Value-added tax (VAT)
VAT is levied under the VAT Act, 2013 and the VAT Regulations, 2017. VAT is a tax on value addition and is accounted for using the input-output mechanism. In Kenya, there are currently three rates of VAT: standard rated at 16%, zero-rated and exempt.
VAT registration is required for persons making or expecting to make taxable supplies of over KES 5 million in a 12-month period. In determining the registration threshold, the sale of capital assets is excluded. A person making taxable supplies below the registration threshold may voluntarily apply for VAT registration upon meeting the set requirements. However, this VAT registration threshold does not apply to non-residents who supply electronically supplied services to Kenyans.
Input tax on a taxable supply (or importation) may be deducted from the tax payable by a registered person to the extent that the supply was acquired to make taxable supplies. Input tax is allowable for deduction within six months after the end of the tax period in which the supply or importation occurred. To deduct input tax incurred on taxable supplies, a taxpayer must possess the requisite documentation supporting the input tax deduction. With effect from 1 July 2023, there is an additional condition in order to secure input tax recovery. Apart from holding the requisite documentation for recovering input tax, the taxpayer must also ensure that the supplier has accounted for the VAT to the Kenya Revenue Authority.
Taxable value is the consideration for the supply and includes any taxes, duties, levies, fees, and charges paid or payable on or by reason of the supply.
With effect from 1 July 2023, taxpayers can seek refund of VAT paid on bad debts within ten years from the date of supply. Taxpayers will now be eligible to claim refunds where the customers are not legally insolvent but under statutory management such as appointment of an administrator, receiver and liquidator.
VAT obligations for Non-resident suppliers
Non-resident suppliers supplying electronically supplied services to Kenyans will need to adhere to The VAT (Electronic, Internet and Digital Marketplace Supply) Regulations, 2023.
These regulations provide clarity on the nature of supplies subject to VAT, at the standard rate of 16%, when supplied electronically through a digital marketplace. A digital marketplace is defined as an online platform that enables users to sell goods or provide services.
A non-resident person supplying such taxable services is required to register for VAT in Kenya if the supplies are made to a recipient in Kenya in both business-to-consumer (B2C) from April 2021 and business-to-business (B2B) transactions from 1 July 2022.
Prior to enactment of the Finance Act, 2022 on 1 July 2022, the obligation to account for VAT on digital marketplace supplies for business-to-business B2B supplies rested with the recipient in Kenya and was accounted for through the reverse-charge mechanism.
This person shall register for tax through a simplified tax registration framework and will declare taxes payable on supplies made on the digital marketplace by filing a monthly VAT return. In addition, any VAT due to the Commissioner shall be paid on or before the 20th day of the month following the end of the month in which the service was supplied.
These services include a wide variety of electronic services such as downloadable digital content, e-books, subscription based media, software programmes, cloud storage, distance teaching and so on. For a full list of services that are included, please contact us.
Import (customs) duty
Import duty is levied on importation of goods under the provisions of the East African Community (EAC) Customs Management Act ('the Act'). Imported goods are generally subject to import duty at varied rates. With effect from 1 July 2022, the East African Community Common External Tariff (EAC CET) 2022 version introduced, a four-band tariff with a minimum duty rate of 0%, rates of 10% and 25%, and a maximum rate of 35% in respect of all products imported into the East African Community.
The EAC Gazette notice No. 11 of 2023, introduced amendments to the EAC CET increasing the duty rates of various articles including all items under Chapter 3 (Fish and crustaceans, molluscs, and other aquatic invertebrates), some live animals, and items such as footwear and coffins which will attract a duty rate of 35%, up from 25%. Additionally, some of the subheadings within the EAC CET have been split to enable a more accurate classification of imported goods. The items affected include industrial sugar, salt and certain items of paper and paperboard, among others.
We further note that the EAC Gazette Notice provided a stay from payment of duty of certain products. This stay is applicable for a period of one year beginning 1 July 2023. The affected sectors include; metal and allied, textile, shoe, diaper and furniture. Similarly, certain motor vehicles of tariff headings 8702, 8703 and 8704 which will now be subject to duty at a rate of 35% for a period of 1 year.
Machinery and inputs (excluding motor vehicles) imported by a licensed company for direct and exclusive use in oil, gas, or geothermal exploration, development, and distribution are exempt from payment of import duty.
