LEGAL ALERT – TAX LAWS CHANGES
EGAL ALERT – TAX LAWS CHANGES
The Government has enacted fundamental changes to the tax regime in Kenya and it is important for individuals and companies to comply with the changes. In this e-alert, we provide an analysis of the most significant changes effective 1st January 2021 or as unless specified otherwise in the sections below:
THE INCOME TAX ACT (ITA)
- Residential Rental Income Tax (RRIT)
The Act has increased the upper threshold for Residential Rental Income Tax from KES. 10 Million to 15 Million per annum. Further, the amendment increased the lower threshold from Kshs 144,000 to Kshs 288,000 per annum to align to the PAYE tax bands.
Effective Date – 1st January 2021
- Minimum Tax
The Act has introduced a new tax known as “Minimum Tax” under Section 12D of the Income Tax Act. Minimum Tax is applicable at the rate of 1% on gross turnover and is payable in instalments by the 20th day of each period ending on the fourth, sixth, ninth, and twelfth month of the year of income.
The following income will be exempt from Minimum Tax:
- Exempt Income under the Income Tax Act (ITA);
- Income earned from Employment (Sec 5), Residential rental income (Sec 6A), Capital gains under eighth schedule, extractive industries under the ninth schedule and Income Subject to turnover tax (Sec 12 C);
- Where Instalment tax payable is higher that the minimum tax payable;
- Persons engaged in business whose retail price is controlled by the government; and
- Persons engaged in Insurance business.
This is a new tax obligation and is meant to bring companies that have declared losses into the tax bracket noting that it is not a tax on the gain/profit. Unlike Instalment tax which is an advance tax, the law has not specified whether minimum tax will be considered as an advance tax or final tax.
Effective Date – 1st January 2021
- Digital Service Tax (DST)
The Act also introduced another new tax known as “Digital Service Tax” under Section 12E of the Income Tax Act. Digital Service Tax (DST) will be applicable at the rate of 1.5% of the gross transactional value and is payable at the point of transferring payment to the service provider.
DST will be applicable to income derived or accrued in Kenya from provision of services through a digital marketplace.
The Income Tax act defines a digital marketplace as a platform that enables the interaction between buyers and sellers of goods and services through electronic means.
A resident person or a non-resident person with a permanent establishment in Kenya can offset the DST paid against the corporate tax liability for that year of income.
Effective Date – 1st January 2021
- Dis-Allowable Business Expenses
The ITA has disallowed the following expenses previously allowed under section 15 of the ITA:
- Subscriptions payable to trade associations and club subscriptions paid by an employer on behalf of an employee. The subscriptions that were previously taxed on employees as benefit will now be taxed on the employer;
- Expenditure of a capital nature incurred by a corporate body on legal costs and other incidental expenses relating to authorization and issue of shares, debentures and similar securities offered for purchase by general public or for the purchases of listing on any securities exchange operating in Kenya, without raising additional capital; and
- Expenditure of a capital nature incurred by a corporate body on rating for the purposes of listing on any securities exchange operating in Kenya.
Effective Date – 1st January 2021
- Amendments to the First Schedule on Exempt Income
The Act has reduced the current income tax exemptions listed in Part I of the 1st Schedule of the ITA. The following incomes have been removed/excluded as tax exempt:
- Home Ownership Savings Plan (HOSP) amendments – Effective Date – 1st January 2021
- The Act has scrapped the provision that allowed depositors to enjoy a tax deduction on deposits placed with an approved HOSP institution. Previously contributions of up to KES. 96,000 per annum to HOSP was treated as an allowable deduction.
- Income of a registered Home Ownership Savings Plan is now taxable.
- Interest income earned on deposits to a registered HOSP will now be subject to tax. Previously, any interest income earned by a HOSP depositor on deposits of up to KES. 3 Million was exempt from tax.
- Income from employment paid in form of bonuses, overtime, and retirement benefits payable to the employees in the lowest tax band. – Effective Date – 30th June 2020
- Payment of a lump sum pension to persons of 65 years or more will be subject to tax. The Act now only exempts monthly pensions paid to persons of 65 years or more. Effective Date – 1st January 2021
PAYE Rates
Tax Laws (Amendment) Act No. 2 of 2020 introduced new tax rates on individual income as follows:
The new rates replace the rates introduced in April 2020 to mitigate the impact of Covid-19