FINANCE BUDGET 2020/21 | Audit and Accounting Firm in Kenya

FINANCE BUDGET 2020/21

STIMULATING THE ECONOMY TO SAFEGUARD LIVELIHOODS,
JOBS, BUSINESS AND INDUSTRIAL RECOVERY. The Kenya Finance budget 2020/2021.

The financial and tax highlights from the budget speech as presented by 

Cabinet Secretary for National Treasury and Planning.

Introduction.

On 11th June, 2020, the Cabinet Secretary for National Treasury and Planning, Hon. (Amb.) Ukur Yatani presented the budget for the financial year 2020/21 to the National Assembly as fulfillment of the requirements of Section 40 of the Public Finance Management Act of 2012.
The budget was themed ‘Stimulating the Economy to safeguard Livelihoods, Jobs, Business and Industrial Recovery’.
The budget targets revenue collection and appropriation in aid amounting to Kshs 1.89 trillion in the financial year 2020/21. The ordinary revenues are projected at Kshs 1.63 Trillion. This indicates the current target for the Kenya Revenue Authority for the Financial Year 2020/21.
On the other hand, the total programmed spending as projected amounts to Kshs 2.79 trillion in the financial year 2020/21. In February 2020, the budget policy statement was submitted to the house with initial financial projections assumed to grow by 6.1% assumed to grow under normal environment this is an improvement from 5.4% in 2019. However, the outbreak of the COVID-19 pandemic globally led to the contraction off the global economy, out of which Kenya was not spared. As a result, the government of Kenya intervened with constraining measures put in place to mitigate its spread, protect lives and its adverse effects to businesses and the economy at large.
Other than the pandemic, the CS recognized other stumbling blocks in the economy which included the locusts invasion and the recent flooding in the country. The government of Kenya put in place relief measures through cash injections and provisional measures aimed at increasing the disposable incomes to the people and businesses.
These measures include;
  • Employees earning a gross salary of Kshs 24,000 will receive a 100% tax relief.
  • The maximum PAYE tax band has been reduced from 30% to 25%.
  • The resident corporate tax has been reduced from 30% to 25%.
  • For the micro, small and medium enterprises, Turn Over Tax has been reduced from 3% to 1% with the threshold for qualifying increased from Kshs 5 Million to Kshs 50 Million.
  • The VAT was reduced from 16% to 14% with the medicaments being exempted from VAT.
  • For VAT refunds amounting to Kshs 10 Billion, KRA shall expedite on processing and paying the same.
  • The Central Bank Rate has been lowered from 8.25% to 7.0%.
  • The cash reserve rate has also been lowered from 5.25% to 4.25%.
  • The government convened all the commercial banks and had an agreement allowing the banks to restructure the non-performing loans as a result of the covid-19 pandemic for its borrowers and extending their payment periods.
  • There is an order to temporarily suspend the listing of individuals, MSMEs and corporate entities on the Credit Reference Bureau.
  • Government provided Kshs. 13.1 billion to settle verified pending bills owed by Ministries and the Departments. The Government allocated Kshs 1 Billion to recruit health workers.
  • The Government allocated Kshs 400 Million for food and non-food commodities for affected households.
  • The government rolled out a Covid-19 Emergency Response kitty to receive voluntary donations and contributions from the well-wishers.
  • The government also rolled out the ‘Kazi Mtaani Programme’ designed to improve public hygiene standards and so far, 26,000 youths have been engaged.

THE BUDGET ANALYSIS

Inside the 2.7 trillion

As themed above, budget 2020/21 Is aimed at creating and protecting jobs, stimulating industrial growth and ultimately steer economic recovery.In order to boost the economy;

First, the government purposes on implementing the 8-Point Economic Stimulus Programme previously announced by the H.E the President in order to stimulate growth and cushion families and companies against the Covid-19 pandemic.

Second, the government intends to coordinate the fiscal, monetary and financial polices to lower the cost of living and doing business and thus maintain the macroeconomic stability, economic growth and development. The CS announced that the government will manage the public debt in order to minimize the cost and risks of the portfolio while accessing external concessional funding to finance development projects.

Third, the government shall promote ‘Buy Kenya Build Kenya’ initiative by expanding opportunities available to the local enterprises and Micro, Small and Medium enterprises.

Fourth, the government shall budget allocations to the drivers and Enablers under the Big 4 Agenda.

Fifth, the government shall enhance allocations to support development of roads, rail, energy and water in order top reduce the cost of living.

