Finance Act 2020 Anaylsis
Finance Act 2020 Anaylsis
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The Finance Act 2020 was assented into law by the H.E the President on 30th June 2020 with most of the proposals in the Finance Bill 2020 being enacted, (we add that some have remained controversial and may be subject of contest in and out of Court). However, key areas that are now law are as follows:
1. INCOME TAX ACT
a) RESIDENTIAL RENTAL INCOME TAX (EFFECTIVE 1ST JANUARY, 2021)
a) RESIDENTIAL RENTAL INCOME TAX (EFFECTIVE 1ST JANUARY, 2021)
• The Act has increased the upper limit for residential rental income from KES 10 Million to KES 15 Million per annum and;
• Has also increased the lower limit from KES 144, 000/= per annum (KES 12,000/= per month) to KES 288, 000 per annum (KES 24,000/= per month).
COMMENTS
Those earning annual residential rental incomes of between KES 288, 000/= to KES 15 Million qualify for RRIT. RRIT, is still payable of a monthly basis at the rate of 10% latest the 20th day of the subsequent month.
b) MINIMUM TAX (EFFECTIVE 1ST JANUARY 2021)
• The Act has introduced a new tax known as minimum tax at the rate of 1% at the annual gross turn over.
• Minimum tax shall be computed at the rate of 1% of the gross turn over, and shall be payable on the 20th day of the 4th, 6th, 9th and 12th month of year of income.
COMMENTS
Loss making entities will now have to pay the minimum tax this is against the basic principle of charging income tax on gains/ profits and is also punitive to entities that are in a loss position as a result of significant investments on which they have enjoyed capital allowances.
In case of investment holding companies where dividend income is taxed at source, the dividend income could be subjected to a further tax of 1%.
The term gross turnover is not defined.
c) DIGITAL SERVICE TAX (EFFECTIVE 1ST JANUARY 2021)
• The act has introduced digital service tax for persons earning income through the digital market place which is:
Applicable to any person on income derived from or accrued in Kenya from the provision of services through a digital market place.
Payable at the rate of 1.5% of the gross transaction value at the point of transferring payment to the service providers
• Resident persons and non-resident persons with a Permanent Establishment in Kenya will offset the Digital Service Tax against the Income tax payable against that year of income.
• The Commissioner has powers to appoint Digital Service Agents for the purpose of collecting and remitting the Digital Service Tax.
COMMENTS
It is not clear how the tax will be collected and remitted.
The due dates for the payments have not been defined.
Given that most nonresident persons require payments net of tax, there is a possibility that the payment of the tax will be borne by the consumer.
d) ALLOWABLE DEDUCTIONS IN ASCERTAINMENT OF TOTAL INCOME
• The Act has deleted the following allowable deductions from Section 15 of the ITA:
Entrance fee or annual subscription paid to a trade association which has opted to pay tax meaning that all subscriptions to trade associations are now disallowed.
Capital expenses incurred on legal costs and incidental expenses relating to:
Authorization and issuance of shares, debentures and other securities for purchase by the general public and
Listing on a securities exchange operating in Kenya without raising additional capital.
Club subscription by an employer for an employee
e) REMOVAL OF THE HOUSE OWNERSHIP SAVINGS PLAN (HOSP) TAX RELIEF (EFFECTIVE 1ST JANUARY 2021)
• The Act has scrapped the provisions that allowed depositors to enjoy a tax deduction on deposits placed with an approved institution under registered Home Ownership Savings Plan.
• The Act has also scrapped the income tax exemption enjoyed by a registered Home Ownership Savings Plan.
COMMENTS
Interest income earned on deposits to a registered HOSP will now be subjected to withholding tax at the rate of 15%.
The Act does not provide a transitional clause for those already under the scheme
f) INCOME TAX EXEMPTIONS SCRAPPED (EFFECTIVE 1ST JANUARY
• The Act has scrapped income tax exemption on employment income paid in the form of bonuses, overtime and retirement benefits to low income earners this income will now be subjected to tax.
