TAX AMMENDMENT GUIDE 2020/2021

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;

1. RESIDENTIAL RENTAL INCOME – (section 6A) Effective date; (1ST JANUARY 2021).

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.

2. MINIMUM TAX – (NEW SECTION 12D) Effective date; 1st January 2021

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. The minimum tax applied is 1% of the gross turnover, which is the rate currently applied to turnover tax. On the other hand, every person making taxable income in a year of income is subject to pay installment tax on the tax payable on the net income of the person.
  2. The minimum tax will be payable, on 20th day of fourth, sixth, ninth, and twelve months of the year of income, if:

    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.

Our Comment

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.

3. DIGITAL SERVICE TAX (NEW SECTION 12E)- EFFECTIVE DATE 1ST JANUARY 2021

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.

  1. Resident and Non-resident with permanent establishment will be entitled to offset the digital service tax paid against their income tax payable for that year of income
  2. The rate of tax is 1.5% of the gross transaction value and shall be due at the time of transfer of payment for the service to the service provider
Our Comment

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.

4. DELETION OF FOLLOWING ALLOWABLE EXPENSES (SEC 15(2) EFFECTIVE DATE 1ST JAN 2021

The following items have been deleted from the list of allowable deductions:

  1. Membership subscriptions and entrance fees on members’ clubs and trade associations.
  2. Legal and other incident capital expenditure relating to the authorization and issues of shares debentures or similar securities offered for purchase by general public.
  3. Expenditure of a capital nature incurred in that year of income by a person, on legal costs and other incidental expenses, for the purposes of listing on any securities exchange operating in Kenya, without raising additional capital
  4. All listing expenses
  5. Club subscription paid by the employer on behalf of the employee
  6. Capital expenditure incurred by the person in the year of income on the construction of the public schools, hospitals road or any similar kind of social structure
Our Comment

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.

5. REGISTERED HOMEOWNERSHIP SAVINGS Effective date; 1st January 202

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.

6. AMENDMENT TO TAX EXEMPTION- Effective Date; 1st January 2021

The Act has made changes to subject following income categories that was currently exempt from tax.

  1. Income of a registered Home ownership saving plan to be taxed
  2. Income from NSSF to be taxed
  3. Taxation on monthly pension for persons aged 65 or more is still EXEMPT
  4. Income from employment paid in form of bonuses, overtime and retirement benefits to employees whose taxable employment before bonus and overtime allowance does not exceed the lowest Tax band –( Effective date; 30th June 2020)
Our Comment

The main effect is to reduce tax expenditures, which were eroding the tax base.

7. Value Added Tax Auto Assessment – Effective date; 30th June 2020)

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.

8. Transitional Provision for exemption of goods under Special operating framework arrangement (SOFA). – (Effective date; - 30th June 2020 )

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 agreement

Our Comment

These amendments ensure that companies and project under SOFA to continue enjoying the vat exemption on the goods for remaining period of agreement