Sixth, the youth, women and persons with disabilities shall be actively supported in this economic recovery journey.  Seventh, the government shall enable the access to education, strengthen the health care systems and enhance cash transfers to support the vulnerable individuals in the society by scaling up the resource allocations.

Eighth, support the county governments by strengthening their systems to enhance service delivery to the public.

Ninth, to implement structural reforms that enhance efficiency of public service delivery and ensure accountability for better macroeconomic stability, fiscal stability, fiscal discipline and minimized corruption.

In order to sustain the efforts towards the full recovery of the economy, the government is developing the post covid-19 recovery spearheaded by H.E the President which is aimed at accelerating the economic recovery and providing the roadmap for transition to new development framework beyond the current vision 2030. The Post Covid-19 Economic Recovery Strategy will focus on;

  • Sound macroeconomic policy framework to support a higher sustainable economic growth that will address the challenges of poverty, unemployment and income inequality;
  • Adequate local and foreign resource mobilization to ensure sustainable funding of our development programmes;
  • Enhancing the role of the private sector in the economy, including financing infrastructure projects from diverse sources such as Public Private Partnership and lease financing; 
  • Supporting Micro, Small and Medium Enterprises by facilitating access to adequate finances through the Credit Guarantee Scheme; 
  • Full and timely implementation of the Economic Stimulus Programme which will create jobs and stimulate businesses; 
  • Investment in ICT and digital infrastructure to support the use of digital platforms to facilitate e- commerce and efficient delivery of public services;
  • Promotion of local production processes and domestic supply value chains;
  • Enhancement of disaster risks management systems;
  • Improvement of social-protection through targeted policy interventions and programmes; and
  • Strengthening Monitoring and Evaluation System for quality outcomes of the projects

The Eight Point Economic Stimulus Program.

Through this programme, the government aims to cushion Kenyans and Kenyan own businesses from the difficult cash flow problems and unemployment, which are the two major issues that they are facing during this crisis. The total stimulus package is Kshs. 56.6 Billion to be distributed in the following sectors respectively;

INFRASTRUCTURE DEVELOPMENT.

Due to the ongoing rains, roads have been drastically affected, floods have rendered millions of people homeless. To address this, Kshs. 5 Billion will be used to hire local labour and buy local construction material from micro and small enterprises for the purpose of rehabilitating roads, footbridges and other public infrastructure.To address the issue of youth unemployment and empowerment in urban informal settlement, the government has allocated Kshs. 10 billion under the ‘Kazi Mtaani Program’ which targets to employ 200,000 youths.

EDUCATION

A total of Kshs. 7.4 Billion has been allocated to the Ministry of Education for the purpose of hiring 10, 000 teachers and 1, 000 ICT Interns in order to support digital learning. In addition, the programme seeks to improve school infrastructure through acquisition of 250, 000 locally fabricated desks in order to support the local artisans and builders’ businesses.

MICRO, SMALL AND MEDIUM ENTERPRISES (MSMEs)

The Small and Medium enterprises have been adversely affected more so due to liquidity issues. Through this programme, it aims to deal with this sector in two ways; Kshs. 3 Billion will be injected as Seed Capital for the SME Credit Guarantee Scheme so as to provide affordable credit to the SMEs and another Kshs. 10 Billion to fast-track payment of VAT refunds.

HEALTH-CARE

The Ministry of Health intends to hire an additional 5, 000 healthcare workers with diploma/certificate level of qualification for a period of one year. This will not only enhance the COVID-19 response capability but also, it will be in furtherance of the implementation of the Universal Health Coverage (UHC) programme. In addition, Kshs. 1.7 Billion will be injected for the purpose of expansion of bed capacity in public hospitals, walk-through sanitizers at our border points and across main hospitals across the country.

AGRICULTURE & FOOD SECURITY

The stimulus programme will revitalize the agriculture sector through Kshs. 3 Billion set aside for subsidizing farm inputs supplies through e-vouchers targeting 200, 000 small scale farmers. A further Kshs. 3.4 billion has been set aside for expanded community household irrigation.
Moreover, Kshs. 1.5 Billion will be to assist the horticulture producers to access international markets. These measures aim to help secure food security.

TOURISM

Soft loans will be provided to hotels and related establishments through the Tourism Finance Corporation (TFC). A total of Kshs. 3 Billion will be allocated to support renovation of hotels and restructuring of business operations in the industry. The programme will also engage 5,500 community scouts under the Kenya Wildlife Service and additionally 160 community conservancies at a cost of Kshs. 2 Billion .
The government has also waived landing and parking fees at our airports in order to facilitate movement of cargo, in and out of Kenya.

