The Tax Laws (Amendment) Bill, 2020 (the “Bill”) was assented to by the President on 25th April 2020, as one of the measures to cushion citizens from the negative economic effects of COVID-19. The Tax Laws (Amendment) Act, 2020 (the “Act”) amends provisions on the following: Income Tax, Value Added Tax, Pay As You Earn Tax (PAYE), Excise Duty, and the Tax Procedures, the Miscellaneous Fees and Levies Act and the Kenya Revenue Act.

The provisions of the Act are effective as the date of assent of the Act, that is, Saturday, 25th April 2020. Changes in respect of the taxable value of fuel and other products which will however be effective from 15th May 2020.

A. Income Tax

1. An increase in the personal relief to KES 28,800 per annum (KES 2,400 per month) from the current KES 16,896 per annum (KES 1,408 per month); A reduction of the top rate of income tax for individuals from the current 30% to 25%. The top rate of tax will now apply on monthly income in excess of KES 57,333.
2. A reduction in the corporation tax rate from the current 30% to 25%.
3. A reduction in the top rate of tax for pensions.
4. The expansion of qualifying interest, received by a Kenya resident individual, rather than just bank, building society and that earned from the Central Bank;
5. The provisions for electricity rebate for manufacturers have been repealed.
6. Exemptions for the following classes of income have been repealed:
   1. interest earned on contributions paid into the Deposit Protection Fund established under the Banking Act;
   2. dividends received by a registered venture capital company, special economic zone enterprises, developers and operators licensed under the Special Economic Zones Act;
   3. gains arising from trade in shares of a venture company earned by a registered venture capital company within the first ten years from the date of first investment in that venture company by the venture capital company: Provided that the venture company has not been listed in any securities exchange operating in Kenya for a period of more than two years;
   4. interest income generated from cash flows passed to investors in the form of asset-backed securities;
   5. dividends paid by special economic zone enterprises, developers or operators to non-resident persons; and
   6. compensating tax for power generating companies. This exemption was relevant when compensating tax was still in the law.
7. Repeal of the Second Part of the First Schedule to the ITA in respect of interest earned on particular securities.

B. Withholding Tax

1. Now applicable on reinsurance premiums at the rate of 5%;
2. Applicable on sales promotion, marketing, advertising services, the transportation of goods (excluding air and shipping transport services) paid to non-residents at the rate of 20%. A proviso has been introduced in the Act exempting transport services within the East African community;
3. Withholding tax rate on dividends paid to non-residents persons has been increased from 10% to 15%;

C. Value Added TAX

1. The following items that the Bill had proposed to remove from the exempt schedule have been retained and the items thus remain exempt:
   1. fertilisers;
   2. taxable supplies for the construction of liquefied petroleum gas storage facilities;
   3. specialised equipment for the development and generation of solar and wind energy, including deep cycle batteries which use or store solar power;
   4. entry fees into national parks and national reserves/services of tour operators, excluding in-house supplies;
   5. inputs or raw materials supplied to solar equipment manufacturers for manufacture of solar equipment or deep cycle-sealed batteries which exclusively use or store solar power;
   6. plant, machinery and equipment used in the construction of a plastics recycling plant;
   7. helicopters, aeroplanes, other aircraft of unladen weight not exceeding 2,000 kg as well as other ground flying trainers and parts of aeroplanes and helicopters;
   8. made up fishing nets of man-made textile material of tariff number 5608.11.00;
   9. mosquito nets of tariff number 6304.91.10;
   10. materials, waste, residues and byproducts, whether or not in the form of pellets, and preparations of a kind used in animal feeding;
   11. tractors other than road tractors for semitrailers;
   12. inputs or raw materials, whether locally purchased or imported, by manufacturers of agricultural machinery and implements upon approval by the Cabinet Secretary for Industrialization; and m. inputs for the manufacture of pesticides.
2. The following items that were proposed to be classified as exempt by the Bill have been retained as zero rated:
   1. ordinary bread; and
   2. milk and cream, not concentrated nor containing added sugar or other sweetening matter of the specified tariffs.
3. The following items that the Bill had proposed to remove from zero rating have been retained as zero rated:
   1. agricultural pest control product;
   2. inputs or raw materials for electric accumulators and separators including lead battery separator rolls whether or not rectangular or square supplied to manufacturers of automotive and solar batteries in Kenya; and
   3. taxable goods supplied to marine fisheries and fish processors upon recommendation by the relevant state department
4. The following zero rated items will now be subject to standard rate VAT:
   1. asset transfers and other transactions related to the transfer of assets into real estate investment trusts and asset backed securities;
   2. insurance agency, insurance brokerage and securities brokerage services;
   3. certain medicaments; and
   4. taxable services provided for direct and exclusive use in the construction and infrastructural works in industrial and parks of one hundred acres or more including those outside special economic zones

