Key Highlights of the Finance Bill 2025

The Finance Bill 2025 was tabled in Parliament by the Cabinet Secretary for the National Treasury on 30th April 2025. The Bill proposes various amendments to the Income Tax Act, VAT Act, Excise Duty Act, Tax Procedures Act, and the Miscellaneous Fees and Levies Act. It is currently at the public participation stage.

Outlined below are the key proposals set to take effect from 1st July 2025, if enacted in their current form, along with a discussion of their practical implications on your business operations.

Income Tax Act Proposals

1. Expanded scope to royalty definition

The bill seeks to expand the definition of royalty to include the distribution of software where regular payments are made for the use of the software through the distributor. This therefore means that distribution of software will henceforth fall under the ambit withholding tax. Currently, the resale of software, where the reseller does not commercially exploit or modify the software, does not attract withholding tax.

2. Increase per diem Threshold

The bill seeks to raise the tax-exempt per diem from KES 2,000 to KES 10,000 for amounts received by employees for travelling, subsistence and entertainment while away from their usual work station. This is a positive development as it aligns the exemption with current economic conditions and cost-of-living realities.

3. Tax Relief on Pension Income

The Bill seeks to delete various sections relating to tax relief on pension income so as to align the same with the changes brought about by the Tax Laws Amendment Act, 2024 specifically exempting from tax the withdrawal of pension benefits provided that a person has met the retirement age, has been a member of fund for at least 20 years or the withdrawal done prior to attaining retirement age is necessitated by ill health.

4. Expansion of Significant Economic Presence (SEP) Tax

The bill seeks to broaden the scope SEP tax to encompass incomes of non-resident entities derived or accrued in Kenya through the internet, electronic network or digital market place. Currently only income of nonresident derived through a digital, market place fall under the ambit of SEP tax. The expanded scope is to also covers incomes generated through the internet or electronic network. The bill furthers seeks to delete the exemption threshold accorded to non-residents with an annual turnover of below KES 5 Million

5. Withholding Tax on Supplies of Good to Public Entities and Sale of Scrap Metal

The proposes to amend Section 10 of the ITA to include supplies of goods to public entities and sale of scrap metal to fall under the ambit of withholding. This is to align the same with the introduction made by the Tax Laws Amendment Act, 2024.

6. Minimum Top up Tax

The Tax Laws Amendment Act, 2024 introduced a minimum top up tax applicable to Multinational Enterprises operating in Kenya, that are:

• Part of a group whose consolidated annual turnover is 750 million Euro or more; and
• Have a combined effective tax rate of less than fifteen percent in a year of income.

The Bill proposes that the due date for the payment of minimum top-up tax shall be the end of the fourth month following the close of the accounting year.

7. Digital Asset Tax (DST)

The Bill propose to reduce digital asset tax to 1.5% on the income derived from the transfer or exchange of a digital assets. DST was introduced by the Finance Act 2023 with the rate currently at 3 %.

8. Limitation on Carry-Forward of Tax Losses

The Bill proposes to limit the current indefinite carry-forward period for tax losses to a maximum of five years. Further the bill proposes to repeal the provision granting the Commissioner powers to extend the period of carry forward of tax losses beyond the stipulated period. Businesses which are capital intensive or those with extended recovery periods may be forced to forfeit their tax losses should they not be able to utilize the same within five years.

9. Offset of Capital loss on disposal of property

Section 15 of the Income Tax Act currently allows taxpayers to offset tax losses against capital gains arising from other property transactions within the same year of income, or to carry forward such losses for offset in future periods. The Finance Bill proposes to repeal this provision. If enacted, this change would prohibit businesses from offsetting or carrying forward tax capital losses against capital gains, potentially leading to a higher tax liability in years where gains are realized.

10. Deductibility of Mortgage Interest

The Bill seeks to expand tax deductibility of mortgage interest to include interest on amounts borrowed for the construction of owner occupied residential properties. Currently the ITA only allows for the deductibility of interest on the purchase or improvement 0f owner occupied residential properties.

11. Expenditure Incurred on Timber Production

Section 15 of the Income Tax Act currently permits the deduction of expenses incurred in the production of timber, subject to the Commissioner’s approval as being just and reasonable. The Bill proposes to repeal this requirement, thereby allowing businesses to self-assess and claim such expenditure without needing prior approval.

12. Advance Pricing Agreements (APA’s)

The Bill proposes to introduce Advance Pricing Agreements (APAs) between taxpayers engaged in related-party transactions with non-residents and the Commissioner. These agreements will be valid for a period of five years. However, in instances where there is misrepresentation of facts by the taxpayer, the Commissioner will have the authority to declare the APA null and void. This measure will significantly enhance certainty for multinational enterprises by reducing the likelihood of disputes related to transfer pricing arrangements.

