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Kenya issues 2018/2019 budget

Executive summary

On 14 June 2018, Kenya’s Treasury Cabinet Secretary presented the 2018/19 Budget (the budget). The theme of the budget, “creating jobs, transforming lives and sharing prosperity,” underpinned the Government’s Big Four agenda of boosting manufacturing activities, enhanced food and nutrition security, achieving universal health coverage and supporting the construction of at least 50,000 affordable houses by 2022.

The following proposals were made by the Treasury Secretary through the Finance Bill, 2018. The dates the proposals come into effect are noted.

Detailed discussion

Business tax

Definition of dividend income enhanced

The definition of what constitutes dividends has been enhanced in the Bill to include any amount paid by a company on behalf of its shareholder or a person related to the shareholder, such as debts or other obligations. Under the Bill, transfer pricing adjustments that result in additional taxable income or reduced losses are also deemed as a dividend distribution.

The proposal seeks to ensure that there is no loss of revenue in regards to the distribution of dividends to shareholders.

Effective date: 1 July 2018

Compensating tax

The Bill proposes a reduction in the compensating tax rate from 43% to 30%. Previously, the law required taxpayers to maintain a dividend tax account (DTA) to monitor the amount of dividends that could be paid without triggering compensating tax. The Bill proposes to levy the tax on any untaxed gains or profits, and effectively removes the requirement to maintain a DTA.

Notwithstanding the reduced tax rate, this amendment may end up being more punitive during the transition as it does not take into consideration any past payments of tax.

Effective date: 1 January 2019

Withholding tax amendments

The Treasury Secretary proposes to introduce withholding tax on demurrage charges and insurance premiums (with the exception of premiums on aircrafts) paid to nonresidents at the rate of 20% and 5% respectively.

The move is aimed at creating a level playing field for Kenyan business in the transport sector, as well as taxing revenues from the well-established and developed general insurance business.

Effective date: 1 July 2018

CGT amendments

The Bill has clarified that the CGT is applicable on the transfer of property by general insurance business.

Effective date: 1 July 2018

Introduction of presumptive tax

The Bill has eliminated the turnover tax and introduced a presumptive tax for persons whose annual turnover does not exceed KES5 million. The presumptive tax is set at 15% of the value of a business. The tax, payable by resident persons issued with, or liable to be issued with a business permit or license by a county government will be due at the point of applying for the permit.

Taxpayers may opt out of this regime by notice in writing to the Commissioner, in which case they revert to the usual provisions. It excludes management and professional services, rental businesses and incorporated entities.

The tax is geared towards the Government’s objective of expanding its tax base through taxation of the informal sector.

Effective date: 1 January 2019

Incentives for the manufacturing sector

In a bid to boost the manufacturing sector, the Treasury Secretary has proposed granting manufacturers a tax deduction of 130% of their total electricity expense subject to conditions set by the Ministry of Energy.

The proposal aims at reducing overheads costs for manufacturing entities.

Effective date: 1 January 2019

Special operating framework

In keeping up with its commitment to attract foreign investors; the Treasury Secretary seeks to introduce a preferential tax rate for investors.

It is expected that more guidance on the specific conditions and deliverables will issued by the Treasury Secretary.

Effective date: 1 January 2019

Personal tax

Proposal to expand income tax brackets

The proposal under the Income Tax Bill, 2018 to introduce a 35% tax bracket for high income earners has been dropped.

Introduction of the National Housing Development Fund (NHDF)

The Bill proposes the introduction of a contributory fund, the NHDF. The contribution will be made by both the employer and employee, each set at 1% of the employee’s monthly earnings, to a maximum of KES5,000.

Effective date: 1 October 2018

Tax Procedures Act

Penalties and interest

The late submission of an individual return will attract a penalty of 5% of the amount of tax outstanding under the return or KES2k, whichever is higher.

The Bill also introduces a late tax payment penalty of 20% and simple interest will increase to 2% from the current 1%.

A late filing penalty will not apply where an extension to file a return has been requested.

