The Finance Act 2020 was assented by the president on 30th June 2020. Basically the tax law was largely designed to effect the present measure to cope with the current pandemic situation in the country. We have come across a number of tax deduction and other introduction of taxes like Voluntary tax disclosure programme, Digital Tax service, minimum tax for small scale business, and entrepreneur. The tax guide includes amendments from Tax Law (Amendment Act 2020) i.e Finance Act 2020
The following are the proposed amendments, and new tax law introduced;
The Act increased the upper threshold from 10 million to 15 million. In addition, the lower threshold is from KES 144,000 to KES 288,000/-. These will align with lower individual tax band.Our Comment
The Residential Rental Tax was introduced in the finance bill of 2016 to enable Rental income into a Tax net. Residential rental income from 144,000 to 15 million account to gross - tax 10% and is payable by 20th of the following month. However, landlords can if they deem to be preferable to be taxed on net income basis, opt in writing to KRA By increasing upper threshold the landlords can align to the regime which has minimal compliance cost.
The Act has introduced new minimum tax that is minimum income tax, payable by all companies regardless of whether or not they make profit. The elements of tax are as follows;
1)That person's income is not exempt under Income Tax ACT
2)That person’s income is not derived from employment, residential rental income, the turnover tax regime, capital gains and extractive industry which are taxable.
The introduction of minimum tax will adversely impact business that are not paying installment tax on preceding year or current year basis, they will now be required to pay minimum tax. Companies that have tax losses will now be payable to minimum taxes. The impact will significant effect all sectors indirectly even to those paying low installment tax than to required minimum tax.
The Act has introduced new tax as (DST) , which shall be payable by person whose income from service is derived from or accrued in Kenya through a digital market place.
The new digital tax will enhance increase in tax base as more change is seen in the business models from traditional method to digital platform.
The following items have been deleted from the list of allowable deductions:
As we are all in the midst of global pandemic, it is not clear why the bill seek to repeal the deduction for social infrastructure. Companies will be discouraged in investing in the social wellbeing projects if the expenses are not allowable.
Membership in trade association is now expensive, cost is not tax deductible. Clubs subscription made on behalf of the employees are still taxable benefit that is taxable under PAYE system.
The Bill proposes to repeal (section 22), which allows tax deduction of HOSP, currently deductible KES 8000/= per month and maximum of KES 96,000/- per year of income Further this section exempt interest income earned by depositor on such deposit up to maximum of KES 3,000,000/=Our Comment
These was introduced in 1995 to enable depositors save for home acquisition and development. Deletion of this section will discourage the home ownership saving and potentially will shift to loans which are eligible to mortgage relief. However, this is contrary to government proposal on affordable housing, this may further erode the saving base in the country.
The Act has made changes to subject following income categories that was currently exempt from tax.
The main effect is to reduce tax expenditures, which were eroding the tax base.
The Act has amended the procedure for claiming the Input VAT, by introducing the new provision which provides that tax payer will not be allowed to Input VAT deduction whereas the registered supplier has not declared the respective sales in their VAT return.Our Comment
This is an addition to the requirement that proper documentation should be kept for deduction of input tax to qualify. However, it does not justify on the recipient, cannot be held responsible for supplier not having declared the supplies, provided all the required documents are in place. The responsibility to charge and account for and pay Vat lies with supplier which is absolutely correct. However, the amendment will reduce cases of fraudulent claims.
The Act has amended a new subsection (2A) in order to give transitional provision to allow companies project which are currently under (SOFA) to continue enjoy VAT exemption for goods purchased or produced locally for the remaining period of the agreementOur Comment
These amendments ensure that companies and project under SOFA to continue enjoying the vat exemption on the goods for remaining period of agreement
The Act has amendments to introduce VAT on items previously exempted from VAT under concessions accorded by the Cabinet Secretary. These items include taxable supplies incurred on construction of the assembly, manufacture or repair of clean cook stoves. The clean cook stoves are environment friendly as they produce fewer emissions compared to open fires. The introduction of VAT on these stoves will reduce their affordability to ordinary Kenyans who cannot afford other forms of energy for cooking.
The finance Act 2019 moved maize, cassava & wheat flour from zero rated supplies to exempt supplies. The amendments is therefore to zero rate the flour in order to make it cheaper and affordable. These amendment is in operation for a period of six months from 30th June 2020.
The zero-rated items that are proposed to become taxable at the standard rate were included in the Tax Laws Amendments Bill, 2020 but not enacted. Making ordinary bread taxable, given that it is a basic commodity, does not make sense.
