A Scrutiny of The Kenya Finance Bill of 2024.

Author: Nyamboga George Nyanaro.

In Kenya, a finance bill holds immense importance as it lays out the government's strategies for generating revenue to fulfill its financial goals for the year. The government utilizes this Bill to introduce new taxes, modify existing tax structures, or extend the current tax structure.

The Finance Bill in Kenya frequently incorporates revisions to multiple legislations, such as the Income Tax Act, the VAT Act, the Excise Duty Act, the Tax Procedures Act, the Tax Appeals Act, and the Miscellaneous Fees and Levies Act, among others. The proposed modifications seek to raise tax rates, broaden the tax base, and improve the efficiency of tax collections in real-time.

The Kenyan Finance Bill 2024 was released on May 9th, 2024, and was scheduled for public participation. The legislative process began on May 13th, 2024, with the initial reading of the bill during a parliamentary session. The Kenya Kwanza government aims to generate revenue for its projects through tax proposals in the bill.

ARE NEW TAX PROPOSALS IN THE BILLS COMPLIANCE WITH TENETS OF TAX ADMINISTRATION?

Dr. Victoria Miyandazi’s regurgitation of Professor Aketch Migai’s Administrative Law Text (Strathmore University Press, 20160 pages 205-207 argues that whereas the reason for taxation is to raise revenue for the government they elect under the working of a social theory to pursue the public good, the taxing powers needs to be done with due regard for tax principles. The inter-alia include procedural fairness, public participation in rulemaking, and reasonableness as emphasised in the Wednesbury case. Some of the proposed tax measures violate such principles, let’s have a look at them.

The emphasis of the Medium-term Revenue Strategy on removing VAT exemptions and zero rating suggests that the most recent Bill gives Appropriations in Aid a higher priority than earlier Finance Bills. As part of this plan, the Kenya Revenue Authority (KRA) is to be exempted from the Data Protection Act's restrictions regarding accessing taxpayer data. Recommendations in the Bill are both admirable and contentious, and Africa Law Hub predicts that taxpayer reaction will be mixed. A huge concern is how reasonable will the tax master be when waived from stringently following the Constitution of Kenya 2010’s Article 31 right to privacy and provisions of the Data Protection Act of 2019, especially given how it abused its powers in the fiasco experienced the customs department of Jomo Kenyatta International Airport during the arrival of Kenyans in diaspora.

Banking services will no longer be excluded from VAT. This will harm Kenyans. This will, during public participation in the tax rule making receive a thumbs down, why? It will increase the cost of doing transactions to the detriment of the normal Wanjiku. It also clearly violates the Constitution of Kenya 2010’s provisions decreeing that there shall be “openness, fairness, and accountability, including public participation in financial matters.

The Kenyan Finance Bill 2024's monthly allowable pension deduction increase from KES 20,000 to KES 30,000 is a positive change with two key advantages. Firstly, it encourages individuals to save more for retirement by allowing a larger portion of their income to be deducted for pension contributions. This leads to a more secure financial future for retirees. Secondly, the increased deduction reduces an individual's taxable income, lowering their overall tax burden and increasing their disposable income for other financial goals or necessities.

The introduction of the Eco Levy in the Kenyan Finance Bill 2024 represents a significant shift that will have both environmental and economic consequences for consumers. Specifically, the levy targets goods that negatively impact the environment, including mobile phones, diapers, rubber tires, batteries, and plastic packing bags. The aim is to hold manufacturers and importers accountable for the environmental harm caused by these products. However, the implementation of the Eco Levy may also result in increased costs for consumers, with charges ranging from KES 98 to KES 1,800 per unit. For instance, a levy of KES 225 per unit will be imposed on smartphones, while rubber tires will be subject to a charge of KES 1,000 per unit. Additionally, the Eco Levy may have wider economic implications, such as contributing to inflation and potentially reducing the affordability of these goods for consumers, particularly those with lower incomes.

The Bill’s proposed Advance Pricing Agreements (APAs) are an important development in transfer pricing because they provide several benefits. Firstly, they promote certainty and predictability by establishing a set of criteria for specific cross-border transactions. This helps to ensure compliance with the arm’s length principle and can reduce the risk of transfer pricing disputes. Secondly, APAs can lead to cost and resource efficiencies by decreasing compliance costs and burdens and reducing exposure to customs valuation and reputational risk. Additionally, APAs offer flexibility in developing practical solutions to complex transfer pricing issues and allow for withdrawal, revision, and amendment as needed. Finally, bilateral, or multilateral APAs can eliminate the risk of double taxation arising from controlled transactions. The introduction of APAs in Kenya's Finance Bill 2024 could benefit taxpayers by creating a more predictable and stable tax environment.

The Kenyan Finance Bill 2024 proposes an increase in the Import Declaration Fee (IDF) from 2.5% to 3.0% of the customs value, which could result in significant impacts on the country's economy. The rise in import costs may make it challenging for businesses to access raw materials and intermediate inputs. Additionally, the increased cost of imported goods could lead to higher consumer prices and inflation, thus affecting the living costs. This hike in IDF could also result in higher operational costs for businesses that rely on imported goods or materials, potentially affecting their competitiveness. Furthermore, it may lead to trade imbalances by discouraging trade and reducing imports. Overall, the proposed increase in IDF may have various economic implications that need to be considered.

Some necessary adjustments regarding the process of claiming tax refunds across different tax categories are being made. The government is bringing back penalty and interest waivers, but they are doing so with an emphasis on accountability measures. However, there is a catch: banking services are set to become more expensive, as many previously VAT-exempt services will now be subject to VAT. This includes making loans or providing credit, handling, and processing cheques, clearing, and settling transactions, issuing credit and debit cards, and managing unit trusts or collective investment plans registered with the Capital Markets Authority. The change is causing concern about the impact of VAT on financial services.