9. Amendments to the First schedule – exemption
  1. The Act deleted following items from exemption schedule ; - Effective date; 30TH June 2020
    1. Aluminum pilfer proof caps with EPEliner
    2. Specialized Equipment for the development and generation for Solar and wind energy.
    3. Goods of tariff 4011.30.00 (Pneumatic Tyres) usually used by Aircraft.
    4. 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 approved by the Cabinet Secretary upon recommendation by the Cabinet Secretary for the time being responsible for matters relating to energy.
    5. Stoves, ranges, grates, cookers (including those with subsidiary boilers for central heating) barbeques, braziers, gas rings, plate warmers and similar non-electric domestic appliances, and parts thereof, or iron or steel.
    6. 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 and which is not exempted from Value Added Tax.
    7. The supply of maize (corn-flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than 10 % in weight. ( Vat is exempted and the items will be Zero rated up till 31st December 2020).
    8. Also exemption of maize seeds of tariff number 1005.10.00.
    9. The Act has amended part II of exemption schedule which is ambulance services, which is essential service, are exempted from VAT.
    10. 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. (Para 18 amendment to second schedule deleted from zero rated to standard rate)
  2. The following list is (Effective from 1st July 2021)
    1. Helicopters of unlade weight not exceeding 2000 kg
    2. Helicopters of an unladen weight not exceeding 2,000 kg.
    3. Helicopters of an unladen weight exceeding 2,000 kg.
    4. Aero planes and other aircraft, of an unlade weight not exceeding 2,000 kg
    5. Other parts of aero planes and helicopters.
    6. Air combat simulators and parts thereof.
    7. Aircraft launching gear and parts thereof; deck-arrestor or similar gear and parts thereof.
    8. Other ground flying trainers and parts thereof.
    9. Tractors other than road tractors for semitrailers.
    10. Hiring and leasing of helicopters of tariff numbers 8802.11.00 and 8802.12.00
  3. (Amendments of supplies from ZERO RATED to STANDARD RATE) Effective date - 30th June 2020
    1. The supply of liquefied petroleum gas including propane.
    2. Supply of ordinary bread.
  4. New Exemption Introduced - (Effective date -30th June 2020)
    1. Maize(corn) seed
    2. Ambulance service
Our Comment

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.

10. Definition of ‘License” (Effective date; 30th June 2020)

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.

11. Changes for Alcoholics strength of spirituous beverages; (Effective date; 30th June 2020

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.

12. Deletion of excise duty on Betting (Effective date; - 30th June 2020)

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

13. Introduction of Voluntary Disclosures Programme (VDP). (EFFECTIVE DATE 1ST JANUARY 2021)

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;

  1. The VDP shall be open for a period of 3 years effective 1st January 2021;
  2. The disclosures eligible under the programme will be for tax periods of up to 5 years prior to 1st July 2020;
  3. Where the applicant is accepted, the applicant shall be granted a remission of the interest and penalty due on the tax liability as follows;
    • Where the disclosure is paid and Tax liability paid in the first year of programme, 100 % remission of interest and penalty;
    • Where the disclosure is made and tax liability is paid in the second year of the programme, remission of 50 % of the Interest and Penalty.
  4. A person granted a relief under VDP shall not be prosecuted for their previous tax liabilities and terms of payment shall be set out by the commissioner and payment shall be made within one year.
  5. The Commissioner may withdraw the relief, assess additional tax or commence prosecution in case of failure to disclose the material facts of the Tax Liability.
  6. A Taxpayer will not be eligible for VDP where the Taxpayer;
    • Is under audit investigation or is a party to ongoing litigation in respect of the tax liabilities or any matter relating to tax liabilities
    • Has been notified of a pending audit or investigation by commissioner
Our Comment

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.

AMENDMENTS TO THE MISCELLANEOUS FEES AND LEVIES ACT

14. Import Declaration fee (IDF) on goods imported under the East African Community Duty Remission Scheme.(Effective date; – 30th June 2020

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.

15. ADDITIONALLY DUTY ON GOODS ENTERED FOR HOME USE FROM AN EXPORT PROCESSING ZONE (NEW SECTION 9A) (EFFECTIVE DATE; 30TH JUNE 2020).

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.

16. PART a) Deletion of IDF Exemption
  1. The following items have been deleted from the list of items that are exempt from Import Declaration
    1. Aircrafts of unladen weight not exceeding 2000kg and Helicopters (Tariff heading 8802.11.00 and 8802.12.00); (Effective date; 1st July 2021)
    2. Goods as the Cabinet Secretary may determine are in public interest, or to promote investment which value shall not be less than 200 million or more; (Effective date; – 30th June 2020)
    3. Goods imported for implementation of projects, under special operating framework arrangement with the Government; (Effective date; - 30th June 2020)
  2. IDF exemption of equipment, machinery and motor Vehicles for official use by Kenya Defense forces and national Police Services.(Effective date;- 30th June 2020) The Act exempts equipment’s, machinery and motor vehicle for official use by Kenya Defense Force (KDF) and National Police Service from payment of IDF at importation
Our Comment