COMMENT
Finance Bill had proposed to scrap income tax exemptions on NSSF income and monthly pensions provided to persons aged 65 years and above. This provision was however not enacted and as such these incomes are still exempt from income tax.
2. THE TAX PROCEDURES ACT
a) VOLUNTARY TAX DISCLOSURE PROGRAMME (EFFECTIVE 1ST JANUARY, 2021)
• The Act has introduced a Voluntary Tax Disclosure Programme for a period of three years. Where a tax payer will be required to disclose their past tax liabilities to the Commissioner in exchange for relief from penalties and interests accrued from the disclosed principle taxes.
• The period covered by the programme is five years prior to 1st July, 2020 (i.e. 1st July, 2016 - 30th June, 2020).
• Tax payers qualifying for relief of penalties and interest under the proposed programme will not be prosecuted with respect to the tax liability disclosed and;
Where the disclosure is made and the tax liability paid in the first year of the programme a full remission of the interest and penalty.
Where the disclosure is made and the tax liability paid in the second year of the programme remission of 50 % of the interest and penalty.
Where the disclosure is made and tax liability paid in the final year of the programme remission of 25% of the final interest and penalty.
• The application shall be voluntary and all material facts shall be disclosed.
• Where the commissioner is satisfied with the facts disclosed in the application, the commissioner shall grant the relief applied for provided that the relief shall not result in the payment of a refund to the person.
• Where the commissioner grants relief, the commissioner shall enter into an agreement with the person, setting out the terms of payment of the tax liability and the period within which the payment shall be made which shall not exceed one year from the date of the agreement.
• Where a person fails to meet the terms of the agreement agreed with the commissioner, the person shall be liable to pay the full interest and penalties that had been remitted under the agreement.
• A person granted relief under this agreement shall not seek any other remedy including the right to appeal in respect to the taxes, penalties and interests remitted by the commissioner.
• Where before the expiry of the agreement, the commissioner establishes that the person failed to disclose a material fact, in respect of the relief granted, the commissioner may withdraw any relief granted, assess and collect any balances of tax liability and may institute proceedings under the provisions of Section 80 of the TPA. However, a person who is aggrieved by the decision shall have the right of appeal.
3. VALUE ADDED TAX
a) DEDUCTIBILITY OF INPUT VAT BY TAXPAYERS (EFFECTIVE 30TH JUNE, 2020)
• The Act bars taxpayers from claiming input VAT from purchases if suppliers have not declared output VAT on the sales invoices on their VAT returns.
COMMENTS
This provision negates the principal of claiming input tax as the purchaser has no way of determining if the supplier has declared output tax. Moreover, the VAT Act clearly lays the process of issuing a tax invoice and the burden to enforce tax compliance should be on KRA and not the buyer.
b) RECLASIFICATION OF SUPPLIES FROM EXEMPT TO STANDARD RATE (EFFECTIVE 1ST JULY, 2021)
• The Act has reclassified the following items from exempt status to standard rate
|
SUPPLIES |
NEW RATE |
OLD RATE |
|
Helicopters of an unladen weight not exceeding 2, 000 kg
of tariff 8802.11.00 |
14% |
Exempt |
|
Helicopters of an unladen weight not exceeding 2, 000 kg
of tariff 8802.12.00 |
14% |
Exempt |
|
Airplanes and other
aircraft of an unladen weight not exceeding 2,000 kg or tariff 8802.20.00 |
14% |
Exempt |
|
other parts of airplanes
helicopters of tariff 8803.30.00 other parts of airplanes helicopters or tariff
8803.30.00 |
14% |
Exempt |
|
Aircraft launching gear
and pars therof; deck-arrestor or similar gear and parts therefo of tariff 8805.10.00 |
14% |
Exempt |
|
Air combat simulator and parts thereof of tariff
8805.21.00 |
14% |
Exempt |
|
