As of the date of publication, there are various legal challenges to the Finance Act, 2023. While the Finance Act, 2023 is currently operational, taxpayers should keep updated on the outcome of the legal challenges.
Various new tax rates and levies have been introduced as a result of the Finance Act 2023 including a housing levy chargeable on personal emoluments. Further, the VAT rate on fuel has been standardised to 16% while the rate of capital gains tax has been increased to 15%.
The rate of turnover tax has been increased from 1% to 3% . This is applicable to micro, small, and medium enterprises (MSMEs) if their business turnover is between KES 1 million and KES 25 million.
MSMEs earning below 1 million Kenya shillings (KES) are exempt from turnover tax to cushion them against the negative impact of the COVID-19 pandemic. However, MSMEs exempted from turnover tax will still be required to declare and file their corporate tax returns.
The Finance Act, 2023 has decreased the upper threshold in respect of the turnover tax from KES 50 million to KES 25 million.
Digital services tax (DST)
The Finance Act 2019 amended the charging section of the Income Tax Act (“ITA”) to provide that income accruing through a digital marketplace is income chargeable to tax in Kenya where a digital marketplace was defined as “a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means”.
Further, the ITA was amended through the Finance Act 2020 to specifically bring into taxation digital transactions that were previously not within the tax bracket and also to provide for the DST rate of 1.5% on the gross transaction value.
In addition, the Income Tax (Digital Service Tax) Regulations ("the DST Regulations”) were issued on 02 December 2020 vide Legal Notice no. 207 towards operationalising the DST legislation. Among other things the DST Regulations provided for the in scope digital services as highlighted below:
- downloadable digital content including downloadable mobile applications, e-books, and films
- over-the-top services including streaming television shows, films, music, pod casts, and any form of digital content
- sale of, licensing of, or any other form of monetising data collected about Kenyan users which has been generated from the users’ activities on a digital marketplace
- provision of a digital marketplace
- subscription-based media including news, magazines, and journals
- electronic data management including website hosting, online data warehousing, file-sharing, and cloud storage services
- electronic booking or electronic ticketing services including the online sale of tickets
- provision of search engine and automated help desk services including supply of customised search engine services
- online distance training through pre-recorded media or e-Learning including online courses and training, and
- any other service provided through a digital marketplace.
The Finance Act 2021 further amended the ITA to provide for DST on income accruing from a business carried out over the internet or an electronic network including through a digital marketplace where the definition of a digital marketplace was amended to “an online or electronic platform which enables users to sell or provide services, goods, or other property to other users”.
DST is currently only applicable to non-resident persons who do not have a permanent establishment (“PE”) in Kenya and who are providing in-scope digital services to users located in Kenya.
Income subject to withholding tax and income derived by non-resident persons from transmission of messages is currently exempt from DST. A non-resident person eligible for DST registration is required to register through the simplified tax registration framework or through appointment of a tax representative.
DST is due on or before the twentieth day of the month following the end of the month in which the digital service was rendered.
Proposed tax reforms
In 2018, the National Treasury of the Republic of Kenya released a draft Income Tax Bill (ITB) in efforts to overhaul the Income Tax Act (ITA), which was enacted in 1974. The ITA has undergone a number of piecemeal amendments that have, in some instances, resulted in inconsistencies and led to ambiguity in the legislation. The ITB is intended to do away with the confusion created by the previous piecemeal amendments, provide greater clarity, and make the legislation simple and easy to comprehend.
Further, on 8 July 2022, the National Treasury developed a draft National Tax Policy for guiding tax administration and revenue collection. The policy sets out broad parameters on tax policy and related tax matters in Kenya, with the objectives of providing:
- policy guidance on the collection, enforcement, and administration of tax laws
- the basis for review and development of tax laws
- guidelines to stakeholders, including investors, on tax policy matters
- guiding principles for the Kenyan tax system, and
- a legal framework for granting tax incentives to various sectors of the economy.
The National Tax Policy is intended to bring certainty in the Kenya tax regime and congruence between the economic and tax policy.
Significant amendments proposed in the Finance Act 2023
The Finance Act, 2023 has amended the definition of the term 'winnings' to mean the payout from a betting, gaming, lottery, prize competition, gambling or similar transaction under the Betting, Lotteries and Gaming Act, excluding the amount staked or wagered in that transaction.
The term 'digital content monetisation' has been defined to mean offering for payment entertainment, social, literal, artistic, educational or any other material electronically through any medium or channel, in any of the following forms:
- advertisement on websites, social media platforms or similar networks by partnering with brands including endorsements from sellers of such brands
- sponsorship where a brand owner pays a content creator for content creation and promotion
- affiliate marketing where the content creator earns a commission whenever the audience of the content creator clicks on the product displayed
- subscription services where the audience pays a periodic fee to access the content and support the content creator
- offering for use of a logo, brand or catchphrase associated with the content creator merchandise sales e-books, course or software
- membership programmes for exclusive content including yearly access
- licensing the content including photographs, music or other businesses or individuals for use in the user's own projects, or
- a content creator earns a commission or fees from crowd funding.
The Finance Act, 2023 has introduced a withholding tax of 5% for payments relating to digital content monetisation.
The Act has amended the Income Tax Act by introducing Digital asset tax (DAT) at a rate of 3% deducted by a person who owns of a platform or facilitates the exchange or transfer of a digital asset.The tax is levied on the gross fair market value consideration received or receivable at the point of exchange or transfer of a digital asset and remitted within five days after making the deduction. Non-resident persons who own platforms on which digital assets are exchanged or transferred will be allowed to register under the simplified tax regime.
The Finance Act, 2023 amended the Tax Procedures Act empowers the Commissioner to issue a waiver on interest and penalties for principal taxes that were due but have been paid before 31 December, 2022. Where the principal tax had not been paid by 31 December 2022, a taxpayer can apply for amnesty on interest and penalties on the unpaid tax that have accrued up to the 31 December 2022. The taxpayer must propose a payment plan for the outstanding amount and commit to pay all the outstanding principal taxes not later than 30 June 2024.
The Act has amended the Income Tax Act to introduce a tax exemption on income earned by a non-resident contractor, sub-contractor, consultant or employee involved in the implementation of a project financed through a 100% grant under an agreement between the Government and the development partner, to the extent provided for in the Agreement. The exemption shall be valid only if the non-resident is in Kenya solely for the implementation of the project.
Finally, The Finance Act, 2023 introduced a housing levy.. Both employers and employees are each required to contribute 1.5% of the gross salary of the employee every month as the housing levy.