In a move to salvage some key fiscal reforms, the Tax Laws Amendment Bill 2024 was introduced in the National Assembly. Designed to go through the standard Money Bill process as per Article 114 of the Income Tax Act, this bill seeks to reintroduce beneficial proposals initially part of the Finance Bill 2024, which was withdrawn after facing strong opposition. The new bill responds to public backlash and youth-led protests and aims to reinstate certain tax provisions while addressing previous concerns. Key reintroduced measures include:
- Introduction of a Minimum Top-Up Tax
- Expansion of allowable pension and mortgage contributions
- Exemptions on pension scheme withdrawals
- Revised VAT rates for select products
This article provides an in-depth analysis of the proposals outlined in the bill.
1. Income Tax
A) Corporate Income Tax Proposals
| Proposal | Details | Commentary |
|---|---|---|
| Amendment of Individual Retirement Fund Definition | Exempts retirement funds from mandatory registration with the Commissioner; only RBA approval needed. | Simplifies administration by reducing bureaucratic requirements, initially proposed in the Finance Bill 2024. |
| Expansion of Royalty Definition | Adds software usage as royalty, subjecting software purchases to withholding tax. | Contrasts with OECD guidelines; affects software not commercially exploited, as limited by the Seven Seas Technologies ruling. |
| Addition of “Donation” Definition | Defines donations as monetary or in-kind benefits without consideration. | Clarifies tax-deductible donations as per Sections 15(2)(w) and 15(2)(aa). |
| Increase in Non-Taxable Benefits | Raises monthly limits for non-cash benefits and meal allowances to Kshs. 5,000 each. | Supports employee incentives, benefitting both employers and employees. |
| Tax on Digital Marketplace Income | Non-residents earning from digital content monetization to be taxed. | Expands tax base by including digital marketplace owners; previously, only the marketplace income was taxed. |
| Introduction of Significant Economic Presence Tax | Replaces digital service tax with a 3% turnover tax for non-residents on digital services. | Increases the tax rate; faces potential opposition from non-resident providers. |
| Minimum Top-Up Tax | Applies a minimum 15% tax to multinational groups operating in Kenya. | Aligns with the Global Anti-Base Erosion Rules; ensures multinationals contribute fairly to local tax revenue. |
| Expansion of Allowable Deductions | Adds Social Health Insurance Fund and Affordable Housing Act contributions to deductible income. | Alleviates financial burden on employees, increasing their net pay. |
| Mortgage Interest Deduction Increase | Raises deductible mortgage interest to KES 360,000 per year. | Promotes affordable housing and reduces employees’ tax burden. |
| Expanded Pension Income Exemption | Exempts pension income for retirees under qualifying conditions. | Encourages long-term retirement savings, promoting economic stability for retirees. |
| Removal of Tax Exemption for Family Trusts | Subjects family trusts’ income to tax. | Reduces tax benefits of family trusts, potentially driving wealth management offshore. |
| Exemption for Government-Partnered Project Income | Non-resident contractors working on fully grant-funded projects are exempt from tax. | Facilitates foreign collaboration on developmental projects without tax liabilities on relevant income. |
B) Reorganization of Exempt Schedules and New Adjustments
The bill revises the Income Tax Act’s exempt schedules:
- Pension Withdrawals: Exempts withdrawals for contributors over 20 years or as per fund guidelines, irrespective of age.
- Family Trusts: Newly taxable, potentially discouraging local trust formation.
- Green Bonds: Limits interest income exemption on infrastructure bonds to only public-benefiting projects, such as green initiatives.
- Non-Resident Contractors on Grant-Funded Projects: Exempts specific income earned through government-partnered, fully grant-funded projects.
C) Employment Taxes
| Proposal | Details | Commentary |
|---|---|---|
| Non-Cash Benefits | Increases limit to Kshs. 5,000 per month. | Encourages employee incentives, benefiting employee productivity. |
| Meal Benefits | Raises meal benefit exemption to KES 60,000 per year. | Motivates employers to offer enhanced meal benefits. |
| Gratuity Contributions | Tax-free limit increased to Kshs. 360,000 per annum. | Supports employees with tax relief on long-term gratuity payouts. |
| Pension Contribution Limit | Raises tax-free pension contribution to KES 360,000/year. | Incentivizes retirement savings. |
D) Withholding Tax
- WHT on Goods Supplied to Public Entities: Imposes 5% WHT, expanding the tax base.
- Digital Content Monetization: Sets withholding requirements on payments via digital platforms.
E) Capital Gains Tax
- Family Trust Transfers: Gains from transferring immovable property to family trusts are now taxable.
- Nairobi International Financial Centre: Reduces CGT to 5% for certified firms with substantial local investments.
2. Value Added Tax (VAT)
Proposed Changes
| Item | Current Rate | Proposed Rate | Implications |
|---|---|---|---|
| Sanitary Towels, Tampons, Diapers | 16% | Exempt | Lowers prices. |
| Agricultural Pest Control Products and Fertilizers | Zero-rated | Exempt | May increase prices. |
3. Excise Duty
New and Adjusted Excise Rates
| Description | Prior Rate | Proposed Rate |
|---|---|---|
| Electric Transformers and Parts | N/A | 25% |
| Telephone & Internet Data Services | 15% | 20% |
| Betting, Gaming, Lotteries | 12.5% | 15% |
The Bill proposes adding excise duties on imported goods and certain services to generate additional revenue and manage economic impacts.
4. Miscellaneous Levies Act
Railway Development Levy: Increased from 1.5% to 2.5%.
5. Amendments to the Tax Procedures Act
Proposals include requiring electronic tax invoice information, extending tax amnesty, penalties for late submissions, and provisions for refunding or offsetting overpaid tax.
by Agnes Gitau
