Treasury CS Ukur Yattani read the budget promising to stimulate the economy and safeguard jobs and businesses. The 2020/21 budget will be financed by tax revenue, financial aid, and debt.
Yattani noted that tax revenue is estimated to reduce slightly to Ksh1.621 trillion in FY 2020/21 compared to the target of Ksh1.64 trillion in FY2019/20. These estimates remain overambitious given the prevailing economic conditions; COVID-19 pandemic, locust invasion, and floods that threaten food security.
Therefore, in a bid to increase the tax revenues, the treasury announced some tax-related changes. Among the raft of measures announced are;
Direct Tax Measures
Direct tax measures imply the deduction of tax dues on a person’s income or profits rather than on goods and services. These will take effect on 1 January 2021:
- Digital service tax 1.5% – Titus Mukora from PwC Kenya says this will tax gross transaction values for businesses involved in selling electronic event tickets, software programmes, web hosting services, and downloadable digital content.
- The imposition of a minimum tax of 1% on the gross turnover for taxpayers who are carrying out business and thus earning revenue but their tax payable is lower than 1% of their gross turnover
- Tax on rental income: Expansion of the residential rental income tax bracket from KSh10 million to KSh15 million. This proposal will enable more people to utilize the simplified tax regime who were otherwise locked out due to the KSh10 million limit. The tax is payable on a monthly basis.
- The introduction of an ‘additional duty’ on goods entered for home use from EPZs
- Interest income earned by a Home Ownership Savings Plan (HOSP) depositor shall be fully taxable. Currently, any interest income earned by a depositor on deposits of up to KSh3 million to a registered HOSP is exempt from tax.
- Monthly or lump sum pension granted to a person who is 65 years of age or more; and bonuses, overtime and retirement benefits paid to low-income employees shall become taxable
- The incomes of a registered HOSP which runs counter to the housing agenda
- Incomes of the National Social Securities Fund (NSSF) and this may affect retirement savings
Indirect Tax Measures
The occurrence of the COVID-19 pandemic has seen the government introduce a raft of tax measures meant to cushion taxpayers from adverse effects of the pandemic. In this case, Job Kabochi from PwC Kenya says that there has been a reduction of VAT from 16% to 14%. However, no need to celebrate too early as Yattani introduced indirect taxes that will see commodity prices rise, making life hard for financially strained households.
Changed VAT Status from Exempt to Standard-Rated
This implies that the products shall become taxable at the general rate which is currently 14%:
- Plant, machinery, and equipment used in the construction of a plastics recycling plant
- Transfer of business as a going concern
- Hiring/leasing/chartering helicopters
- Supply of aircrafts, aircraft launching gear and parts, New pneumatic tyres for use in aircrafts, air combat simulators and parts
- Insurance and securities brokerage services
- One personal motor vehicle, excluding buses and minibuses of seating capacity of more than eight seats, imported by a public officer returning from a posting in a Kenyan mission abroad and another motor vehicle by his spouse
- LPG increased due to taxation of supply of liquefied petroleum gas which is currently zero-rated
- Inputs or raw materials for electric accumulators and separators, including lead battery separator rolls, whether or not rectangular or square, supplied to manufacturers of automotive and solar batteries in Kenya.
- Specialised solar equipment and accessories, including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power
- Taxable goods locally purchased or imported by manufacturers or importers of clean cooking stoves for direct and exclusive use in the assembly, manufacture or repair of clean cook stoves
Changed Status from Standard-Rated to Exempt
The following items were exempted from VAT:
- Raw materials and inputs for manufacture of masks, sanitizers, ventilators and personal protective equipment including coveralls and face shields are exempt intended to provide relief towards COVID19 containment
- VAT exemption on maize (corn seeds)
- VAT exemption on ambulance services
- All inputs used for manufacture of baby diapers
Protection of Local Industries
In his address, Yattani reiterated the government’s efforts to protect the local industry. In this case, he proposed a review of the contracting framework for infrastructure projects in order to ensure greater participation of local contractors in line with the “Buy Kenya, Build Kenya” theme:
- 35% import duty on imported iron and steel products meant to promote the use of locally manufactured iron sheets
- 25% on paper and paper board products
- Inputs for assembly or manufacture of mobile phones will be imported duty-free
- 25% import duty for leather and footwear
- 35% import duty on electrical parts and accessories
Curb Tax Cheats
Businesses will be required to maintain records for all transactions in steps geared towards curbing tax fraud and avoidance. In addition, Yattani introduced a tax amnesty programme with effect from 1 January 2021. The amnesty is expected to run for 3 years and shall apply to tax liabilities that accrued within a period of five years prior to 1 July 2020. A taxpayer who voluntarily discloses to the Commissioner their tax liabilities (including material facts) will be granted relief from penalties and interest on the tax disclosed.