THE FINANCE ACT 2019

The President of Kenya assented to the long awaited Finance Act, 2019 from the parliament on 7^th November, 2019. The Act maintained most of the provisions from the Bill.

However, the National Assembly eliminated the following provisions;

• Increase in the Capital Gains Tax;
• Widening the range of services subject to Withholding Tax;
• Capping of the interest rates;
• Withholding tax on repatriation of income from a branch to a head office.

The following tax legislations will be amended through Finance Act, 2019;

• The Income Tax Act;
• The Tax Procedures Act;
• Value Added Tax Act;
• Excise Duty Act;
• Stamp Duty Act; and
• Miscellaneous Fees and Levies Act.

Other Acts that have been amended through this Finance Act include;

• The Banking Act;
• The Retirement Act;
• The Capital Markets Act;
• Employment Act; and
• The Housing Act etc.

KEY TAX CHANGES IN THE FINANCE ACT ARE AS SUMMARIZED BELOW;

INCOME TAX CHANGES

Taxation of Digital Marketplace

The Finance Act introduces tax on income accrued through a digital market place. A digital Market Place is defined ‘a platform that enables direct interactions between buyers and sellers of goods and services through electronic means.’

The Cabinet Secretary for National Treasury will issue regulations providing the mechanisms of taxing of the digital economy.

Our Opinion

This law aims at expanding the tax bracket by tapping into the digital marketplace. This is bound to affect the many entities whose main business transactions are carried out in the digital market place. However, most countries are facing difficulties in forming and putting into practice the laws for taxing the digital economy. Given the sensitivity of the digital economy globally, we are very interested in receiving the guidelines that the CS will issue hoping that they will define clearly on how the incomes through the digital platforms will be subjected to tax. It is our hope that the regulations will align with the international best practice on digital economy by including measures proposed under the OECD Base Erosion Profit Shifting (BEPS) framework.

Effective Date 7, November.

Turnover Tax

The Finance Act has reintroduced turnover tax at a rate of 3% on the gross receipts of businesses whose annual turnover does not exceed Kshs 5 Million. Individuals liable to turnover tax are still liable to presumptive tax.

The finance Act, 2018 introduced presumptive tax at the rate of 15% of the amount payable for a single business permit or license fee issued by the county government. However, presumptive tax can be offset against the turnover tax to be paid as a credit.

Our Opinion

Turnover Tax has been reintroduced with the main target being to expand the tax collection from the informal sector. With the county governments being relied upon in revenue collection, this forum may enroll more taxpayers the informal sector.

Effective Date January 1, 2020.

Capital Gains Tax

The Finance Act has exempted gains accruing from transfer of property that is necessitated by a transaction involving incorporation, recapitalization, acquisition, amalgamation, separation, dissolution or similar restructuring of a corporate entity, where such transfer is;

• A legal or regulatory requirement;
• As a result of a directive or compulsory acquisition by the government;
• An internal restructuring within a group that does not involve transfer of property to a third party;
• In the public interest and approved by the CS in charge of National treasury.

Our Opinion

The exemption of property transfer as a result of group restructuring from tax is a welcome move which will lower the statutory costs and encourage business establishments in the country.

Effective Date November 7, 2019.

Thin Capitalization

The Finance Act exempts foreign controlling companies that implement projects under an affordable housing scheme upon recommendation by the CS for housing from thin capitalization.

This amendment is meant to encourage foreign companies to invest in the affordable housing scheme as one of the Big Four Agendas.

Effective Date January, 1 2020.

Income from Demurrage

The Finance Act has amended the income deemed to have accrued in Kenya by the non-resident ship owners to include income from demurrage and detention of containers at the port to be income derived in Kenya.

Effective Date November 7, 2019.

Compensating Tax (Untaxed Profits)

The Finance Act, 2018 repealed the compensating tax and introduced a corporate tax on dividends paid out of untaxed profits at 30%. However, it was not clear on the income that is already exempted from tax.

The Finance Act seeks to clarify the above that the income which is exempt as per the Income Tax Act is not subject to further tax where dividends are distributed out of such.

Effective Date November 7, 2019.

Home Ownership Saving Plans (HOSP)

The Act gives the Capital Markets Authority, as one of the bodies, the powers to issue guidelines or regulations regarding investing deposits in a HOSP. Additionally, a fund manager or investment bank registered under the Capital Markets Act can hold deposits under a registered HOSP.

Our Opinion

Initially, the Central Bank of Kenya would issue guidelines regarding investing deposits in a HOSP. Now the Capital Markets Authority can also give guidelines for investing under HOSP. This is a welcome move which in the long run will provide more investment opportunities to the investors.

Effective Date November 7, 2019.

Affordable Housing Relief

The Finance Act reduces the amount of affordable housing relief to 15% of the employees’ contribution but shall not exceed Kshs 108,000 per annum.