13. Change of Accounting Year End

The Income Tax Act currently allows taxpayers to apply for a change of their accounting year end but does not specify a timeline within which the Commissioner must respond. The Finance Bill proposes to introduce a six-month timeframe for the Commissioner to make a decision on such applications. If no response is issued within this period, the application will be deemed automatically approved.

14. Income Tax Exemption Certificate

 The bill seeks to extend the timelines of issuing an income tax exemption certificate from the current sixty days to ninety days from the date the application is lodged.

15. Taxation of Non-citizens’ Employment Income

Currently, one-third of gains and profits from employment income earned by non-citizens meeting specific criteria is exempt from tax. The Finance Bill proposes to repeal this provision, thereby subjecting the entire employment income of non-citizens to tax.

16. Expenditure Incurred in Sport Related Activities

 The Bill proposes to explicitly allow expenditure incurred on sponsorship activities as deductible for tax purposes, removing the current requirement to obtain approval from the Cabinet Secretary responsible for sports. Additionally, it introduces a provision to treat donations made towards the construction of public sports facilities as allowable deductions.

17. Penalty for Underpayment of Installment Tax

Currently, the Income Tax Act imposes a 20% penalty on the underpayment of instalment tax. The Bill proposes to repeal this provision and align the penalty rate with that of the Tax Procedures Act, which prescribes a lower rate of 5%.

Value Added Tax (VAT) Act, 2013

1. Tax Invoice

The Bill proposes to amend the definition of a tax invoice to explicitly include invoices generated through the electronic Tax Invoice Management System (e-TIMS). This amendment aims to harmonize the definition with that provided under Section 23A of the Tax Procedures Act.

2. Place of Supply of Services

The bill proposes to include internet services under the definition of electronic services. This therefore means that services provided over the internet by a non resident person to a person in Kenya will be deemed to have been supplied in Kenya.

3. VAT Refund Applications

Currently, the VAT Act allows taxpayers to apply for VAT refunds on excess input VAT resulting from zero-rated supplies within 24 months. The Bill proposes to shorten this application period to 12 months in order to align with the provisions of the Tax Procedures Act (TPA).

4. Refund Arising from Bad Debts

The VAT Act currently permits taxpayers to apply for refunds on VAT related to bad debts, provided the application is made after a period of three years. The Bill proposes to reduce this timeframe to two years.

Similarly, the Bill proposes to repeal the provision requiring taxpayers who recover amounts previously refunded by the Commissioner due to bad debts to remit the recovered sums within 60 days. Instead, it aligns this obligation with the Tax Procedures Act, which mandates a refund to the Commissioner within 30 days of recovery.

The Bill seeks to move the following supplies from zero rated to exempt

 The Bill seeks to move the following supplies from exempt to standard rated

Tax Procedures Act Proposals

1. Failure to Deduct WHT

Currently, a person who fails to deduct and remit withholding tax is penalized, even if the recipient of the payment has already declared the income and paid the applicable tax. The Bill proposes to provide relief in such instances, potentially eliminating the penalty where the tax has been duly accounted for by the recipient.

2. Timeline Relating to Objection to Tax Decisions

 The Bill seeks to amend the Tax Procedures Act to clarify that, where the Commissioner permits a late objection and the objection is validly lodged, the 60 days’ timeline for making a decision on the objection will begin from the date the late objection is submitted.

The bills further propose to exclude Saturday, Sundays and public holidays when computing the statutory timelines of lodging a tax objection or appeal at the Tax Appeals Tribunal, High Court or Court of Appeal.

3. Penalties on Errors Generated by Electronic Tax System

The Bill proposes to give the Cabinet Secretary the power, based on advice from the Commissioner, to cancel penalties or interest charged on taxpayers in cases where errors are caused by the electronic systems, delay in updating system or where a taxpayer is wrongly registered for a tax obligation.

4. Trade Secrets and Customer Data

Currently, the Commissioner does not have the legal power to access trade secrets or personal data for purposes of integrating them into the electronic tax management system. The Bill now proposes to grant the Commissioner this power, allowing access to such information to enhance tax administration.

5. Amended Assessments

The Bill proposes to require the Commissioner to provide reasons when amending a tax assessment. This is a positive step toward fair tax administration, as it will enable taxpayers to understand the basis of the changes and effectively lodge objections where necessary.

Conclusion

Businesses are encouraged to review these proposals and assess their implications. MGK Consulting will continue tracking the Bill’s progress and provide timely updates post-enactment.

For personalized impact assessments, reach out to our Tax Experts through enquiries@mgkconsult.co.ke