In addition, enterprises that are established under the Special Economic Zones Act and the Export Processing Zones Act enjoy exemption from payment of import duty on importation of goods. Where raw materials that are not subject to 0% import duty are used to manufacture goods within the East African Community and for export outside the East African Community, one may apply for remission under the EAC duty remission scheme. Please note that one may be required to execute a bond as security for remitted taxes. Further, assemblers of motor vehicles and motorcycles, among others, enjoy import duty remission under the scheme.
Excise duty is imposed on the local manufacture, importation or local supply of certain commodities and services. Excisable commodities include bottled water, soft drinks, cigarettes, alcohol, fuels, and motor vehicles. Excisable services include telephone and Internet data services, fees charged for money transfer services, and other fees charged by financial institutions.
The TLAA, 2020 revised the Excise Duty Act, 2015 by amending the definition of ‘other fees’ earned by financial institutions to exclude other fees earned from non-licensed activities. This change reduced disputes with the tax authority on what ‘other fees’ should be subject to excise duty.
The Excise Duty Act defines the word ‘licence’ to mean the following:
- In the case of excisable services, ‘licence’ refers to the certificate of registration.
- In the case of excisable goods, ‘licence’ refers to the licence issued under section 17 of the Excise Duty Act.
- In the case of carrying out of any other activity in Kenya for which the Commissioner General for the KRA may impose a requirement for licence, ‘licence’ refers to the licence required under section 15(1)(e).
The Finance Act, 2021 re-introduced excise duty on betting and gaming at the rate of 7.5% of the amount wagered or staked, while the Finance Act, 2022 exempted horse racing.
The Finance Act, 2023 amended the Excise Duty rates for various excisable services, including the following:
- 20% to 15% for telephone and internet data services.
- 20% to 15% for fees charged for money transfer services by banks, money transfer agencies and other financial service providers.
- 12% to 15% for money transfers by cellular phone service providers and payment service providers.
- 15% for alcoholic beverages and gaming advertisements on television, print media, billboards and radio stations.
Prior to the Finance Act, 2023 the Excise Duty Act contained a requirement for annual inflationary adjustment on excise duty rates.. The provision on annual inflationary adjustment was deleted by the Finance Act, 2023 effective 01 July 2023.
The Finance Act, 2023 has provided clarity on offences relating to excise stamps and other markings. The Finance Act, 2023 further has introduced for the payment of Excise Duty within twenty-four hours for licensed manufacturers of alcoholic beverages and betting and gaming industries.
The Finance Act, 2023 also introduced new goods to the ambit of Excise Duty these include; white chocolate of heading 1704, imported chocolate and other food preparations containing cocoa of tariff nos. 1806.31.00, 1806.32.00 and 1806.90.00, imported plastics, The Finance Act,2023 further increased the Excise Duty on imported Glass bottles (excluding imported glass bottles for packaging of pharmaceutical products), imported alkyd, imported unsaturated polyester, imported emulsion VAM, imported emulsion-styrene acrylic, imported homopolymers, and imported emulsion B.A.M.
Stamp duty is payable on transfer of properties, leases, and securities. The rates of stamp duty apply as specified in the Schedule to the Stamp Duty Act.
The rates of stamp duty are shown below:
|Activity||Stamp duty rate|
|Transfer of immovable property:|
|Creation or increase of share capital||1%|
|Registration of a company (nominal share capital)||0%|
|Transfer of unquoted shares or marketable securities||1%|
|Transfer of quoted shares of marketable securities||Exempt|
|Transfer of houses constructed under affordable housing scheme||Exempt|
|Registration of a debenture or mortgage:|
|Supplemental security||KES 20 per counter part|
|Period of three years and under||1% of annual rent|
|Period over three years||2% of annual rent|
Capital gains tax (CGT)
Gains derived on the sale or transfer of property by an individual or company are subject to a final tax at the rate of 15%. The definition of ‘property’ is widely drawn and includes securities in Kenyan resident private companies (though a specific exemption from CGT exists for securities listed in Kenya).
The High Court has ruled that the Income Tax Act (ITA) cannot impose an obligation on a taxpayer to pay CGT on or before presenting a transfer instrument for registration as opposed to upon registration of the transfer instrument. The KRA has appealed the Court's ruling. No final decision is available at this date.
In addition, an exemption is granted where the transfer of property is triggered by a change in law, a government directive, internal restructuring within a group (with the exclusion of a transfer to a third party), or a transfer made in public interest (the latter being subject to the Cabinet Secretary's approval) from CGT.
The Finance Act, 2023 introduced a tax on gains from the sale of shares or comparable interests if, 365 days before the sale, more than 20% of their value directly or indirectly comes from immovable property in Kenya. This aims to subject such gains to taxation if they are significantly tied to Kenyan immovable property.