Our Opinion

This move is intended to cap the loophole where allowable persons do not get a housing relief that is higher than their contributions

Effective Date January 1, 2020

Plastic Recycling Plant

The Finance Act has introduced a reduced corporate income tax rate of 15% for the first five years from the year of commencement of companies operating a plastic recycling plant.

Our Opinion

This is a legislation intended to encourage environment conservation and plastic waste management.

Effective Date November 7, 2019

VALUE ADDED TAX

Vat on Imported Services

The Finance Act broadens the definition of supply of imported services to be applicable to persons not registered for VAT.

Our Opinion

Initially, only registered individuals would be imposed with VAT liability on imported services. However, this legislation extends the reverse charge VAT liability to all the persons importing services regardless of being registered or unregistered for VAT. It is our hope that the i-tax system will be upgraded to accommodate the non-registered individuals when accounting for Vat on imported services.

VAT on Digital Market Place Supplies

Supplies made through a digital market place will be subject to VAT.

The CS shall issue regulations and administrative guidelines for implementation of this particular provision.

Concessional Loans

The Act defines concessional loan as a loan with at least 25% grant element.

Currently, goods and services directly used in implementation of official aid funded projects are exempt from VAT. It is with this that the Act defines a concessional loan for purposes of Vat exemption.

Withholding VAT rate

Withholding VAT rate has been reduced to 2% of the taxable value on purchasing taxable supplies.

Exempt and Zero-rated Supplies

The Act exempts the following supplies from VAT;

• Electric accumulators and accessories;
• Locally manufactured motherboards;
• Imports of inputs for manufacturing of motherboards;
• Plant, machinery and equipment used in construction of plastics recycle plant;
• Supply of maize (corn) flour, cassava flour, wheat or meslin flour or maize flour containing cassava flour by more than 10% weight;
• Goods imported or purchased locally for the direct and exclusive use on the construction of houses under the affordable housing scheme approved by the Finance CS;
• Musical instruments and other other musical equipment imported or purchased locally, for exclusive use by educational institutions, upon recommendation by the CS for Education.

The following supplies are limited in VAT exemptions;

• Equipment and accessories for development and generation of solar and wind energy will be exempt, upon recommendation by the CS for Energy;
• Exempt tractors will not include road tractors for semi-trailers. The latter will now be subject to VAT;
• Securities brokerage services will now be VAT exempt.

Zero Rated Supplies

The following items will now be zero rated;

• Supply of liquefied petroleum gas including propane;
• Agricultural pest control products.

Effective Date November 7, 2019.

EXCISE ACT

Excise Duty Rates

The following are the key changes in the excise duty rates

Description	From	To
Electronic cigarettes	Shs 3,318.53/unit	Shs 3,787/unit
Cartridge for use in electronic cigarettes	Shs 2,212.36/unit	Shs 2,525/unit
Cigarettes with filters (hinge lid and soft cap)	Shs 2,765.45/mile	Shs 3,157/mile
Cigarettes without filters (plain cigarettes)	Shs 1,990.49/mile	Shs 2,272/mile
Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes	Shs 11,061.78/Kg	Shs 12,624/Kg
Other manufactured tobacco and manufactured tobacco substitutes	Shs 7743.25/Kg	Shs 8,837/Kg
Wines and other alcoholic beverages obtained by fermentation of fruits	Shs 165.93/Litre	Shs 189/Litre
Spirits of un-denatured ethyl alcohol; alcoholic strength exceeding 10%	Shs 221/Litre	Shs 253/Litre
Imported white chocolate(bars, slabs, blocs)	Shs 20/kg	Shs 200/kg
Imported motor vehicles (>1500 cc)	20%	25%
Motor vehicles for transport of persons (including station wagons and racing cars)	30%	35%
Electric powered motor vehicle	20%	10%
Imported Gas Cylinders	NA	35%

 

Betting Activities

The Act has introduced a 20% excise duty on any amount wagered or staked. In relation to excisabe betting services, the Act has defined ‘amount wagered or staked’ as the amount placed by an individual for an outcome/result in a bet.

Our Opinion

This is a burden in the betting industry with the government aiming to curtail the betting activity that is widely spread among the youths.

Definition of ‘Other Fees’

The Act has specified the fees charged by financial institutions that is exempt from excise duty to include fees or commissions earned in respect of a loan or any share of profit. It further exempts insurance premiums or premiums based or related commissions specified under the Insurance Act or subsidiary regulations.

Our Opinion

In our opinion, the Act is aiming at demystifying the ambiguity brought about in the definition of other fees, which has been a contentious bond between the financial institutions and the Kenya Revenue Authority for a long time.

General Penalties

The Act has introduced a general penalty imposed for any contravention of any provision in the Excise Act up-to or not exceeding Kshs 2 Million or imprisonment for a term not exceeding 2 years or to both with an aim of enhancing compliance.

TAX PROCEDURES ACT

Personal Identification Number (PIN)

The Act empowers the Commissioner to exempt any person or class from the requirement of a PIN for any transaction specified in the TPA. This is upon the person making an application to the Commissioner with a request for the exemption.

