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.
The Finance Act, 2020 has introduced an additional condition on deductibility of input tax. A person claiming input tax is required to hold the documentation provided for under Section 17 (3) or the registered supplier to have declared the output tax in their VAT return.
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.
The time within which taxpayers can seek refund of VAT paid on bad debts has been revised from five years to four years. Initially, 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 will need to be prompt in applying for VAT refunds on bad debts due to reduction of the window period within which VAT refund applications can be lodged with the revenue authority.
The Value Added Tax (Digital Marketplace Supply) Regulations, 2020 have recently been published. The regulations seek to operationalize the collection of Value Added Tax (VAT) on digital marketplace supplies as provided for in the VAT Act. The regulations have sought to 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.
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. These rates are 0% for raw materials and capital goods, 10% for intermediate goods, and 25% for finished goods. However, a different rate of duty can be prescribed by the Council of Ministers of the EAC partner states, depending on the agenda concerning certain industries.
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 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 for use locally within the EAC and for export outside the EAC, 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, some measures provide incentives to manufacturers of baby diapers, surgical face masks and hand sanitizers in line with Kenya’s Big Four Agenda.
Excise duty is imposed on the local manufacture or the importation 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 is a welcome change and will help reduce disputes with the tax authority on what ‘other fees’ should be subject to excise duty.
The Finance Act, 2020 has amended the definition of ‘licence’ in the Excise Duty Act 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 Kenya Revenue Authority (KRA) may impose a requirement for licence, ‘licence’ refers to the licence required under section 15(1)(e).
The Finance Act, 2020 has introduced a requirement for annual inflationary adjustment on excise duty rates to be tabled before Parliament for approval before the same can be effected by the Commissioner. The Act has also removed payment of excise duty on betting activities.
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 5%. 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 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 obligated to contribute monthly to the NSSF a standard contribution of KES 200 each. However, the new NSSF Act provides for a higher contribution rate of 6% of pensionable earnings with matching contribution from the employer. The implementation of the new Act awaits conclusion of a pending court case.
National Hospital Insurance Fund (NHIF) contributions
An employer has an obligation to deduct and remit NHIF contributions on a monthly basis.
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.
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 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 Finance Act, 2020 has maintained exemption from RDL on goods imported for implementation of projects under a special operating framework arrangement with the government. The Act has also exempted payment of RDL on machinery and motor vehicles for official use by the Kenya Defence Force & National Police Service and currency notes and coins imported by the Central Bank.
Import declaration fee (IDF)
The IDF is now 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 Finance Act, 2020 has exempted payment of IDF on machinery and motor vehicles for official use by the Kenya Defence Force & National Police Service.
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.