On 31 October 2024, the Cabinet Secretary, National Treasury and Economic Planning published an explanatory note on changes proposed to be introduced by the Tax Laws (Amendment) Bill 2024 and the Business Laws (Amendment) Bill 2024.
Background of the Two Bills
On 26 June 2024, the President declined to assent into law the Finance Bill 2024 following weeks of public uproar against the measures that had been proposed in the Finance Bill 2024. It is against this backdrop that the Government through the Tax Laws Amendment Bill seeks to reintroduce some of the provisions that were contained in the ill-fated Finance Bill 2024. The government also seeks to introduce some entirely new provisions. On its part, the Business Laws Amendment Bill seeks to address certain issues which were identified by the Ministry of Investments, Trade and Industry as issues hampering the growth of manufacturing, investments and exports in Kenya.
Proposals that are beneficial to taxpayers
Adjustments to the taxation of employment benefits
The Bill proposes to adjust the taxation of employment benefits by:
- Increasing the value of tax-free meals provided to employees in a canteen or cafeteria operated or established by an employer from Kenya Shillings forty-eight thousand (KES 48,000) per year to Kenya Shillings sixty thousand (KES 60,000);
- Increasing the limit of non-taxable benefits granted with respect to employment from Kenya Shillings thirty-six thousand shillings (KES 36,000) per year to Kenya Shillings sixty thousand (KES 60,000) per year; and
- increasing the limit of tax-free pension contributions that are exempt from tax from two hundred and forty thousand (KES 240,000) per year to three hundred and sixty thousand (KES 360,000) per year.
Implication
This proposal seeks to increase the limits that have remained unchanged for close to nineteen (19) years despite the increase in the cost of living and increase in income levels. In addition, this is one of the positive proposals that were not enacted due to the withdrawal of the Finance Bill 2024.
Deduction contributions made to the Social Health Insurance Fund, post-retirement medical fund and the affordable housing levy are deductible for tax purposes
The Bill proposes to include the following as allowable deductions in determining the taxable income of an individual:
- Contributions made by a person to the Social Health Insurance Fund;
- in the case of an employee, the amount deducted by an employer in accordance with the Affordable Housing Act, 2024; and
- Contribution to post-retirement medical fund subject to a limit of fifteen thousand shillings per month.
Implication
This proposal seems to be in response to concerns relating to the negative impact that contributions to both the Social Health Insurance Fund and the Affordable Housing Levy have had on the net earnings of employees. To this end, the proposal will allow such contributions to be deducted before arriving at the taxable income of an employee. This will lead to a reduction in the pay as you earn (PAYE) payable by employees and therefore ultimately lead to an increase in the net pay of employees. This was one of the proposals that was contained in the Finance Bill 2024.
Increase in the amount deductible as interest mortgage relief
The Bill proposes to increase the limit of the interest deductible with respect to a loan taken towards the purchase or improvement of a home utilised for residential purposes from Kenya Shillings three hundred thousand (KES 300,000) to Kenya Shillings three hundred and sixty thousand (KES 360,000) per year of income.
Implication
This proposal is welcome and is in line with the apparent efforts of the government to reduce the PAYE payable by employees by increasing the amount of deductions.
Expansion of tax-exempt pension income
The Bill proposes to exempt from income tax the payment of pension benefits to a person upon attainment of the retirement age determined by the rules of their respective registered retirement scheme. In addition, the exemption shall also apply where a person retires early before attaining the retirement age due to ill health or withdraws from the fund after twenty (20) years from the date of registration as a member of the fund.
Implications
This proposal will encourage saving for retirement through a registered scheme and prevent early withdrawals due to the conditions for the exemption such as the requirement for withdrawal after twenty years from the date of registration as a member of the fund.
Extension of tax amnesty
The Bill proposes to extend the running of the tax amnesty until 30 June 2025. This will enable taxpayers who had not paid principal taxes prior to 31 December 2022 to pay such principal tax without any penalties and interest accruing until 30 June 2025.
Implication
This proposal is a result of the successful performance of the initial amnesty program that was run until 30 June 2024. In this regard, this is a move by the government to grant taxpayers more time to regularise their tax affairs.
Payment of excise duty
The Bill proposes to increase the time of payment of excise duty relating to alcoholic beverages from 24 hours to the fifth day of the following month.
Implications
This will be a significant relief to manufacturers of alcoholic drinks who have raised concerns over the impact on cash flow on the law requiring payment of excise duty within 24 hours.
Capital gains tax rate of 5% for investments certified by the Nairobi International Financial Centre Authority
The Bill proposes to provide for a capital gains tax (CGT) rate of five per cent on any gain arising on the transfer of investments whereby the Nairobi International Financial Centre Authority certifies that (a) the firm has invested at least KES 3 billion in at least one entity incorporated or registered in Kenya within two years and (b) the transfer of the investments is to be made after five (5) years of the date of the investment.
Implication
This proposal will make setting up in the Nairobi International Financial Centre very attractive due to the lower fixed rate of 5% on gains arising on the exit of investments. The rate will be applicable regardless of when the investment was made.
VAT exemption for the transfer of business as a going concern
The Bill proposes to make the transfer of business as a going concern exempt from VAT. Currently, VAT is applicable on such transfers at the standard rate of sixteen per cent (16%).
Implications
The application of VAT on the transfer of business as a going concern at the standard rate of sixteen per cent (16%) increased the cost of such transfers as the buyer would incur the VAT costs and in addition, where the buyer makes exempt supply, not be eligible to claim the input VAT. Since the transfer of shares is exempt from VAT, to save on the additional VAT cost, transaction parties have in most instances opted for the transfer of shares when acquiring a business. While the exemption is welcome as it will eliminate the additional VAT cost to the buyer, the vendor would not be able to deduct the input tax incurred in relation to the transfer. The ideal treatment would have been to zero rate such transfers to allow the seller to claim the input tax incurred in relation to the transfer..
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