The Finance Act also amended the ITA to change the timing of CGT payment. Under the amendment, CGT will be paid at the earlier occurrence of either the vendor receiving the full purchase price or the registration of the transfer
Payroll taxes are administered through the Pay-As-You-Earn (PAYE) mechanism of deducting income tax from employment income (salaries, wages, bonuses, commissions, etc.). PAYE also applies to taxable non-cash benefits.
It is the employers’ obligation to deduct and account for payroll taxes on a monthly basis.
The PAYE deducted thereof should be paid to the KRA by the 9th day of the following month.
The employer should submit a monthly PAYE return (can be filed online using the KRA’s electronic platform, i-Tax). This return, known as form P10, declares the PAYE for a specific month.
The tax tables applicable to individuals are provided in the Taxes on personal income section of Kenya’s Individual tax summary.
Employers’ National Social Security Fund (NSSF) contributions
The National Social Security Fund Act No. 45 of 2013 (“the NSSF Act 2013” or “the new Act”) was assented in 2013 and came into force on 10th January 2014. However, its implementation was suspended almost immediately following a consolidated petition filed in 2014. On 3 February 2023, the Court of Appeal upheld the provisions of the NSSF Act 2013, and NSSF confirmed through a press release issued on 9 February 2023 that the new Act was effective immediately i.e. starting in the payroll period of February 2023.
The updated NSSF rates
The new NSSF Act 2013 introduces enhanced NSSF contributions at the rate of 12% of an employee's pensionable earnings. This is made up of equal portions of 6% from the employee and 6% from the employer. Pensionable earnings has been defined under the new Act as the lower of an employee’s monthly wages and the Upper Earnings Limit (UEL) of Kenya Shillings (KES) 18,000.
This is an increase from the previous contributory payments of KES 400 per month per employee. The new contributions will be subject to a monthly upper limit (or cap) of KES 2,160 for employees earning above KES 18,000.
Tier I and Tier II contributions
The contributions to NSSF will be classified into two categories:
- Tier I contributions - NSSF contributions relating to the earnings up to KES 6,000, (which has been defined as the Lower Earnings Limit) will be a maximum of KES 720 comprising equal portions of employee and employer contributions and will be credited by the NSSF fund to an account referred to as a Tier I account.
- Tier II contributions - NSSF Contributions relating to the earnings above KES 6,000 and not exceeding KES 18,000, will be a maximum of KES 1,440 comprising equal portions of employee and employer contributions. These will be credited by the NSSF fund to an account referred to as a Tier II account.
How to opt out of Tier II contributions
The new Act further provides that an employer may opt to pay the Tier II contributions into an approved “contracted-out scheme” i.e., occupational or private pension scheme that the employer participates in or intends to establish.
The application for contracting out should be submitted in writing to the Retirement Benefits Authority (“RBA”) accompanied by the prescribed forms and supporting documentation, at least 60 days before the opting out date. The RBA shall respond in writing indicating its approval or otherwise, to the employer within 30 days and notify the NSSF accordingly. If the opting out is approved, Tier II contributions paid to the NSSF shall be transferred to the approved contracted-out scheme.
National Hospital Insurance Fund (NHIF) contributions
An employer has an obligation to deduct and remit NHIF contributions on a monthly basis on or before the 9th day of the following month.
NHIF is payable by the employee at graduated bands, up to a maximum of KES 1,700 per month. The maximum contribution is reached at a salary level of KES 100,000 per month. There is no corresponding employer contribution.
The Finance Act, 2021 introduced a tax relief on the contributions made by a resident individual to the NHIF with effect from 1 January 2022. The relief shall be provided under the existing insurance relief provisions at a rate of 15% of the amounts contributed to the NHIF. This relief seeks to encourage individuals to enrol in the NHIF to boost the government's efforts towards achieving universal healthcare coverage in Kenya.
The Finance Act, 2023 has made amendments to the Employment Act, 2007, introducing a new section 31B ‘Affordable Housing Levy’ (“AHL”). According to this new section, employers will be required to deduct and remit the AHL at:
- 1.5% of the employee’s gross monthly salary for the employees, and
- 1.5% of an employee’s gross monthly salary for the employer.
The levy must be remitted within 9 working days after the end of the month in which payments are due. If the levy payment is delayed, a penalty of 2% of the unpaid amount will be imposed for each month of delay.
Gross monthly salary constitutes basic salary and regular cash allowances. This includes housing, travel or commuter, car allowances and such regular cash payments, and would exclude those that are non-cash as well as those not paid regularly such as leave allowance, bonus, gratuity, pension, severance pay or any other terminal dues and benefits.