ENVIRONMENT, WATER & SANITATION FACILITIES

For the purpose of rehabilitation of wells, water pans and underground tanks in the Arid and Semi-Arid areas Kshs. 850 Million will be set aside, for the purpose of flood control measures, Kshs. 1 Billion and Kshs. 540 Million for the Greening Kenya Campaign. This will help mitigate the impact of deforestation and climate change.

MANUFACTURING

In furtherance of the “Buy Kenya Build Kenya” initiative, an initial investment of Kshs. 600 Million will be set aside for the purpose of purchasing locally assembled vehicles. This is expected to sustain the operations of local motor vehicle manufacturers, and the attendant employment of workers. A further Kshs. 712 million is intended to be set aside to provide credit targeted to MSMEs players in the manufacturing sector.

STRUCTURAL REFORMS

Several structural reforms have been introduced through this budget in order to enrich the business environment and improve the service delivery to the public. Public Procurement and Asset Disposal Regulations, 2020 The Public Procurement and Asset Disposal Act of 2015 has been operating without the supporting regulations.  The regulations of 2020 have been introduced to enhance uniformity of operations across the Procuring entities and promote the local economy.
Contracting Framework

The government is reviewing the contracting framework for the construction sector to ensure that it engages local contractors more unlike previously where most of these contractors were foreigners. This is aimed at ensuring that the revenue received from these kinds of contracts is retained within the country.
Pension Reforms
The government shall clear all the pension payment backlog by end of the calendar year.
The government is also formulating a National Retirement Benefit Policy that will strengthen the legal and regulatory framework to achieve a comprehensive pension coverage across the formal and informal sectors for the beneficiaries and the contributors.
The government is also establishing a National Micro Pension Scheme that targets to serve the informal sector.
The CS proposed to introduce sanction clause in the Retirement Benefit Act that will impose penalties to Pension Schemes that fail to submit actuarial valuation reports to the authority within the specified timelines.
Capital Markets Reforms
The government proposes to amend the Capital Markets Act to remove the function of payment to the beneficiaries from collected unclaimed dividends. This is because this function is currently incorporated under the Unclaimed Financial Assets Authority (UFAA).
Pending Bills
The government has directed all Principal Secretaries and Accounting officers to clear all pending bills. Further to this, the government may withhold exchequer releases to government agencies with pending bills without approved payment plans.

Fiscal Projections for the Budget 2020/21

Revenues

The government has targeted to collect a revenue of Kshs 1.89 trillion, with KRA contributing an amount of Kshs 1.63 trillion.

Expenditures

Projected total expenditure under this Budget amounts to Kshs. 2.77 Trillion.
The Recurrent Expenditures amount to Kshs. 1.82 trillion.
Allocations to the county governments is projected at Kshs. 633.1 billion.
The fiscal deficit from the above expenditure vs revenues, inclusive of grants is projected to be Kshs 840.6 billion.

Expenditure Allocations

Description Amount
Big Four Agenda Kshs 128.3 billion
Universal Health Coverage Kshs 111.7 billion
Affordable Housing Kshs 15.5 billion
Manufacturing Kshs 18.3 billion
Food and Nutrition Security Kshs. 52.8 Billion
Infrastructure Kshs. 172.4 billion
Security and Protecting Borders Kshs. 167.9 billion
Education System Kshs. 497.7 billion
Vulnerable members of the society Kshs. 26.6 billion
Equity, Poverty Reduction, Women and Youth Empowerment ( NYS) Kshs. 64.229 billion
Information Communication Technology ( digital economy) Kshs. 14.9 billion
Sports, Arts and Social Development Fund Kshs. 14.0 billion
Tourism Promotion Fund Kshs 2.5 billion
Tourism Fund Kshs 3.8 billion
Environmental Protection, Water and Natural Resources Kshs. 98.1 billion
Ethics and Anti-corruption Kshs. 20.2 billion
Judiciary Kshs 18.1 billion
Parliament Kshs 38.3 billion
County Governments Kshs. 369.9 billion
Nairobi Metropolitan Services Kshs. 26.4 billion

TAX PROPOSALS AND MISCELLANEOUS AMENDMENTS

Income Tax Provisions

Residential Rental Income

The Cabinet Secretary proposes to increase the residential rental income tax maximum threshold from Kshs 10 Million to Kshs. 15 Million.

Our Opinion

From 1 January 2016, the government introduced a simplified income tax regime for landlords with residential incomes between 144,000 to 10 Million per year. With the threshold being increased to Kshs 15 Million, this is a welcome move especially after the recent directives by the government encouraging landlords to waive rents for their tenants who could not afford rent as a result of the Civid-19 pandemic.

