The legislative process for the next fiscal year’s budget will begin today, when the Finance Bill 2024 undergoes its First Reading in a special sitting of parliament.
In a bid to boost tax revenues, the bill proposes a raft of new tax measures and powers for KRA that are bound to be controversial. Several of them will raise the cost of crucial goods and services significantly for both individuals and businesses.
- The government plans to remove VAT exemptions for some critical banking services.
- The bill also maintains excise duty on multiple financial and telecom services at 15% for money transfer services, telephone, data, and at 12.5% for betting and gaming.
- It also maintains 20% excise duty on fees charged by digital lenders, and introduces a similar rate for fees charged by banks.
Among the VAT exemptions on financial services the bill seeks to remove include the issuing of credit and debit cards, money transfer services, foreign exchange transactions, cheque processes, issuance of securities, and assignment of debt.
The 20% excise duty on “other fees charged by financial institutions” is likely to raise the cost of critical financial services. Combined with the lifting of VAT exemptions, it’ll significantly raise the tax bill for banks. It seems to be a one-size-fits all solution to a long-running dispute between lenders and the taxman on what fees and services were subject to what taxes. In several court cases the dispute has been over taxation on fees such as interchange fees, management and professional fees, and taxes on royalty payments.
“…the removal of some of the exemptions such as assignment of debt for consideration and issuance of securities for money whereas the granting of the credit is exempt from VAT is irrational,” analysts at legal firm Bowman’s Law said in a breakdown of the bill’s proposals.
New Taxes
The bill intends to replace the current 1.5% digital services tax with a Significant Economic Presence Tax which would see some foreign digital businesses pay 20% of gross turnover. Another tax measure is a proposed minimum top-up tax where the “combined effective tax rate…is less than fifteen per cent.” It also raises the tax obligations for Kenyan digital businesses to five percent, while foreigners will pay 20 percent.
Multinationals with turnover of KShs 105bn will pay a minimum top up tax calculated as 15 percent of net income minus the actual tax rate, multiplied by excess profit. The bill also introduces an eco levy “to ensure that manufacturers and importers …pay for the negative environmental impacts” of certain electronics and goods such as tyres and diapers. In addition to other taxes-such as 10% for the importation of phones-this could raise the price of the goods significantly.
Among the most controversial changes are a removal of VAT exemptions on bread, and the introduction of a 2.5% annual tax on the value of cars which will be bundled with insurance covers. The law will also replace the current flat tax rate for imported motorcycles beyond a certain price point with a 10% of value tax.
For KRA, New Teeth
The new law proposes to give the taxman powers to demand that taxpayers intergrate eTIMs into their invoicing process, or risk up to KSh 2 million in penalties for non-compliance. Given the slow uptake of the system by SMEs, this particular proposal seems aimed at both pushing for compliance by small businesses.
Controversially, the bill also grants KRA certain exemptions to data protection laws. If passed, it would amend the law to allow disclosure where “necessary for the assessment, enforcement or collection of any tax…” In addition to data protection concerns, the eTIMS system, for example, has been an issue for the medical profession where services carry a high expectation of privacy.
Combined with a separate proposal to expand KRA’s ability to demand agents who owes a taxpayer to deduct unpaid taxes, this represents a significant expansion of revenue collection powers.
Read the whole bill here.