Effective date: 1 July 2018

Extension to file return

The Act has been amended to provide specific timelines, as follows, for making this application:

  • Application for extension to be made at least 15 days before the due date for a monthly return and 30 days for an annual return.
  • Commissioner to respond to the application five days before due date of filing with approval subject to reasonable cause.
  • Failure by the Commissioner to respond to the application means the application is granted.
  • An applicant is allowed one extension in respect of a tax period.

Effective date: 1 July 2018

Extension of the tax amnesty return filing period for investors in the diaspora

The Bill proposes to extend the tax amnesty return filing date to 30 June 2019.The current tax amnesty covers the period ending on or before December 2017.

Further, repatriated funds are to be excluded from provisions of the Proceeds of Crime and Anti-Money Laundering Act, 2009 and other Acts relating to the investigation of financial transactions.

The uptake of the amnesty has not been good. The proposal therefore aims to give taxpayers a chance to declare income earned outside Kenya without being penalized, especially those who feared investigation. This provision appears to require to be backed by a substantive policy review and broader legal re-thinking in order to achieve its objective.

Effective date: 1 July 2018

Tax representatives

The Bill has clarified that where a taxpayer has more than one tax representative, each representative shall be responsible for the tax obligation for which they have been appointed.

The proposal gives more clarity on the extent of the liabilities of a tax representative.

Effective date: 1 July 2018

Objection to tax assessment

With respect to filing a notice of objection, the Finance Bill proposes to allow a taxpayer to apply for an extension of time to pay the undisputed tax amount.

This is a positive development as it will minimize financial constraint on taxpayer while allowing the taxpayer to submit a valid objection.

Effective date: 01 July 2018

Penalty on late payment of Value Added Tax (VAT) & Excise duty

The Bill proposes to introduce a late submission penalty for VAT and Excise duty at the rate of 5% of the tax payable subject to a minimum of KES10,000.

The proposal clarifies the penalties applicable for VAT and excise duty.

Effective date: 1 July 2018

Remission of penalties and interest

For remissions of penalties and/or interest exceeding KES1.5 million, the Bill proposes that the Commissioner is to seek prior approval from the Treasury Secretary.

If the amendment is enacted, the proposal may delay the process of remission of penalties and interest.

Effective date: 1 July 2018

VAT

All proposals come into effect on 1 July 2018 unless otherwise noted.

Change of VAT status

The following list of items that were previously exempt will now be subject to VAT:

  • Maize (corn) seed of tariff no. 1005.10.00 – This is contrary to the pillar of food security agenda.
  • Garments and leather footwear, manufactured in an export Processing Zone at the point of importation.
  • Transportation of cargo to destinations outside Kenya, this was exempt in April 2017 to avert a possible crisis in the sector. Prior to that the VAT status was ambiguous.
  • Medicaments containing alkaloids, which falls under tariff no 3004.40.00.
  • Petroleum products that were previously exempt for a transition period of two years become taxable with effect from 1 September 2018, unless the period is extended under the Finance Act. This will adversely affect all the sectors of the economy.

The list of exempt goods falling under the Part A of the First Schedule to the VAT Act, 2013, was expanded to include the following:

  • Seed of tariff heading 1001 which includes wheat and meslin seeds and 1003 which includes barley seeds.
  • Cereals straws and husks, unprepared, whether or not chopped, ground, pressed or in the form of pellets of tariff number 1213.00.00.
  • Lucerne (alfalfa) meal and pellets of tariff number 1214.10.00.
  • Beet-pulp, bagasse and other waste of sugar manufacture of tariff 2303.20.00.
  • Plant and machinery of chapters 84 and 85 used for the manufacture of goods.
  • Specialized equipment used for development and generation of solar and wind energy including deep cycle batteries which use or store solar power. This is aimed at promoting green energy.
  • Exemption on hospitals expanded to include equipment and outpatient facilities which were previously not covered.
  • Parts imported or purchased locally for the assembly of computers subject to approval by the Cabinet Secretary of the National Treasury or Cabinet Secretary for Information Technology.
  • Exemption expanded to include equipment for construction of grain storage, upon recommendation by the Cabinet Secretary responsible for Agriculture. This is aimed at ensuring food security.
  • Supply of beverages for the Kenya Defense Forces Canteen Organization.
  • Goods imported or purchased locally for direct and exclusive use in the implementation of projects under a special operating framework arrangement with the Government.

