The Finance Bill 2024, introduced to the National Assembly by the Chairperson of the Finance and National Planning Committee on May 13, 2024, proposes a range of significant changes to Kenya’s tax laws.
These changes, which will take effect on July 1, 2024, unless otherwise stated, will impact businesses, sectors, and individuals differently.
Here, we break down the key elements of the bill using relatable Kenyan examples to ensure a clear understanding.
Executive Summary
The Finance Bill 2024 proposes various amendments to the Income Tax Act (ITA), the VAT Act of 2013, the Excise Duty Act, the Tax Procedures Act of 2015 (TPA), and the Miscellaneous Fees and Levies Act, among other non-tax statutes.
These changes are designed to enhance tax collection, streamline processes, and address emerging economic activities, such as digital content monetization.
1. Business Tax
Digital Content Monetization
Imagine Wanjiku, a popular content creator on YouTube and Instagram. The new bill proposes that Wanjiku’s income from her creative works, like videos and posts, will be taxed. This includes any money she makes from creating or sharing her content.
Donations
Suppose Kamau, a businessman, donates food supplies to a local school. The Bill clarifies that both Kamau’s cash donations and the food supplies are deductible from his income for tax purposes.
Public Entity
The term “public entity” now officially includes ministries, state departments, state corporations, county governments, and other government agencies. So, when Njoroge, a contractor, supplies goods to these entities, the new definitions apply.
Related Party
Currently, there are three different ways the term “related person” is defined in tax laws. The Bill proposes one standard definition to simplify things. For example, if Mwangi and his brother jointly run a business, this new definition will clearly outline their tax obligations.
Royalty
Let’s say Amina develops software and licenses it to businesses. The Bill now includes licensing fees, training fees, and software support fees under the definition of “royalty.” This means Amina’s income from these activities will be taxed as royalties.
Introduction of Withholding Tax
When Ondieki, a supplier, sells goods to a government hospital, the hospital will withhold 3% of the payment as tax if Ondieki is a resident. If he is a non-resident, the tax withheld will be 5%.
De Minimis Withholding Tax Threshold
Previously, if a resident like Sarah earned less than KES 24,000 from professional services, no tax was withheld. The Bill proposes to remove this threshold, meaning all payments will now have tax withheld regardless of the amount.
Export Processing Zones
The Bill proposes removing the penalty for late submission of tax returns by companies in export processing zones, like a factory in Athi River.
Deferment of Realized Foreign Exchange Losses
Imagine a company in Nairobi that borrows money in dollars. If the exchange rate changes, causing a loss, this loss can only be carried forward for three years instead of five to offset future profits.
2. Income Tax Exemptions
Repeal of Various Exemptions
The Bill proposes removing tax exemptions on various incomes. For example:
- Income from local sports clubs will now be taxed.
- Interest from infrastructure bonds bought after the bill’s enactment will be taxed at 5%.
- Gains from the sale of property to family trusts will be taxed.
3. Motor Vehicle Tax
New Motor Vehicle Tax
When Wanjiru buys a new car, she will now pay a tax of 2.5% of the car’s value. If her car is valued at KES 1,000,000, she will pay KES 25,000 as tax. However, the tax will not be less than KES 5,000 and not more than KES 100,000. Insurers will collect this tax when issuing motor insurance covers.
4. VAT Changes
Financial Services and VAT
If M-Pesa starts charging VAT on money transfers, the cost of sending money will increase. Similarly, using services like telegraphic money transfers and foreign exchange transactions will attract VAT at the standard rate of 16%.
Increased VAT Registration Threshold
Small businesses like a shop in Kibera will now need to register for VAT if their annual sales exceed KES 8 million, up from KES 5 million.
Tourism and Manufacturing Sectors
Previously, certain goods for the tourism and manufacturing sectors were exempt from VAT. For example, goods used exclusively for constructing hotels were exempt. The Bill proposes removing these exemptions, making such goods taxable at 16%.
5. Excise Duty Changes
New and Increased Excise Duties
- Motorcycles: If Juma buys a motorcycle, the excise duty will be 10% of its value or KES 12,952.83, whichever is higher.
- Plastic Products: All plastic products will have excise duty, which could increase prices for items like plastic packaging.
- Vegetable Oils: Products like sunflower oil will have an excise duty of 25%, which may raise cooking oil prices.
6. Miscellaneous Fees and Levies
Introduction of the Eco Levy
The Bill proposes a new eco levy on certain goods to address environmental impacts. For example, if Atieno imports smartphones, she will pay an eco levy of KES 225 per unit. This levy also applies to items like batteries, which will cost KES 750 per kilogram.
Increase in Import Declaration Fee
The import declaration fee will rise from 2.5% to 3%, which means higher costs for imported goods. This affects importers like Juma, who brings in electronics from abroad.
Exemptions from Import Declaration Fee
Goods imported for official use by the National Intelligence Service and raw materials for making mosquito repellents will be exempt from this fee.
Conclusion
The Finance Bill 2024 brings significant changes to various tax laws, impacting everyone from digital content creators to small business owners and consumers. It’s essential for Kenyans to understand these changes and seek advice from tax professionals to navigate the new landscape effectively.
