate Investment Trusts(REITS)
The high interest rates associated with real estate development and the undersupply of housing especially for the lower segment of the market have proven to be a challenge towards the further advancement of this sector. To remedy this, the Government seeks to encourage investments in real estate through REITS which will give Kenyans an opportunity to invest in development projects that may be out of their economic reach. In this regard, no stamp duty shall be payable on an instrument whose effect is to transfer a beneficial interest in property from one trustee to another or from a person(s) for the transfer of units in the REIT. This exemption will only apply in respect to instruments executed before 31 December 2022.