The list of exempt services falling under the Part B of the First Schedule to the VAT Act, 2013, was expanded to include the following:

  • Postal services provided through supply of postage stamps, including rental of post boxes or mail bags and any subsidiary services thereto.
  • Services imported or purchased locally for the direct and exclusive use in the implementation of projects under special operating framework arrangement with the Government.

The list of zero-rated goods falling under the Second Schedule to the VAT Act, 2013, expanded to include medicaments consisting of mixed or unmixed products for therapeutic or prophylactic uses put up in measured doses or in forms or packaging for retail sale. These include:

  • 3004.41.00 containing ephedrine or its salts
  • 3004.42.00 Containing pseudoephedrine (INN) or its salts
  • 3004.43.00 Containing nor ephedrine or its salts
  • 3004.49.00 Other

Taxable value of cellular services

The VAT Act has been amended in Section 13 to include excise duty in the taxable value for purposes of determining VAT on cellular services.

Harmonization with other tax laws

Provisions regarding unauthorized access to or improper use of tax computerized systems and interference with tax computerized systems have been deleted. This is covered under the Tax Procedures Act (TPA).

All issues regarding extension of time for submission of VAT have been transferred to TPA.

Excise Duty Act

Inflation adjustment

The Bill proposes to decrease the inflation adjustment period from “every two years” to “once every year.”

With the increasing annual inflation, the Government is keen to increase revenues annually in line with the inflation rates.

Effective date: 1 July 2018

Goods and services not liable to excise duty

The Bill proposes to repeal Section 7(5) of Act to provide clarity on what qualifies for excise duty exemption.

Effective date: 1 July 2018

Ambiguity on cancellation of licenses removed

The Bill proposes to delete Section 21(1)(d). This Section currently provides that where a license has been suspended and the taxpayer has appealed the suspension, then by extension, the license is deemed cancelled.

This is a positive development as the rejected appeal will no longer mean an automatic cancellation of the license. This ambiguity is removed.

Suspension of an excise license

Section 23 has been repealed. The new section introduces instances when the Commissioner may suspend a license without notice, including if the taxpayer:

  • Is engaged in fraud
  • Has been in possession of counterfeit stamps
  • Has violated any regulations relating to health and safety standards

Effective date: 1 July 2018

Contribution to sports, arts and the Social Development Fund

Section 36 of the Act has been amended to require the Commissioner to pay into the Fund:

  • Sixteen percent of the excise duty in respect of money transferred by cellular phone service providers
  • All excise duty resulting from money transfer services (i.e., 0.05% of money transfers of KES500,000 or more) by financial institutions

Effective date: 1 July 2018

Penalties and offenses

Section 38 is amended to introduce stricter penalties on the offense of undertaking excisable activities without a license. The proposed penalty is double the excise duty that would have been payable or KES5 million, whichever is higher. The Act is also amended to provide for forfeiture of plant or excisable goods for which an offense has been established.

This is aimed at discouraging unlicensed persons from manufacturing or importing excisable goods and to curb counterfeits.

Effective date: 1 July 2018

Excise duty rates

The bill seeks to amend and/or introduce excise duty on some goods and services as follows:

Description
Current rate
Proposed rate

Illuminating Kerosene per 1000L @ 20degC

KES7205 per 1000L

KES10,305 per 1000L

Motor vehicles of tariff no. 8703.24.90 and 8703.33.90 (private passenger vehicles of cc rating exceeding 2500 and 3000 for diesel and petrol respectively)

20%

30%

Sugar confectionery (including white chocolate) of tariff heading 17.04; chocolate in blocks, slabs or bars of tariff Nos. 1806.31.00, 1806.32.00, 1806.90.00