Minimum Tax

The Cabinet Secretary proposes to introduce minimum tax at 1% which will be payable by companies that declare losses.

Minimum tax will be payable at 1% rate on the gross turnover.

Our Opinion

In countries like Tanzania and Nigeria, there are such similar regulations that tax entities that have been making losses for a number of years. However, there are policies and grace periods given to starting companies for a period of between 1 to 5 years of operation since inception.

With a benchmarking from the other countries, a 1% is quite on the higher end and thus more punitive.

In as much as the introduction of minimum tax is aimed at taxing loss making businesses and expand the revenue channels for the government, It is absurd that this provision is introduced when the covid-19 pandemic has adversely affected many businesses.

It is quite disturbing that there are other tax incentives such as capital deductions that have been allowed by the Income Tax Act, whereas on the other hand, the government is taxing these entities through minimum tax. It is our urge that this provision is put in halt and a further benchmarking is done so that more policies regarding the same can be formulated for effectiveness.

Digital Service Tax

The Cabinet Secretary proposes to introduce Digital Service Tax on income deemed to be derived in Kenya through a digital marketplace.

The digital service tax will be applicable at the rate of 1.5% on the gross transactional value withheld at the point of making a payment to the service provider.

Our Opinion

Taxation of income through the digital marketplace was introduced by the Finance Act, 2019 which was subject to further regulations from the CS for National Treasury for effective implementation by the taxpayers. However, with the delays in publishing there regulations indicate how difficult it is going to be in implementing the taxation of incomes via digital market place.

With the recent trends after the effects of the Covid-19 pandemic, most businesses have switched to rely mostly on online business transactions which have been completed via a digital marketplace.

However, with this provision, the government intends to capitalize on the digital transformation for many businesses and thus increase in their revenue collection.

This provision is not clear on how the tax will be collected and remitted and the ultimate due dates for the same. As much as we expect further guidelines in order to ensure seamless implementation of these provisions, this will definitely bring an additional tax liability to most businesses that seal their transactions via digital marketplace.

Value Added Tax Provisions

Voluntary Tax Disclosure Program

The Cabinet Secretary proposes to change the VAT status of the following items from vatable to exempt as shown below;
Standard Rate Supplies to Exempt Supplies
ItemProposed RateCurrent Rate
Ambulance servicesExempt14%
Maize or corn seedsExempt14%

Our Opinion

By exempting ambulance services and maize(corn) seeds, the CS aims to cushion Kenyans from the high costs of such services and make the latter affordable to the farmers.

As much as the CS has the interests of the Kenyan observed, exempting these supplies does not make them any more affordable to the final consumer. This is because, exempting such products and services restricts the final consumer from claiming any Vat input on the same and thus, the status quo of the final VAT payable remains.
We hope that the CS puts a further consideration into zero-rating the above supplies.

Tax Procedures Act

Voluntary Tax Disclosure Program

The Cabinet Secretary proposes to introduce a Voluntary tax Disclosure Program for a period of three years for tax liabilities accrued within the last five years for taxpayers who inadvertently made omissions in their tax returns.
Taxpayers volunteering for this program will be waived of penalties and interest from non-compliance on the tax disclosed after payment of the principal tax.

Our Opinion

It is understood that this provision is aimed at enhancing compliance and that the Kenya Revenue Authority does collect the outstanding tax arrears from the taxpayers.

However, this tax amnesty to the local taxpayers is a welcome move considering the penalties and interest charges will be waived under this program.

Public Roads Toll Act

Grounds for Tax Appeals

The Cabinet Secretary proposed to amend the Public Roads Toll Act to enable the persons who enter into agreement through the Pubic Private Partnership arrangement with the government to collect road tolls on roads constructed and managed under such agreements.

Our Opinion

This is a welcome move since it encourages more investments through the Public Private Partnership arrangements with the government.

Miscellaneous Fees and Levies Act

Import Declaration Fees and Railway Development Levy (IDF & RDL)

The CS seeks to boost the budget allocations to the Kenya Defence Forces by proposing to exempt from the Import Declaration Fee and Railway Development Levy on all goods, including materials, suppliers, equipment, machinery and motor vehicles imported for the official use by the National Police Service and the Kenya Defence Forces.

Our Opinion

Exempting these goods and supplies from the IDF and RDL is a welcome move since this reduces the cost of importation and thus boosting the security system of the country through the National Police Service and the Kenya Defence Forces.

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