When Kenya introduced an excise tax on financial services in the Finance Act '13, it was with the intention of levying it on services that were previously not subject to VAT. However, now both VAT and excise taxes are being imposed, with VAT being applied after excise. This change in taxation has created a significant impact, and here we see that the Tax Procedures Act is being aligned with the Interpretation and General Provisions Act to clarify the deadline for tax payments.

The many taxpayers who have previously been impacted by the conflict will have Saturdays, Sundays, and public holidays excluded from the future calculation of the period. It is proposed to amend the Data Protection Act to allow KRA to access personal data without being subject to limits if such access is necessary for the assessment, enforcement, or collection of any tax or obligation under the relevant tax legislation. The supply of regular bread will no longer be VAT zero-rated, which means that suppliers will not be able to claim the input element and pass the cost on to end customers.

Bread is set to be removed from net zero category. No surprise here; the Treasury CS hinted at this a month or two ago. However, the manufacturer and normal consumer is set to fill the pinch. As a result, consumers will have to bear the additional cost of VAT on their regular bread purchases, affecting their overall budget and potentially influencing their buying decisions. To alleviate this burden, some consumers may opt for alternative bread options that are not subject to VAT, such as whole wheat or sourdough bread, while others may choose to purchase bread from local bakeries or smaller stores that are not required to charge VAT.

The government is planning to introduce an eco-levy, which will raise the price of office machines to Kes 98 per unit, and increase the cost of calculating machines, automatic data processing equipment, and telephones to Kes 225 per unit. The price of arts and accessories, microphones and speakers, and monitors and projectors will also go up to Kes 98 per item and Kes 1,275 per unit, respectively. The prices of these items are expected to increase significantly, which will impact the budget for equipment purchases in the AV industry. As a result of the increase in demand, the prices of these items are expected to continue rising in the future.

The government is proposing to remove Section 30A from the Income Tax Act, which provides Affordable Housing Relief at a maximum of Kes 108,000 per year. This relief was a crucial aspect of the Affordable Housing Bill (now Act) 2024, making its removal a significant concern for many Kenyans. However, the proposal to introduce Advance Pricing Agreements (APAs) is seen as a positive step for taxpayers involved in transfer pricing, offering better predictability of the tax impact of overseas transactions. For KRA, this should significantly reduce the cost of administering transfer pricing matters. It is worth noting that the APA will be valid for a maximum of five consecutive years, which I believe is a reasonable term.

We consider the Motor Vehicle Tax to be a significant issue. The proposed tax rate is 2.5% of the car's value, with a minimum of Kes 5,000 and a maximum of Kes 100,000. However, the penalty for unpaid taxes is steep, amounting to 50.0% of the uncollected tax plus the actual amount owed. Furthermore, when combined with the existing 4.0% insurance rate, the total tax burden amounts to 6.5% of the vehicle's value, which is excessive. It is crucial for insurers to consider the implications of these taxes on the sector. In order to ensure a stable and thriving insurance industry, insurers must carefully evaluate the potential impact of these taxes and adapt accordingly.

The Finance Bill 2024 proposes changes to the timeline for tax refunds, with income tax refunds now required to be processed within 5 years, and other taxes within 6 months. The National Treasury has recommended an increase in the import declaration rate from 2.5% to 3.0%. Alcoholic beverage makers will also benefit from a revision in the window for remitting excise tax revenues from 24 hours to 5 working days. The VAT threshold will be raised from Kes 5.0 million to Kes 8.0 million, the first adjustment since the increase from Kes 3.0 million to Kes 5.0 million in 2007. Kenya plans to replace the Digital Services Tax (DST) with the Significant Economic Presence Tax (SEP). Some critics argue that implementing the SEP tax could result in double taxation for companies operating in Kenya, which could potentially harm the country's economy.

The Finance Bill 2024 proposes significant changes to the Value Added Tax (VAT) withholding agents. The scope of Kenya Revenue Authority (KRA) for selecting manufacturers as agents will be expanded, and the Kes 3.0 billion investment barrier will be eliminated. This means that agents will now have to remit collections to KRA within 5 working days, instead of the previous deadline on the 20th of each month. However, there is some uncertainty surrounding the Electronic Tax Invoice Management System (eTIMs). KRA will have the power to mandate a taxpayer to incorporate eTIMs, and non-compliance will result in a monthly penalty. It is important to note that this provision is aimed at small enterprises and could cause significant harm to them.

Additionally, Section 14 of the Excise Duty Act is being abolished, which means that producers will no longer be able to offset their excise obligation for the finished product with excise duty paid on excisable imports used as raw material. This also means that people who purchase data or internet in bulk for resale will no longer be able to balance excise to the ultimate consumer with what they paid to the service provider.

Other notable developments include an increase in excise on telephone and internet data services from 15.0% to 20.0%, and a rise in the excise tax on money transfer services by banks, money transfer firms, and other financial service providers by 20.0%. The excise tax on money transfer fees levied by cellular phone service providers has also been raised to 20.0%, and the return of excise duty on betting to 20.0%. These changes raise questions about the stability of tax policy.

The Finance Bill 2024 aims to simplify the buying and selling of affordable housing units by revising the Affordable Housing Act 2024 to eliminate the prerequisite of obtaining prior approval from the Affordable Housing Board. However, some argue that this amendment may be too hasty.

Kenya has just initiated its seventh review with the IMF regarding the US$4.43 billion programme. This ongoing review commenced shortly before the Spring Meetings in April.

The revenue targets have been a major challenge for Kenya during the programme so far. We will have to see how the legislative process of the Bill progresses.