-

KES20 per kg

Fees charged for money transfer services by cellular phone service providers

10%

12%

Money transferred by banks, money transfer agencies and other financial service providers on amounts transferred of KES500,000 or more

-

0.05%

Expansion of the excise duty exemption list

The Bill proposes to exempt the following from excise duty;

  • Alcoholic or non-alcoholic beverages supplied to Kenya Defense Forces
  • Goods imported or purchased locally for direct and exclusive use in the implementation of projects under special operating framework arrangements with the Government

Effective date: 1 July 2018

Customs and international trade

General updates

In a bid to make local products more competitive and protect the local industry from unfair competition, several customs proposals have been submitted to the East African Community (EAC) Ministers and once pre-budget consultations are finalized, they will be communicated through the EAC gazette and implemented from 1 July 2018.

EAC Customs Management Act and EAC Customs External Tariff are undergoing comprehensive review and the final outcome will be communicated once agreed by the EAC Council of Ministers.

Proposed duty increase

The Bill proposes to increase duty on the following items:

Item
Current Duty rate
Proposed Duty rate

Iron and steel products available in the EAC region

25%

35%

Paper and paper board produced in the EAC region

25%

35%

Textile and footwear

25%

US$5 Per unit or 35% whichever is higher

Vegetable oil

-

US$500 per metric ton or 35% whichever is higher

Timber products

25%

  • US$110 per metric ton on particle board
  • US$120 per metric ton on medium density fiber (MDF) board
  • US$230 per metric ton on plywood
  • US$200 per metric ton on block boards

Or 35% whichever is higher

Duty remission

The Bill proposes the following items to qualify for duty remission:

  • Inputs and raw materials for manufacture of pesticides and acaricides to be imported under the EAC duty remission scheme.
  • Inputs and raw materials for assembly of clean energy cooking stoves by local manufacturers to be imported under duty remission 100%.

With the duty remission scheme, inputs and raw materials for pesticides manufacturers and assemblers of clean energy stoves will be relatively less expensive. This will effectively translate to competitiveness in the market and enhanced benefit by final consumers.

Duty exemption

The Bill proposes that sightseeing buses and overland trucks imported by licensed tour operators will be exempt from customs duty.

This is a positive development as it will promote the tourism sector in Kenya

Financial sector amendments

The following proposals have been made by the Cabinet Secretary for the financial sector. All proposals come into effect on 1 October 2018 unless otherwise noted.

Banking Act

The Bill has repealed Section 33B of the Act which gives the Central Bank of Kenya (CBK) power to enforce interest rate ceiling.

Cooperative Societies Act

The Act has been amended to provide for cancellation of registration of a co-operative society whose deposit taking license has been revoked under the Sacco Societies Act.

CBK Act

The CBK Act has been amended to recognize the mortgage refinancing business, which the Government plans to establish as a vehicle for implementation of affordable housing.

There are proposals to:

  • Expand the objects of the CBK to include a licensing and supervising mortgage refinance company
  • Introduce a new part providing guidelines on operation and regulation of the mortgage financing business
  • Require the mortgage refinance companies to submit information to the CBK in the prescribed manner
  • Extend the CBK mandate to include issuing guidelines, circulars and directives in addition to making regulations

Retirement Benefits Act

The Act has been amended to reduce the penalties imposed on trustee for non-compliance in relation to submission of audited accounts for the scheme to the Chief Executive Officer (CEO) of the Retirement Benefits Authority (RBA) as below:

 
Proposed penalty (KES)
Current penalty (KES)

Late filing by the due date

100,000

500,000

Penalty to accrue for each day the return remains unsubmitted

1,000

5,000

The Act has also been amended to introduce penalties to fund managers and administrators who fail to submit investment and contribution returns respectively to the CEO as follows:

 
Proposed penalty (KES)

Late filing by the due date

10,000

Penalty to accrue for each day the return remains unsubmitted

1,000

The Act has been amended to empower the RBA to intervene in instances where an employer fails to remit contributions to the scheme by the due date. The RBA will be empowered to issue collection notices, levy penalties for late remittance and issuance of cessation orders.

