Kenya

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 value-added tax (VAT) rate on fuel has been standardised to 16%, while the rate of capital gains tax (CGT) has been increased to 15%.  

The Finance Bill, 2024 was tabled in the National Assembly on 13 May 2024. Despite approval by Parliament on 25 June 2024, the Kenyan President declined to sign it into law.

Turnover tax

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 1 million and 25 million Kenya shillings (KES).

MSMEs earning below KES 1 million are exempt from turnover tax. 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)

Digital Services Tax (DST) is a tax on income accruing through a digital marketplace, where a digital marketplace is defined as ‘a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means’.

The DST rate is 1.5% on the gross transaction value.

In addition, the Income Tax (Digital Service Tax) Regulations (‘the DST Regulations’) were issued on 2 December 2020 vide Legal Notice no. 207 towards operationalising the DST legislation. Among other things, the DST Regulations provides 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, podcasts, and any form of digital content
• sale of, licensing of, or any other form of monetising data collected about Kenyan users that 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 Income Tax Act (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 (WHT) 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 20th 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.

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. 

Further on 23 November 2023, the National Treasury tabled a National Tax Policy to the Parliament. The overall objective of this Policy is to guide progressive development and administration of the Kenya tax system.

The National Tax Policy is intended to bring certainty in the Kenya tax regime and congruence between the economic and tax policy.

In September 2023, the Government of Kenya published the draft Medium-Term Revenue Strategy (MTRS) for the financial years from 2024/25 to 2026/27. 

According to the MTRS for 2024/25 to 2026/27, tax expenditure in Kenya is estimated to be about 6% of gross domestic product (GDP), which is higher than the average of 5% for sub-Saharan Africa. The MTRS also noted a rise in the corporate tax revenue collection gap, which is attributed to low compliance and tax expenditures.

The MTRS outlines various tax policy and administrative measures to be implemented gradually over the strategy period, such as:

• Reviewing and rationalising exemptions and preferential rates on corporate income tax (CIT), personal income tax (PIT), VAT, excise duty, and customs duty. 
• Developing a Tax Expenditure Governance Framework to guide the introduction, monitoring, evaluation, and reporting of tax expenditure and to improve transparency and accountability. 
• Strengthening the capacity and coordination of the National Treasury, the Kenya Revenue Authority (KRA), and other stakeholders in tax expenditure management and analysis. 
• Aligning the tax expenditure regime with the regional and international commitments and best practises, such as the East African Community (EAC) Common External Tariff and the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) framework. 

By implementing the above measures, the MTRS aims to raise the tax-revenue-to-GDP ratio from 13.5% in 2022/23 to 20% by 2026/27.