other ground flying trainers and parts thereof of tariff
8805.29.00 |
14% |
Exempt |
|
tractors other than road tractors for semitrailers |
14% |
Exempt |
|
hiring, leasing and chartering of helicopters of tariffs
8802.11.00 and 8802.12.00 |
14% |
Exempt |
|
specialized equipment for the development and generation of solar and wind energy, including deep cycle bateries |
14% |
Exempt |
|
Goods of tariff 4011.30
(New pneumatic tyres, of rubber of a kind used on aircraft) |
14% |
Exempt |
|
Taxable goods locally purchased or imported by manufactures or importers of clean
cooking stoves for direct and exclusive use in the assembly, manufacture or repair of clean cooking stove |
14% |
Exempt |
|
Stoves, ranges, grates cookers (including those with subsidiary boilers for central
central heating) barbeques, braziers,
gas-rings, plate warmers and similar nonelectric domestic
appliances, and parts thereof, or iron or steel of tariff numbers
7321.11.00, 7321.12.00, 7321.19.00, 7321.81.00, 7321.82.00, 7321.83.00
and 7321.90.00 |
14% |
Exempt |
|
One person motor
vehicle, excluding buses and minibuses of seating capacity of more
than eight seats, imported by a
public office returning from a posting in a Kenyan mission abroad and
another motor vehicle by his
spouse |
14% |
Exempt |
|
Aluminium pilfer proof caps with EPE liner under tariff
number 8309.90.90 |
14% |
Exempt |
|
|
|
|
• The Act has reclassification from standard rate to exempts
Maize (corn) seeds under tariff number 1005.10.00
Ambulance services
d) RECLASSIFIACTION FROM ZERO RATE TO STANDARD RATE (EFFECTIVE 30TH JUNE, 2020)
• The Act has reclassified the following supplies form zero rate to standard rate
Supply of liquefied petroleum gas (LPG) including propane.
Input or raw materials for electric accumulators and separators including lead battery separator rolls whether or not rectangular or square supplied to manufacturers of automotive and solar batteries in Kenya.
e) RECLASSIFIACTION FROM EXEMPT TO ZERO RATE (EFFECTIVE 30TH JUNE, 2020)
• The Act has reclassified the following item from exempt to zero rate for a period of six months from 30th June, 2020.
Supply of maize (corn) flour, cassava flour, wheat or muslin flour and maize flour containing cassava flour by more than 10% in wheat.
4. EXCISE DUTY ACT
a) DEFINITION OF LICENSE EXPANDED (EFFECTIVE 30TH JUNE, 2020)
• The definition of license has been expanded to capture all activities i.e. services, goods and any other activity that require excise duty.
b) EXCISE DUTY ON BETTING (EFFECTIVE 30TH JUNE, 2020)
• Excise duty of 20% on the amount wagered has been deleted. However, the National Treasury released a statement on its plan to reintroduce excise duty on betting activities within the next six months to mitigate against the social vices associated with betting
5. MISCELLANEOUS FEES AND LEVIES ACT
a) IMPORT DECLARATION FEE (IDF) (EFFECTIVE 30TH JUNE, 2020)
• The Finance Act makes amendment on IDF on goods imported under the EA Community (EAC) Duty Remission Scheme.
The Act amends the IDF rates applicable on goods imported under the EAC duty remission scheme from a fixed fee of KES 10,000/= to 1.5% of the customs value.
• Introduction of additional import duty on goods entered for home use from an Export Processing Zone (EPZ) at the rate of 2.5% of the custom value.
• Removal of IDF and Railway Development Levy (RDL) from:-
Aircraft of unladen weight not exceeding 2000 kgs and helicopters of tariffs 8802.11.00 and 8802.12.00 which was previously proposed at the rate of 3.5%
Goods as the CS may determine are in public interest or to promote investment of a value exceeding KES 200,000,000/= which was previously proposed at the rate of 3.5%
Goods imported for implementation of special operating framework agreement projects which was previously proposed at the rate of 3.5%
• IDF and RDL to be exempted on all equipment, machinery and motor vehicle for the official use by the KDF and National Police.
• IDF and RDL to be exempted on currency notes to be imported by the CBK.
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