Effective date: 1 January 2019

The Proceeds of Crime and Anti-Money Laundering Act, 2009

The Act has been amended to expand the process of verification of customer identity to include any business relationships and transactions with any natural and legal persons, legal arrangements or financial institutions from countries identified as posing a higher risk of money laundering, terrorism financing or proliferation by the Financial Action Task Force (FATF) or the Cabinet Secretary as a result of those countries ongoing substantial money laundering and terrorism financing risk.

The Act has also been amended to include Sacco Societies Regulatory Authority (SASRA) among the supervisory bodies responsible for reporting any suspicious transactions encountered during normal course of their duties.

The following proposals were also made by the Treasury Secretary in his budget statement, but did not necessarily filter through to the Finance Bill, 2018.

Capital Markets Act

The Act is to be amended to introduce enhanced financial controls and provide for investor protection in the sector.

Financial Markets Conduct Bill, 2018

The Bill, aimed at dealing with inadequacies in consumer protection and unregulated lending in the financial sector, is currently undergoing stakeholder consultation before cabinet consideration.

Insurance Act

The Bill proposes to amend the Insurance Act as follows:

  • Introduce index-based insurance to allow higher use of insurance by farmers. Index-based insurance will provide an alternative to indemnity based insurance which is currently based on assessment of losses before compensation.
  • Criminalize insurance fraud and protect consumers.
  • Require the insured to make direct payments in respect of premiums to the insurers. This will enhance prompt coverage of the insured as compared to the use of intermediaries.

Other amendments

The Government is working with private sector and development partners to introduce a National Credit Guarantee Scheme as a policy tool to direct credit to Micro, Small and Medium Enterprises (MSMEs).

There is also a proposal to establish the Kenya Development Bank which will play a greater role in providing long term credit to MSMEs.

Also, the Bill proposes consolidation of Uwezo Fund, Youth Enterprise Development Fund and Women Enterprise Development Fund into a stronger institution – Biashara Kenya Fund.

Miscellaneous provisions

The following proposals have been made by the Cabinet Secretary of the National Treasury through the Finance Bill, 2018. All proposals come into effect on 1 October 2018 unless otherwise noted.

Betting Lotteries and Gaming Act

The Act has been amended to:

  • Provide for a 20% penalty and 2% interest on late payment of taxes.
  • Create a framework for licensing casino owners using the fit and proper test.

Stamp Duty Act

The Act has been amended to exclude from duty:

  • An instrument executed for purposes of collection and recovery of tax.
  • An instrument relating to the business activities of special economic zone enterprises, developers and operators licensed under the Special Economic Zones Act, 2015.

The Air Passengers Service Charge Act

The Act has been amended to include the Tourism Promotion Fund as one of the beneficiaries of the service charge on passengers departing by air from an airport within Kenya. Previously the beneficiaries were Kenya Airport Authority and the Kenya Civil Aviation Authority.

Public Finance Management Act, 2012

The Act has been amended to empower the Cabinet Secretary for the National Treasury and Planning to issue regulations to designate an administrator for national public funds. This is aimed at ensuring efficient and effective management of public funds.

Effective 1 July 2018

The Accountants Act

The Act has been amended to align the definition of “Minister” to mean the “Cabinet Secretary” in line with the terminology used in the Constitution.

Proceed of Crime and Anti- Money Laundry Act

The Act has been amended to:

  • Require reporting institutions to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions originating from higher risk countries.
  • Include SASRA as one of the supervisory bodies to be monitoring money laundry.

Tax Appeals Tribunal Act

To Act has been amended to streamline the time of appeal as specified in Section 55 of the Tax Procedure Act and Section 13(7) of the Tax Appeals Tribunal Act. Time taken in alternative dispute mechanisms will be excluded in calculating the stipulated time for dispute resolution under both Acts.

Effective 1 July 2018

Kenya Revenue Authority Act

The Act has been amended to provide for a mechanism for collection of surplus funds from regulatory bodies and timely payment to the National Treasury.

EYG no. 03762-181Gbl

<Download this Tax Alert as a PDF file.

 

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