Background

Despite the uncertainties in the days ahead and how this is likely to impact the Kenyan economy significantly, The Cabinet Secretary for the National Treasury, Ukur Yatani unveiled the budget speech for the financial year 2020/2021 on the 11th of June 2020. The budget for this financial year is Ksh 2 .7 trillion. The budget whose theme was; ‘stimulating the economy to safeguard livelihoods, jobs, businesses and industrial recovery’ focused on an 8-point stimulus package to jumpstart the economy that has been ravaged by the Covid-19 pandemic, national debt and youth unemployment.

The Government has proposed to increase taxation on alcohol makers and importers of manufactured goods, Introduction of new tax areas such as Digital /online businesses (on Loss making companies) as well as tax on retirees (who will see reduced incomes). This taxes have been proposed in order to increase tax collections and hopefully curb the tax deficits.

The Government has prioritized four Key areas while allocating funds in the 2020/2021 budget as follows;

Sector Allocation in (Ksh  bn) Impact
Education 497.7 10,000 intern teachers, 250,000 locally fabricated desks, hire1000 I.T. interns
Infrastructure 172.4 Rehabilitation of access roads, bridges and railway
Security 167.9 Equipping agencies to strengthen their effectiveness
Health Sector 111.7 Improved health outcomes

 

Additionally, the Government projects that the country’s economy is expected to grow at a lower rate of 2.5 per cent in 2020, down from projected 5.4 percent growth rate recorded in 2019.However, the 2021 growth forecast stands at 5.8 percent and 6.5 percent by 2024.

Tax payers will continue to benefit from the tax relief measures granted to curb the impact of covid-19 which were granted through the 2020 Tax Amendment Act that was assented into law by the President on 25th of April2020.  These measures will however be reviewed when the pandemic ends. This 2020 budget highlight covers the following areas.

  • Direct Taxes
  • VAT
  • Protection of Local Industries
  • Curb on Tax Cheats
  • Digital Taxation
  • Budgetary stimulus package overview

DIRECT TAXES

The National Treasury has proposed to subject direct taxes to certain aspects of incomes for individuals and corporates.
Individuals: Incomes from Home Ownership Savings Plans (HOSP), bonuses, overtimes and retirement benefits will now be subject to tax.

Sector Currently 2020 Budget changes
Interest on Home Ownership Savings Plans(HOSP) Up to 3 million exempt Taxable
Bonuses/Overtimes (low income employees) Exempt Taxable
Lump sum Pensions to persons over 65 years Exempt Taxable

Corporates and businesses: Corporation tax still remains at 25% according to the Tax Amendment Act 2020.However, the budget has proposed to introduce a minimum tax of 1% on gross turnover for loss making companies at any given financial year.

Treasury argues that businesses even when in a loss position continue to enjoy Government facilities such as infrastructure whose cost of construction and maintenance is serviced by revenues contributed by other patriotic taxpayers.

Corporate residential rental income: According to the Tax Laws (Amendment) Act, 2020 the tax rates for many taxpayers were reduced whereas the tax rate for landlords did not change. However, the budget has considered tax reduction for landlords by increasing the residential tax bands from Ksh.10 million to Ksh.15 million. This is a welcome relief for landlords who are under pressure to reduce or defer rent payments to help tenants cope with the effects of the COVID-19 pandemic.

EPZ registered companies: that previously sold locally duty free will now be levied a 10% duty on goods entered for home use.

VAT

While the VAT rate continues to be charged at 14% following the adoption of the 2020 Tax Amendment Act, certain products that were previously exempted from VAT will now be charged at standard rates.

The following products will become taxable at the general rate currently at 14%

  • Tractors
  • Plant Machinery and equipment used in the construction of plastic recycling plants
  • Transfer of businesses as a going concern
  • Hiring, Leasing, Chartering of helicopters
  • Supply of aircraft, aircraft launching gear and parts, new pneumatic tyres for use in aircraft, air combat simulators and parts,
  • Insurance and security brokerage services
  • One personal motor vehicle excluding buses and minibuses of seating capacity of more than eight seats imported by a public officer returning from posting in a Kenyan mission abroad and another motor vehicle by his spouse.
  • VAT at 14% will be levied on the following products that were previously Zero rated.
  • Liquefied petroleum gas (LPG)
  • Specialized solar equipment and accessories including solar water heaters and deep cycle-sealed batteries which exclusively use or store solar power
  • Inputs or raw materials for electric accumulators and separators including lead battery separator rolls, whether or not rectangular or squire, supplied to manufacturers of automotive and solar batteries in Kenya.
  • Taxable goods locally purchased or imported by manufacturers or importers of clean cooking stoves for direct and exclusive use in the assembly, manufacture or repair of clean cook stoves.
  • The following items changed from Standard rate to exempt
  • Maize and corn seeds
  • Ambulance services
  • Raw materials and inputs for manufacture of masks, sanitizers, ventilators and personal protective equipment including coveralls and face shields.
  • Inputs used in manufacture of baby diapers

VAT Refunds: The government has allocated KSh 14.3 billion to speed up VAT refunds to local businesses.

