The Tax Laws (Amendment) Act, 2020 was assented to on 25th April 2020. The Act was enacted to shield Kenyans from the economic and financial effects arising from the Covid-19 pandemic and makes changes to various tax laws in Kenya. In this write-up we set out specific amendments made to the Income Tax Act (“ITA”).
Reduced Corporate Income Tax Rate: Corporate income tax rate for resident companies was reduced from 30% to 25%. This will apply from the 2020 year of income. Instructive to note, the reduced rate does not apply to Non-resident companies which rate remains at 37.5%.
Preferential Tax Rates for Newly Listed Companies: The preferential tax rates which applied to newly listed companies on the Nairobi Securities Exchange (NSE) for a defined period of time have been repealed. The rates ranged from 20% to 27%. This could be as a result of the reduced corporate income tax rate as discussed above.
Companies Operating as Plastics Recycling Plant: These companies were subject to a lower corporation tax rate of 15% for the first five years from the date of operation. The rate has now been increased to 25%.
Turnover tax: Turn over tax as initially introduced was simply a tax payable by small businesses whose gross sales does not exceed or is not expected to exceed Kshs. 5 million per year. The changes introduced in respect to turnover tax include:
- Alteration of the annual income threshold for turnover tax to between Kshs.1 million and Kshs.50 million;
- Application of turnover tax to incorporated companies (previously, it was only payable by unincorporated persons); and
- Reduction of turnover tax rate from 3% to 1% with an attendant reduction of the penalties for late payment.
The amendments are aimed at addressing cash flow challenges experienced by small and medium enterprises during the period of the pandemic. The inclusion of incorporated entities is a positive development as most small and medium enterprises are now trading in various registered entities for their legal and financial purposes.
Presumptive Tax: Presumptive tax is a simplified tax regime for small and micro enterprises based on the value of single business permit or a trade license issued/renewed by County Government. The tax which was previously payable at the rate of 15% has been repealed.
Withholding Tax. Among other changes, the Act has extended the application of WHT to payments made to a non-resident person on account of sales, promotion, advertising and marketing services (at 20%); transportation of goods excluding air and shipping transportation services (at 20%) and reinsurance premiums except for reinsurance premiums in respect of aircraft (at 5%). In addition, the WHT for dividends paid to a non-resident person has been increased from 10% to 15%. These changes seek to tax income that was previously untaxed hence increasing government revenue. Notably, this is a short-term measure which can help the government raise revenues especially in this period. However, the government may need to review it in future as it may discourage non-resident investors which could result in reduced revenue for the government.
Deductibility of Expenses: The 30% electricity rebate that was introduced by Finance Act, 2018 effective January 2019 has been repealed. This was an incentive to manufacturing companies which have had to contend with high cost of power over the years. It is a blow that this has been repealed at a time when the government is seeking to improve the contribution of the manufacturing sector to the overall Gross Domestic Product.
Exemptions from Payment of Income Taxes: The Act has removed a number of exemptions previously granted under the ITA for incomes of several Government parastatals, certain diplomats, as well as on other sources. The exemptions include on compensating tax accruing to a power producer under a power purchase agreement, interest earned on contributions paid into the deposit protection fund established under the Banking Act, dividends paid by a Special Economic Zone (SEZ) enterprise, developer or operator to a nonresident person, gains arising from trade in shares of a venture company earned by a registered venture capital company among others.
Pay as You Earn (PAYE)
Individual tax rates- The individual tax rates bands have been expanded with a 100% relief for persons earning gross monthly income of up to Ksh. 28,000 and the amendment of the individual income tax rates with the highest rate of tax rate being reduced from 30% to 25%. In addition, the Act increased the individual tax relief from Kshs 16,896 pa. (Kshs 1,408 pm.) to Kshs 28,800 pa (Kshs 2,400 pm.). The amendments are aimed at translating into increased disposable income at this period of the pandemic.
Pension withdrawal tax rates: The Act has reduced the highest tax band on pension withdrawals from registered retirement funds to 25%, for amounts exceeding Kshs.1, 200,000 per annum. The Act has also widened the tax bands on income withdrawals from retirement funds before the expiration of 15 years in line with the individual tax rates for PAYE as discussed above. These amendments will help in increasing the disposable income available to retirees in an effort to alleviate financial hardships occasioned by the pandemic.
Although the National Assembly approved the reduction of income tax, it rejected some revenue-raising proposals earlier included in the bill. The reduced tax rates like PAYE and the corporation tax means reduced revenue to the government and the government may be forced to find other ways to recover the lost revenue and the Finance Bill, 2020 seems to contain some of these ways. A separate write up on the Bill will follow.
Article by Hillary Kariuki