The Act has amended the definition of the term ‘’license’’ by including a licenses issued for any activity in Kenya for which the commissioner, by notice in the Gazette, may impose a requirement for a license.Our Comment
The amendment seeks to align with the term license to take into account licenses issued by commissioner. It has now clarified the current law.
The Act has amended Alcoholics strength of spirituous beverages under the description; Beer, Cider, Perry, mead, opaque beer and mixtures of fermented beverages with non- alcoholics beverages and spirituous beverages of alcoholics strength not exceeding 10% by reducing the alcoholics strength of spirituous beverages from 10% to 6 %.Our Comment
The move simply widens the net of alcoholic beverages subject to excise duty and is probably a revenue generating measure.
The Act has removed excise duty on betting. The finance Act 2019 had introduced excise duty on betting at the rate of 20 %Our Comment
The change is meant to re-align the taxation of the sector
The Act has introduced Voluntary Disclosure Programme (VDP) which is confidential programme where the tax payer discloses tax liabilities that were previously undisclosed to commissioner for the purpose of being granted relief of penalties and interest to the tax disclosed. The key elements of programme are as follows;
The introduction of these section (37D) is aimed at improving revenue collection through enhanced compliance and to encourage Taxpayer to declare tax liabilities in exchange for amnesty from prosecution and remission from penalties and interest . This will definitely bring more tax payers into the Tax net.
The IDF chargeable on goods imported under the East African Community Duty remission Scheme at the time of entry of goods for home use has been amended from flat rate of KES 10,000 to 1.5% of custom value.Our Comment
These moves seek to harmonize the IDF payable by manufacturers operating under EAC duty remission scheme with that of other manufacturer. However, this measure is likely to make intra-EastAfrican trade more expensive.
The Act introduces new section 9A to charge additional duty at the rate of 2.5% of custom value in respect of goods entered for Home use from export processing zones enterprises(EPZ)Our Comment
These is additional fee under Miscellaneous and levies Act, 2016, this measure will discourage the EPZ’s from offloading their goods into domestic market and comply with their 80% rule of export.
By deleting the exemption the expenditure will reduce and show changes in the tax base that was previously being eroded. The Act exempts items for official duties. These makes sense as KDF and national police Service provide security service and exemption is meant to reduce cost
The Act amended the Tax Appeals Tribunal Act 2013 to restrict documents presented by an appellant to the Tax appeals Tribunal to those which had been provided to the Commissioner during the objection process. These is because the Commissioner can make decision at the Objection stage. The introduction of new documents at the stage of hearing disadvantages the commissioner.Our Comment
The amendments seek to ensure that an appellant does not introduce the new documents at the Tribunal which the Commissioner which the commissioner was not privy to at the time of making the objection decision.
These ensure that any legal proceeding against the authority have a time limit to facilitate effective handling of disputes.
This are additional function for building and training provided to enable KRA to undertake activities in order to provide framework.
The Act amended the Retirement Benefit Act 1997 by inserting new sub section as;
The amendment will enhance compliance with retirement Benefit scheme as previously There was no penalty for failing to submit actuarial report. It will also allow RBA to regularly monitor schemes and safeguard member’s fund
The Act amended the Tax tribunal Act, 2013 by relying on the grounds of documents in addition to those in the memorandum of appeal.Our Comment
These will protect the rights of Taxpayers at the time of litigation at tax appeal tribunal.
The amendment will ensure private sectors invest in construction of road infrastructure, as there is option for private toll collector.
The Act has amended Capital Market Act on the following:
The Capital Market Authority will have more powers over private equity, however it is not clear on venture capital companies, what is the take for venture capital companies having access to private sources?
The Act amended Insurance Act by inserting the time period for appeals from decision of Commissioner to the Tribunal, to be made within a period of 30 days from the Commissioner decision.Our Comment
The proposed time limit will ensure appeals been lodged in timely manner
The Act amends Insolvency Act 2015 to provide that all amounts held on behalf of KRA by Bank, appointed agents for revenue banking service at the point of receivership, liquidation of Bank rank among preferential claims (Effective date; – 30th June 2020)Our Comment
These amendments seeks to reduce the risk of exposure on the tax revenue.
The Finance Act 2020 has been issued earlier compared to past years. Many measures and changes are seen in the finance act 2020. This will probably streamline the process of revenue collection and probably balance against current expenditure by the Government there are various exemption which were previously enjoyed by multiple sectors are removed and new avenues for tax collection is actual seen in the Act. These were not seen in the previous Acts. As our economy is faced with number of challenges to cope up with various disruption in the smooth flow of operation in business, and other areas the finance act has significantly eased on various segments to enable smooth flow of business.
By: Daksha Ranpara F.C.C.A., C.P.A.(K)
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