Kenya’s Finance Bill 2024, introduced on May 9, has stirred significant debate and public interest due to its ambitious tax proposals aimed at raising revenue for the Kenya Kwanza government’s extensive development projects.
This blog explores the key aspects of the bill, the public’s response, and its potential impact on various sectors.
Key proposals in the Finance Bill 2024
1) Motor vehicle tax
A new motor vehicle tax is proposed, set at 2.5% of the vehicle’s insured value.
The tax has a minimum payable amount of KSh 5,000 and a maximum of KSh 100,000.
Insurance companies will be responsible for collecting and remitting this tax when issuing or renewing insurance policies.
2) Value-added tax (VAT) adjustments
The bill proposes the removal of VATValue Added Tax (VAT) in Kenya is a consumption tax levied on the sale of goods and services. As of , the standard VAT rate is set at 16%. This tax is... ... exemptions on several financial services, including:
- The issuance of credit and debit cards
- Money transfer services
- Foreign exchange transactions (Including supply of foreign drafts, and international money orders)
- Cheque processing
- Issuance of securities
- Telegraphic money transfer services
- Management and related insurance consultancy services
- Actuarial services, etc.
Also, the VAT registration threshold for businesses making taxable supplies is raised from KSh 5 million to KSh 8 million.
3) Excise duty increases
Excise taxes on products such as spirits, cigarettes, M-Pesa transactions, airtime, and bank transfers are set to increase.
This could lead to higher costs for consumers and potentially impact household budgets, especially for lower-income families.
A 20% excise duty on various fees charged by financial institutions is introduced, likely increasing the cost of critical financial services, including fees for issuing securities, assignment of debt, and money transfers.
4) Minimum top-up tax
The Finance Bill, 2024 proposes to introduce a minimum top-up taxA top-up tax is a mechanism designed to ensure that large multinational companies (MNEs) pay a minimum level of tax on their profits in each country t... ... that will be payable by resident persons or non-residents with a permanent establishment in Kenya who are members of a multinational group with a consolidated annual turnover of at least EUR 750 million. (About KES 106 Billion)
This targets profit shifting and base erosion by multinational corporations.
The key details are:
- The minimum top-up tax will be payable where the combined effective tax rate (ETR) of the covered person for a year of income is less than 15%.
- The combined ETR is calculated as the sum of all the adjusted covered taxes divided by the sum of all the net income or loss for the year, multiplied by 100.
- The amount of top-up tax payable will be the difference between 15% of the net income/loss and the combined ETR multiplied by the excess profit.
- The minimum top-up tax will not apply to certain entities like public entities, exempt persons, pension funds, and sovereign wealth funds.
This provision aims to align Kenya’s tax framework with the Global Anti-Base Erosion (GloBE) rules under the OECD/G20 BEPS Project, particularly Pillar 2 which ensures multinational enterprises pay a minimum 15% tax on their global profits.
The measure is expected to enable the Kenyan government to collect additional revenue from multinational companies operating in the country.
5) Repeal and replacement of digital services tax
The current 1.5% digital service taxDigital Service Tax (DST) Basics The Digital Service Tax is your new reality if you're engaging in the digital marketplace in Kenya. Set at a rate of ... will be replaced with a Significant Economic Presence Tax (SEPT), levying a 20% tax on the gross turnover of certain foreign digital businesses operating in Kenya.
- SEPT will be payable by non-resident persons who accrue income in Kenya from the provision of services supplied through a digital marketplace.
- The definition of a “digital marketplace” is proposed to be expanded to include various digital services like ride-hailing, food delivery, freelance services, etc.
- The SEPT rate will be 30% of the non-resident’s deemed taxable profit, which is proposed to be 20% of their gross turnover. This results in an effective tax rate of 6% of the gross turnover, significantly higher than the current 1.5% DST
- SEPT will be payable monthly by the 20th day of the end of the month, with affected non-residents required to file a return at the time of payment.
- Similar to DST, SEPT will not apply in cases where the income is otherwise subject to withholding tax.
6) Tax deductible expenses
This bill proposes to make the following contributions expenses tax-deductible
- Contributions to the Social Health Insurance Fund (SHIF)
- Contributions to post-retirement medical funds, subject to a limit of KES 10,000 per month
- Contributions to the affordable housing levy
The key implications of these proposals are:
- For employees, this will result in a slightly lower Pay As You Earn (PAYE) tax, as these contributions will be deductible from their taxable income
- This is aimed at alleviating the tax impact on contributors to these funds and incentivizing participation in the government’s affordable housing and healthcare programs.
- The proposed removal of the post-retirement medical fund relief that was introduced in the Finance Act 2023 is likely to prevent double tax relief for taxpayers.