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

PART B – Deletion of RDL exemption
  1. The following items are deleted from the list of items that are exempt from Railway Development Levy (RDL)
    1. The Act removes exemption from RDL for goods imported for construction for Liquefied petroleum gas storage facilities and exemption granted at the discretion of cabinet secretary for Treasury may determine are in public interest or to promote investment which value shall not be less than 200 million shilling
  2. The Act exempts the following exemptions from RDL:-
    1. Currency notes and coins imported by Central Bank of Kenya (Effective date; – 30th June 2020)
    2. All goods including materials supplies, equipment, machinery and motor- vehicles for official us by Kenyan Defense Forces and National Police (Effective date - 30th June 2020)
AMENDMENTS TO THE TAX APPEAL TRIBUNAL ACT

17. Procedure for Appeal (section 13(6)) – Effective date; 30th June 2020

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.

AMENDMENTS TO KENYA REVEUE AUTHORITY ACT
18. The following amendment are seen in Kenya Revenue Authority Act ( Effective date;- 30th June 2020)
  1. Permitting the authority to establish an institution to provide capacity building and training;
  2. Allowing the authority to collect a commission of up to 2% for collections on behalf of a county government or government agency;
  3. The Act has amended the KRA ACT to limit the period within which suits can be commenced against the authority. A legal action against the authority shall not be instituted unless;-
    1. Commenced within 3 years after the act, neglect or default complained
    2. In the case of continuing injury or damage, within 6months after the cessation of the Act.
    3. At least one month written notice specifying details of claim

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.

19. AMENDMENT TO RETIREMENT BENEFIT ACT

The Act amended the Retirement Benefit Act 1997 by inserting new sub section as;

  1. A trustee who fails to submit copy of the actuarial report to the Chief Executive Officer by the due date specified in the regulation shall pay a penalty of one hundred thousand shillings
  2. Where the report remains unsubmitted, the trustee in addition to the penalty shall pay a further penalty of one hundred thousand for each day or part thereof during which the report remains unsubmitted.
Our Comment

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

20. TAX APPEAL TRIBUNAL (Effective date;- 30th June 2020)

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.

21. THE PUBLIC ROAD TOLL ACT (Effective date; -30th June 2020)
  1. The act amended the definition of the word ‘toll collector’’ to either public toll collector or private toll collector. This means people can be appointed from public or private as toll collector.
  2. Other new definitations are as follow:
    1. Base toll rate, which will prescribed by the Cabinet minister. This is a unit rate for applicable tolls stations.
    2. A National toll fund will be established and will be remitted and administered in accordance with the Public finance Act
    3. The purpose of the Fund will be to ensure proper functioning of roads and Toll stations.
    4. Development repair and maintenance of roads as the minister may direct.
    5. The Act enhances the enforcement of collection of tolls by empowering a toll collector to collect toll from defaulters as a civil debt recoverable summarily
    6. The amendments provides legal mechanism for toll collectors to institute civil action to recover toll from defaulters and charge with a fine which is not exceeding KES 50,000 shillings.
Our Comment

The amendment will ensure private sectors invest in construction of road infrastructure, as there is option for private toll collector.

22. AMENDMENTS TO CAPITAL MARKET ACT –(EFFECTIVE DATE; – 30TH JUNE 2020

The Act has amended Capital Market Act on the following:

  1. To empower Capital Market Authority to license, approve and regulate private equity and venture capital companies that have access to public funds.
  2. Exclude the payment to beneficiaries from collected unclaimed dividend when they resurface, as function of investor compensation fun
Our Comment

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?

23. AMENDMENT IN THE INSURANCE ACT (Effective date; – 30th June 2020

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

24. AMENDMENTS TO INSOLVENCY ACT

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.

CONCLUSION

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)

Partner

CAVEAT

This newsletter has been prepared for general guidance, and does not constitute professional advice. Accordingly, Ashvin Ranpara & Co, its associates and its employees and agents accept no liability for the consequences for anyone acting or refraining for acting, in reliance on the information contained herein or for any decision based on it. No part of the newsletter may be reproduced or published without prior written consent.