Kenya

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. There are five types of supplies that attract VAT at different rates: 16% for local taxable supplies, 8% on local supply of fuel (effective September 2018), 0% for zero-rated supplies and exports, exempt supplies, and supplies that are out of VAT scope.

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.

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.

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. Please note that the Tax Laws Amendment Act, 2020 (TLAA) revised the determination of taxable value for petroleum products listed in Section B of the First Schedule to the VAT Act. Initially, the taxable value of these petroleum products excluded excise duty, fees, and other charges. However, with effect from 15 May 2020, taxable value of petroleum products shall be the consideration for the supply and will include any taxes, duties, levies, fees, and charges paid or payable on or by reason of the supply. 

Taxpayers can seek refund of VAT paid on bad debts within four years from the date of supply. Prior to 25 April 2020, taxpayers had a window period of five years to seek refund of VAT paid on bad debts aged three years and over. Following this amendment, businesses need to be prompt in applying for VAT refunds on bad debts due to reduction of the window period within which VAT refund applications are lodged with the revenue authority for verification before payment. 

The Value Added Tax (Digital Marketplace Supply) Regulations, 2020, which seek to operationalise the collection of VAT on digital marketplace supplies as provided for in the VAT Act, are now published. The regulations provide clarity on the nature of supplies subject to VAT, at the standard rate of 16%, when supplied through a digital marketplace. These services include, amongst others:

• downloadable digital content, including mobile applications, e-books, and films
• software programs, including software, drivers, website, filters, and firewalls
• electronic data management, including website hosting, online data warehousing, file sharing, and cloud storage services
• distance teaching through pre-recorded media or e-learning, including online courses and training
• digital content for listening, viewing, or playing on any audio, visual, or digital media, and
• any other service provided through a digital marketplace that is not exempt under the VAT Act.

A non-resident person supplying the above 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) and business-to-business (B2B) transactions. 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. 

Prior to enactment of 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.

Previously, the definition of digital marketplace was 'an online platform that enables users to sell or provide services, goods, or other property to other users'. The Finance Act 2022 has amended the definition to read 'an online platform that enables users to sell goods or provide services'. This was a clarification on the type of supplies subject to VAT.  

Another key clarification brought about by the Finance Act, 2022 is that the VAT registration threshold of KES 5 million does not apply to non-residents making digital marketplace supplies in Kenya. This means that a non-resident supplying these services is required to register and account for VAT regardless of their turnover.

The Finance Act, 2022 changed the VAT status of exported services from exempt to zero rated for 'business process outsourcing (BPO)' beginning 1 July 2022. The Act, however, did not provide a definition of BPO, and the KRA is yet to give guidance on this. The impact is therefore that services provided for use and consumption outside of Kenya will only qualify for zero rating if they relate to BPO. Services not qualifying as BPO will be subject to VAT at the standard rate of 16%. The change has far-reaching consequences as companies exporting services will now be required to charge VAT, which will be a cost to non-resident recipients of such services, a situation that goes against the destination principle on taxation of cross-border supplies.

Where the amount of input tax that may be deducted by a registered person in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess tax shall be paid to the registered person by the Commissioner in form of a refund claim where:

• such excess arises from making zero-rated supplies, or
• such excess arises from tax withheld by appointed tax withholding agents, and
• such excess arises from input tax incurred by a manufacturer in respect to taxable supplies made to an official aid funded project approved by the Cabinet Secretary in accordance with the First Schedule to the VAT Act.

In addition to the above, taxpayers are also entitled to a refund of VAT paid in error. 

The VAT Act exempts certain medical supplies from VAT upon approval by the Cabinet Secretary for Health. These supplies include physiotherapy accessories, treadmills for cardiology therapy and treatment, medical ventilators and the inputs for the manufacture of medical ventilators, electro-diagnostic apparatus, diagnostic or laboratory reagents, breathing appliances, and gas masks, among others.

Prior to the Finance Act Amendments, taxable goods for direct and exclusive use in the construction and equipping of specialised hospitals with a minimum bed capacity of 50, approved by the Cabinet Secretary for Health, were exempt from VAT. These supplies are now subject to VAT at 16%.