7) Reprieve for telecommunication operators
This bill seeks to introduce an investment deduction claim on capital expenditure incurred on the purchase of spectrum licensesSpectrum licenses are permissions granted by a regulatory authority to use a specific portion of the electromagnetic spectrum for communication purpos... ... by telecommunication operators in Kenya.
Key points:
- The investment deduction will be at the rate of 10% per year, in equal installments.
- For spectrum licenses purchased before July 1, 2024, the deduction shall be restricted to the unamortized portion over the remaining useful life of the permit.
- This measure seeks to incentivize further investment in spectrum licenses by telecommunication operators.
Telecommunication companies incur significant costs in purchasing spectrum licenses, but previously only indefeasible rights to use the fibre optic cable were eligible for investment allowances.
With this new proposal, investment in spectrum licenses will be treated as capital expenditure and become eligible for investment allowance from July 1, 2024
8) Taxing of interests from infrastructure bonds
If this bill passes, the interests accrued from government infrastructure bonds and social bonds will be taxable for tax residents and non-residents:
- 5% withholding tax for residents
- 15% withholding tax for non-residents
All interest income earned from infrastructure bonds that were already listed before the proposed changes come into effect will remain exempt from tax.
![An In-Depth Look at Kenya’s Finance Bill 2024 1 Finance bill 2024 introduction of withholding tax on infrastructure and social bonds and notes](https://money.ke/wp-content/uploads/2024/05/finance-bill-2024-introduction-of-withholding-tax-on-infrastructure-and-social-bonds-and-notes.webp)
9) Eco levy
The proposed Eco Levy will be charged on certain goods manufactured in or imported into Kenya that are deemed to have a negative environmental impact.
The key points regarding the Eco Levy are:
- The Eco Levy will be imposed on select goods listed in the proposed Fourth Schedule of the Bill. This includes various technology products like smartphones, computers, and telecommunication equipment, as well as other items like plastic packaging, rubber tires, and cement clinker.
- For locally manufactured goods, the Eco Levy will be payable by the manufacturer when the goods are removed from the excise stock room. For imported goods, the levy will be payable by the importer when the goods are entered for home use.
- The proposed Eco Levy rates vary, ranging from KES 98 per unit to KES 225 per unit for many technology products. Imported leather products and footwear will attract a 20% Eco Levy on the customs value.
- The purpose of the Eco Levy is to ensure manufacturers and importers of these goods pay for the negative environmental impacts they cause. However, the Bill does not specify how the collected funds will be utilized.
10) Increase in allowable pension deduction
Proposed provision: The Bill proposes to raise the maximum allowable pension contribution that an individual can make to a registered pension fund from KES 20,000 per month to KES 30,000 per month.
Certainly! Here’s a reworded version of the text:
11) Tax-deductible non-cash employment benefits
The proposed legislation aims to raise the maximum allowable value of non-cash employment benefits from the current KES 36,000 per year to KES 48,000 per year.
Expanded powers for the Kenya Revenue Authority (KRA)
eTIMS integration
The bill grants the KRA authority to mandate the integration of electronic Tax Invoice Management Systems (eTIMS) into business invoicing processes.
Non-compliance could result in substantial penalties, encouraging greater tax compliance among small and medium enterprises (SMEs).
Data protection exemptions
KRA will have exemptions from certain data protection laws, allowing broader access to taxpayer information necessary for tax assessment and collection.
This raises concerns about privacy and data security, particularly in sensitive sectors such as healthcare.
Legislative and public engagement
Procedural motion for bill review
The Finance Committee has proposed a procedural motion to reduce the publication period of the draft bill from seven days to four, expediting the legislative process and allowing for quicker implementation of the proposed changes.
Public memoranda deadline
The National Assembly has set May 28 as the deadline for public participation and submission of memoranda.
This allows stakeholders to provide input on the bill’s provisions, ensuring that diverse perspectives and concerns are considered.
Potential impact of the Finance Bill
Consumers
Increased excise duties on everyday items and financial services are expected to raise consumer costs, significantly impacting household budgets, particularly for lower-income families.
Businesses
Businesses will face a higher tax burden due to increased VAT thresholds and the removal of certain VAT exemptions.
The motor vehicle tax will also add to operational costs for companies reliant on vehicle fleets.
Financial services sector
The removal of VAT exemptions and the introduction of a 20% excise duty on various financial services will likely increase the cost of banking and financial transactions, affecting both businesses and individual consumers.
Multinational corporations
The minimum top-up tax and Significant Economic Presence Tax will impact multinational companies with significant operations in Kenya, ensuring fair tax contributions from global entities benefiting from the Kenyan market.