5. The Act now exempts supplies of personal protective equipment, including facemasks, for use by medical personnel in registered hospitals and clinics, or by members of the public in the case of a pandemic or a notifiable infectious disease.
6. The reduction in the standard rate of VAT from 16% to 14%
7. Extension of the time line for issuing a credit note within 30 days after the determination of a commercial dispute in a court of law in regards to the price payable on the tax invoice. This is in addition to the current legislation that allows a credit note to be issued within six months of the relevant tax invoice.
8. The time limit of applying for a refund on bad debts has been reduced from five years to four years from the date of supply.
9. The requirement for all persons to maintain commercial records for five years.

Note:

The above measures are mostly good measures. Moving of goods from zero rated to exempted status makes the particular products more expensive as the input VAT incurred in the manufacturing process is not claimable under the ‘exempt’ status. Thus, reinstatement of bread, milk, pesticides and other agricultural products helps to maintain their current prices. This also applies to the construction of liquefied petroleum plants and entry to national parks, as these are the sectors most affected by the pandemic.

The pandemic has mostly affected the health sector. There has been a strain on the availability of Personal Protective Equipment (“PPE”) especially for the medical personnel hence exempting these products relieves the health sector of a burden, albeit small.

There is a blow to pharmaceutical companies by the exemption of certain medicaments which will lead to an increase in pharmaceutical products. There will also be an increase in insurance premiums which is most likely to impede the accessibility of insurance coverage to the citizens.

These amendments impede the growth of the local manufacturing sector as they increase the cost of manufacturing due to the high cost of supplies.

D. Miscellaneous Fees and Levies Act:

1. 1. Increase in the Import Declaration Fee (“IDF”) on raw materials and inputs from the current 1.5% to 3%.
   2. Introduction of a processing fee of KES 10,000 on duty free motor vehicles, imported by the persons or groups listed under the Fifth Schedule to the East African Community Customs Management Act for example presidents, donor agencies, disabled persons and rally drivers.
   3. IDF has been introduced at 3.5% on: gifts or donations, excluding motor vehicles, by foreign residents to their relatives in Kenya for their personal use; and samples which in the opinion of the Commissioner have no commercial value.
   4. Exemption for goods imported for the construction of liquefied gas storage facilities as approved by the Cabinet Secretary responsible for liquefied petroleum gas.

Note:

The amendments will result to more revenues from IDF on items that were previously exempted. Investors and other importers will however have a chance to apply for exemption from IDF. KRA will also be able to recover costs incurred on clearing duty free vehicles.

E. Tax Procedures Act

1. 1. The Commissioner is empowered to appoint persons registered under the Banking Act to agents for revenue banking services under an agreement. The institutions that will be appointed for this purpose will have two days to deposit the money with Central Bank failure to which they will face a penalty of 2% of the amount collected and not deposited. The penalty will be compounded for each day that the failure continues.
   2. The time limit requiring the Commissioner to respond to a private ruling request has been increased from 45 days to 60 days.
   3. The rate of turnover tax has been reduced from the current 3% to 1%. The tax will now apply on turnover in excess of KES 1 million (the original proposal was KES 500,000) and not exceeding KES 50 million.

F. Kenya Revenue Act

KRA is empowered to reward KES 500,000 to anyone who provides information to KRA leading to enforcement of tax laws. This provision only applies where KRA has not awarded the informer for identification of unassessed duties taxes or recovery of unassessed duties or taxes.