Additionally, the Finance Act, 2022 has introduced a blanket exemption on capital goods, the exemption of which the Cabinet Secretary in charge of Treasury may determine to promote investment in the manufacturing sector, provided that the value of such investment is not less than KES 2 billion.

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. Prior to 1 July 2022, these rates were 0% for raw materials and capital goods, 10% for intermediate goods, and 25% for finished goods.

With effect from 1 July 2022, the East African Community Common External Tariff (EAC CET) 2022 version has been issued and is aligned with the World Customs Organisation’s (WCO's) Harmonised Commodity Description and Coding System (HS System 2022 version) and the 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. 

Most of these products have a stay of application for a period of one year, and, as such, the applicable customs duty rate will revert beginning 1 July 2023. We further note that the EAC Gazette Notice provided a stay from payment of duty of certain products that are of interest. This stay is also applicable for a period of one year beginning 1 July 2022.

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.

Under recent changes through the EAC Gazette Notice, manufacturers of baby diapers, surgical face masks, and hand sanitizers were granted duty remission on importation of raw materials for manufacture.

Excise duty

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 Excise Duty Act contains a requirement for annual inflationary adjustment on excise duty rates to be tabled before Parliament for approval before the same can be affected by the Commissioner. According to The Finance Act, 2022 “the Commissioner may, by notice in the Gazette and with the approval of the Cabinet Secretary, exempt specified products from inflation adjustment after considering the circumstances prevailing in the economy in that year in respect of such products”.

The Finance Act, 2022 has introduced 20% excise duty on fees charged by digital lenders, imported sim cards at KES 50 per card, and on importation of cellular phones at the rate of 10%.

Stamp duty

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:

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 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.

Payroll taxes

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

Employers and employees are each obligated to contribute monthly to the NSSF a standard contribution of KES 200. The fund was set to undergo drastic transformation following the enactment of the NSSF Act 2013, which became effective from 10 January 2014. However, the ruling of the employment and labour relations court on 19 September 2022 found the NSSF act 2013 to be unconstitutional and therefore unenforceable on employers and employees unless they voluntarily opt in. 

Currently, employers are required to remit the monthly NSSF contributions on or before the 15th day of the following payroll month. An amendment made to Section 20 of the Act, which, among other changes, sought to change the due date to the 9th day of the following month with effect from 31 March 2021, was stopped by the above-mentioned court case.

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.

Business permit

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.

Tourism levy

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 RDL is now payable on all imports into the country at 2% on the customs value of the goods. However, the rate will apply at 1.5% for (i) raw materials and intermediate products imported by approved manufacturers and (ii) inputs for the construction of houses under the affordable housing scheme approved by the government.

The Miscellaneous Fees and Levies Act exempts payment of RDL on 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. 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. 

The Finance Act, 2022 has exempted from RDL goods imported for use in construction and maintenance of human vaccine manufacturing plants as approved by the Cabinet Secretary for Health. 

Further, the Act has also exempted goods, inputs, and raw materials imported by a company that is engaged in business under a special operating framework with the government or incorporated for the purposes of undertaking the manufacture of vaccines and whose capital investment is at least KES 10 billion, subject to the approval of the National Treasury on recommendation of the Cabinet Secretary for Health. Also exempted from RDL are inputs and raw materials imported by manufacturers of pharmaceutical products upon approval of the National Treasury on recommendation of the Cabinet Secretary for Health.

Import declaration fee (IDF)

The IDF is payable on all imports into the country at 3.5% of the customs value of the goods. However, there is a reduced rate of 1.5 % on raw materials, intermediate goods, and inputs for the construction of houses under the affordable housing scheme approved by the government.

The Miscellaneous Fees and Levies Act exempts payment of IDF on 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. 

The Finance Act, 2022 has exempted from IDF goods imported for use in construction and maintenance of human vaccine manufacturing plants as approved by the Cabinet Secretary for Health. 

Further, the Act has also exempted goods, inputs, and raw materials imported by a company that is engaged in business under a special operating framework with the government or incorporated for the purposes of undertaking the manufacture of vaccines and whose capital investment is at least KES 10 billion, subject to the approval of the National Treasury on recommendation of the Cabinet Secretary for Health. Also exempted from IDF are inputs and raw materials imported by manufacturers of pharmaceutical products upon approval of the National Treasury on recommendation of the Cabinet Secretary for Health.

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%.

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.