This change came into effect on 1 July 2023.
Every person who carries on a business in Kenya is required to apply for a business permit from the relevant local authority. The business permit is usually based on the size of one’s business and is renewable on an annual basis.
The tourism levy is payable to the Tourism Fund by establishments dealing in tourism activities and services as listed in the Tourism Act at a rate of 2% of turnover.
National Industrial Training Levy (NITA) contributions
All employers are required to pay to the Directorate of Industrial Training a monthly levy of KES 50 per employee. The only exemption is for employers remitting the tourism levy.
Railway development levy (RDL)
The Finance Act 2023, reduced the Railway Development Levy (RDL) rate applicable on imports into Kenya from 2% to 1.5%. This is a reduction from the prior rate of 2%.
The Act has also amended and added additional items to be exempted from RDL. The exempted items include goods, inputs, and raw materials imported by a company engaged in business under a Special Operating Framework Agreement (SOFA) with the Government, denatured ethanol, bioethanol vapour (BEV) stoves, equipment, machinery, and motor vehicles for official use by the Kenya Defence Force and National Police Service and currency notes and coins imported by the Central Bank; and certain aircraft spare parts imported by aircraft operators or businesses engaged in aircraft maintenance, as recommended by the competent authority responsible for civil aviation. In addition, the Cabinet Secretary may exempt other goods in the public interest or to promote an investment, the value of which is Kenya Shillings 5 billion or more.
Import declaration fee (IDF)
The Finance Act, 2023 has made amendments to the Import Declaration Fee (IDF) charged on imports reducing the rate of IDF from 3.5% to 2.5% for all imported goods. Additionally, it has removed the provision that allowed a reduced rate of 1.5% for IDF on raw materials and intermediate products imported by manufacturers and inputs for affordable housing schemes. Further, the Act has deleted the provision that allowed goods imported under the East African Community (EAC) Duty Remission Scheme to be subject to a reduced rate of 1.5% for IDF.
The Act has amended and added additional items to be exempted from the Import Declaration Fee (IDF). The exempted items now include aircraft spare parts, goods, inputs, and raw materials for companies operating under a Special Operating Framework Agreement (SOFA) with the Government, denatured ethanol, BEV stoves, equipment, machinery, and motor vehicles for official use by the Kenya Defence Force and National Police Service. In addition, the Cabinet Secretary may exempt other goods in the public interest or to promote an investment, the value of which is KES 5 billion or more.
Export and investment promotion levy
The Finance Act 2023, has introduced an export and investment promotion levy which is now chargeable at the rate of 10% and 17.5% of the customs value of certain specified imported products. Products subject to the exports and investment promotion levy at 17.5% include cement clinker (tariff no. 2523.10.00); and items of iron and steel (tariff no. 7207.11.00, 7213.91.10, and 7213.91.90).
Articles of paper pulp,of paper or of paperboard (tariff no. 4804.11.00, 4804.21.00, 4804.31.00, 4819.30.00, and 4819.40.00) will be subject to the exports and investment promotion levy at 10%
Advance tax on motor vehicles
Advance tax is payable at varying annual rates depending on the motor vehicles and is creditable against any CIT payable for the year.
Fringe benefit tax (FBT)
The FBT is payable by an employer on interest-free or low-interest loans granted to employees, company directors, and their relatives. FBT is due, whether the employer is exempted from tax or not, at the resident CIT rate of 30% (with effect from January 2021). The benefit is the difference between actual interest charged and the interest computed using the Commissioner's prescribed rate published quarterly. The directors and employees are not personally taxed on the benefit.
Betting, lottery, and gaming taxes
The Finance Act, 2019 introduced a 20% excise duty on the amounts wagered or staked in betting activities.
Furthermore, under the Betting, Lotteries, and Gaming Act, there is an additional turnover tax on lottery and gaming at 15%.
The Finance Act, 2023 amended the Betting, Lotteries and Gaming Act to provide that taxes under sections 29A, 44A, 55A, and 59B will be collected following the procedures outlined in the Tax Procedures Act of 2015. This provision ensures that the collection of these specific taxes is carried out in accordance with the guidelines and regulations set forth in the Tax Procedures Act, promoting consistency and adherence to established tax collection practices.
Local government rent and rates
Rent and rates are levied annually on properties in Kenya, and the rateable value that is payable to the county government shall vary in each county based on various forms of ratings, such as area rate, agricultural rental value, or site value.