The Finance Bill, 2023 (“the Bill”) was published on 28th April 2023 and has already been referred to the Departmental Committee on Finance and Planning of the National Assembly for consideration and reporting to the House.
Proposed amendments affecting the Income Tax Act
Expansion of interest subject to owner-occupied interest deduction
The Bill proposes to include any interest paid to mortgage refinance companies licensed under the Central Bank of Kenya to qualify for owner-occupied interest deduction. Tax resident persons are allowed to deduct interest paid up to a maximum of KES 300,000 on an amount borrowed from a specified financial institution to purchase or improve the premises occupied by the person for residential purposes.
The proposal aims to encourage resident persons to take up mortgage facilities provided by the Kenya Mortgage Refinance Company through providing for the tax deductibility of interest payment.
Taxation of Membership Clubs and Trade Associations
The Bill proposes to bring to tax the gross receipts on revenue for membership clubs and trade associations other than joining fees, welfare contributions and subscriptions. Currently, the ITA exempts taxation of membership clubs from income tax provided that more than 75% of such gross receipts, other than gross investment receipts from the members of such clubs. Trade Associations, on the other hand, elect by notice in writing to the Commissioner in respect of any year income to be deemed to carry on business chargeable to tax.
The proposal seeks to provide clarity and align the taxation of both membership clubs and trade associations. This will relieve cashflows that will be used to advance the members’ common interests
Introduction of a new Tax Band
The Bill proposes to introduce a super tax band at the rate of 35% targeting high-income earners whose income exceeds KES. 6,000,000 per annum. This will result in the government collecting more taxes from high-income earners.
However, the anticipated increase in revenue will be negligible since the majority of employees in Kenya earns below KES. 120,000 per year. The proposed change will also affect Sole proprietors making a profit of above KES.6M per year. This will also encourage the sole proprietors to convert to the limited companies taxed at 30% income tax rate.
Reduction of the Income Tax Rate for Branches and other Permanent Establishments
The Bill proposes to lower the tax rate levied on Branches and other Permanent Establishments (PEs) operating in Kenya from the current rate of 37.5% to 30% on their taxable gains. The proposal will act as an incentive to Branch offices of non-resident persons operating in Kenya and other Permanent establishments.
Repeal of Tax exemptions on Trust Income
Whereas the Finance Act, 2021 introduced tax exemptions on amounts paid by a registered trust to a beneficiary, provided the amount is less than KES 10 million and is used exclusively for the purpose of education, medical treatment or early adulthood housing or any amount as the Commissioner may prescribe, the finance Bill (2023) proposes to repeal the above exemption and therefore, any payments from a registered trust to the beneficiaries will be taxable.