Our Opinion

In our opinion, this provision will ease the business operations especially for the foreigners or non-residents who require bank accounts for their operations in the country. Initially, having a Pin was mandatory for opening of bank accounts.

Tax Decision

The Act has amended the TPA by allowing the Commissioner to issue an Objection decision beyond the 60 days period where the taxpayer does provide additional information for assessment.

 

Our Opinion

Initially, a response to an objection was within 60 days from the date the taxpayer filed an objection notice. With this amendment, KRA is able to extend the period beyond 60 days, as the process could be faced by technicalities or the additional information could help the Commissioner in resolving the disputes. On the other hand, this amendment leaves the Commissioner open to delaying in issuing an Objection Decision to the taxpayer.

 

Late Submission Penalty

The Act has amended the TPA such that the penalty for late submission of the tax return will be calculated after any amounts of the tax and withholding tax already paid have been set off.

 

Our Opinion

The penalty paid for late submission of a tax return was punitive to the taxpayer especially those who had paid principal tax without submitting the tax return or had some withholding tax credits in their portal. This provision intends to harmonize the ambiguity that existed with regards to penalty for late submission of tax returns.

 

Amnesty for companies listed under the Growth & Enterprise Market Segment of the Securities Exchange

The Act has granted a tax amnesty on tax penalties and interest charges recovered from companies prior to two years to listing with the Growth & Enterprise Market Segment of the Securities Exchange in Kenya provided the principal tax is paid in full, they have not been assessed or in tax audits and will make full disclosure of its past income, assets and liabilities for the two years.

 

Our Opinion

This provision is meant to boost the growth of the country’s economy. The SMEs are expected to have easy access to capital and thus a ripple growth both in the SME sector and the economic growth of the country wholly.

 

Tax Shortfall Penalty

The Act has amended the Tax Procedures Act by deleting the tax shortfall penalty as a result of omission whether deliberate or non-intentional. Initially, a 20% penalty rate was applicable on the tax shortfall.

 

Effective Date November 7, 2019.

 

Failure to Deduct Withholding Tax

The Act amends the TPA by introducing a new provision that gives the Commissioner the power to recover taxes from a person who does not deduct or withhold tax and remit to the KRA.

 

MISCELLANEOUS FEES AND LEVIES ACT

Concessional Loan

The Act defines concessional loan as any loan that has at least twenty five percent grant element.

Import Declaration Fee

The Act increases the import declaration fee from 2% to 3.5% of the customs value of goods imported for home use/ finished goods.

The Act has also reduced the import declaration fee form 2% to 1.5% charged on custom value of the following;

• Raw materials and intermediate products imported by approved manufacturers;
• Raw materials and intermediate products imported by manufacturers approved by the CS on the recommendation of the CS responsible for matters relating to the industry;
• Input for construction of houses under affordable housing scheme approved by the CS on recommendation of the CS responsible for matters relating to housing.

Railway Development levy

The Act increases the Railway Development Levy for customs value of goods imported for home use/finished products from 1.5% to 2%.

The Finance Act has retained the Railway Development Levy retained at 2% charged on the custom value of the following;

• Raw materials and intermediate products imported by manufacturers approved by the CS for Treasury upon recommendation by the CS responsible for matters relating to the industry;
• Input for construction of houses under affordable housing scheme approved by the CS for National treasury upon recommendation by the CS responsible for matters relating to housing.

Anti-Adulteration levy

The Act has allowed licensed or registered manufacturers to qualify for a refund of anti-adulteration levy paid with respect to illuminating kerosene used to manufacture paint, resin or shoe polish.

The anti-adulteration levy on all illuminating kerosene imported for home use was introduced by the Finance Act 2018 at the rate of Kshs 18 per litre on the custom value. With the Finance Act 2019, manufacturers are allowed to claim for a refund on a written application.

STAMP DUTY ACT

In order to promote the affordable housing under the Big Four Agendas, the Act has amended the Stamp Duty Act by exempting from stamp duty the transfer of a house constructed under an affordable housing scheme from the developer to the National Housing Corporation.

Effective Date November 7, 2019.

THE BANKING ACT

Rate Capping Law

The Finance Act has lifted the interest rate cap by amending Section 33B of the Banking Act that previously limited financial institutions to set a maximum interest rate chargeable at no more than 4% of the prescribed rate by the CBK.

With the repeal of this interest rate cap, micro, small and medium sized enterprises will have easy access to credit facilities. As a result, the share price for the financial industry is expected to rise.

 

Prepared by;

 

Erastors Chogo

erastors@ronaldsassociates.co.ke

+254 703 764 367

 

 

Disclaimer

The content herein this newsletter is intended to be of general use only and does not constitute professional advice. Ronalds LLP accepts no liability rising from anyone depending on this content for their actions without appropriate professional advice.