PROTECTION OF LOCAL INDUSTRIES

The Government proposed a review of the contracting framework for infrastructure projects in order to ensure greater participation by local contractors in line with the “Buy Kenya, Build Kenya” theme. The Cabinet secretary also reiterated Government efforts to protect the Local Industries through the introduction of the following tax measures.

Item Import duty Levy
Imported iron and steel products 35%
Paper and Paper board products 25%
Electrical parts and accessories 35%

 

It is important to note that Inputs for manufacture of mobile phones will be duty free.

Curb on tax cheats

Businesses will be required to maintain records for all transactions in steps geared towards curbing tax fraud and avoidance. In a bid to encourage tax evaders to becoming tax compliant, the government has introduced a Tax Amnesty Programme.

The amnesty will entail a voluntary disclosure set to run for three years and shall apply to all tax liabilities that accrued within a period of five years prior to 1st July 2020. Tax payers who voluntarily disclose to the commissioner their tax liabilities including material facts) will be granted relief from penalties and interests. The amnesty programme is expected to run for 3 years once approved.

Digital tax

Informed by the recent trends whereby a growing number of transactions are being carried on online, Subscriptions to popular streaming sites like Netflix and other businesses making direct online transactions with buyers in Kenya from their countries of residence. The sale of electronic event tickets, software’s programmes, web hosting and downloads of digital content will also fall under the digital taxation bracket.

Digital service transactions will henceforth attract a tax rate of 1.5 per cent on gross digital value of transactions. The Cabinet Secretary however noted that there is need to have a well-defined framework that will help in the implementation of the taxation of online businesses.

Budgetary stimulus package overview

In order to stimulate the economy to safeguard livelihoods, jobs, businesses and industrial recovery the following key areas have been emphasized.

Youth Employment: Kes 10 billion set aside for the Kazi kwa Vijana programme

Small scale farmers: Kes 4.9 billion to subsidise farm inputs through the e-voucher system to cater for more than 200,000 small scale farmers

To support the recovery of SMEs the State shall gazette the list of goods for local procurement to support the Buy Kenya Build Kenya Initiative.

CS Yatani sets aside Sh5 billion for rehabilitation of access roads and bridges across the country.

Sh300 million set aside to recruit 1,000 ICT interns to support digital learning in schools.

Health Care: Sh111.7 billion allocated to the health sector.  Out of this Sh50.3 billion is towards activities and programs to achieve universal health care in all counties. Sh1.2 billion set aside for the recruitment of health workers for a period of one year. Sh500 million to go to the supply of beds and beddings to hospitals.

The total allocations can be summarised as follows

  • Upgrading Infrastructure-Kazi mtaani programme and Youth employment Kes 15 Billion
  • Enhancing Liquidity to businesses-Through support of small, Micro and Medium Enterprises-Kes 3Billion
  • Reviving Agriculture and food Security-Assisting small scale farmers and the flower industry-Kes 7.9 Billion
  • The Environment-Improved flood control, creation of new water infrastructure and tree planting-Kes 2.4Billion
  • Education-Hiring of educators and Schools Construction-Kes 7.4 Billion
  • Health-Hiring healthcare workers and hospitals improvements-1.7 Billion
  • Tourism-Supporting tourism businesses, community conservancies and hiring 5500 community scouts-Kes 5 Billion
  • Buy Kenya Build Kenya-Purchasing of locally assembled motor vehicles and credit provision for SME’s –Kes 1.3 Billion

The Government has constituted a team in Treasury to review the situation on the ground being faced by state owned enterprises specifically on profitability and sustainability and revert within 90 days. The new tax measures are expected to generate about 38.9 billion and will take effect on January 2021.

For additional information with respect to this tax alert, please contact:

Beatrice Kamau

Outsourced Services Manager

t +254 715 248882  |  +254 733 533449
bkamau@mgkconsult.co.ke